All Forum Posts by: Jeff Stephens

Hey Chris! A few questions to get us started:

• Who is the seller? What is their story? What's their motivation, and why are they selling?
• Do they have any existing debt on the property?  How long have they owned it? Why did they buy it in the first place?

These questions are important because your first option for private financing should be the seller themselves.  If we know more about them, what makes them tick, their situation, etc. we can do a much better job trying to craft a proposal that will fit them.

Next, I'd love to know what you're open to, vs. not open to. For instance:

• Are you open to an equity partner, or are you looking for debt?
• Are you open to making payments on this vacant dirt (which can be difficult since it's presumably not producing any income, etc.).  This leads us to the next question....

What is your vision for the property?

• In five years, what is it you plan to build? Will you keep it as a rental, or want to sell it?
• Is there anything productive that you could do in the meantime with the dirt to produce some income? (ie lease it to a neighbor for storage, charge someone to park their boat on it, etc.?)

Last but not least, if you were able to just waive a magic want and get the creative financing you want, what would that look like? You may or may not be able to get it, but it's valuable to at least know what "perfect" looks like in this situation.

Once we get some of these answers out on the table, we will have more to work with and try to solve the puzzle!

Lise:  It sounds like your real estate career is off to a great start...congrats on those four successful deals! I think you are facing a problem that many of us have faced and can relate to. You hit a bit of a ceiling in your ability to do more deals because of the downpayment and hard money factors you mentioned.

I'll give you my honest answer, here. I'm sorry to say it's not a gimmicky "3 simple steps to get the results you want tomorrow"; rather, it's real work and takes commitment.  But ultimately, I strongly believe we all grow a lot more when we avoid the easy shortcuts anyway. :)

To take your game to the next level, I think you need to do 3 things: 

1. Develop your ability to find deals OFF-MARKET (not just pre-market, from wholesalers or at an auction)
2. Develop your ability to find private financing (not hard money)
3. Develop your ability to find and negotiate seller financing

To find deals off-market, you're going to have to do your own marketing to generate leads.  This will likely involve a regimented program of sending letters, physically getting out and spending time in the neighborhoods you want to buy, and networking.  This is work to be sure, but it will be worth it, because you'll end up with deals that nobody else even knows are available--no competition. That's a game changer.

To find private financing, you're going to have to market and hunt for this very proactively too. You'll have to make yourself credible to potential lenders/investors, learn to find those people, and learn how to pitch them. I recently read a good book that I think may answer some of your questions about this.  Check out Susan Lassiter-Lyons book on this, called "Getting the Money." Developing this proficiency will be a game-changer for you as well. 

Last but not least, developing your ability to find and negotiate seller financing is also such a huge advantage.  So many people assuming [incorrectly] that seller financing is what you do when you can't sell your property any other way; so in a hot seller's market like you've got in Denver, it wouldn't be possible.  So. Not. True.  You just have to learn how seller financing benefits sellers so that you can propose it to them in a way that resonates from their perspective.  Major game changer.

Good luck Lise!

Craig--

One question: is this a traditional transaction with real estate agents involved? I just ask because if so, you have them, their companies, licenses and insurance to help make sure this gets followed through on by the seller; if not, and you're just buying directly from the seller with no agents, you're obviously more on your own to enforce.

Overall, I like your idea of holding the $12k in escrow (assuming that's a reasonable cost for this tree removal), so that the seller doesn't get those proceeds until he performs.  If there were more remaining unfinished items than just this on the repair addendum, I'd probably lean toward pushing closing back.  But given that it's just the trees, I think your hold-back plan is a good one.

That's my two cents...good luck!

JWS

Shak--it sounds like you've had a lot of great, diverse investment experiences. It's neat to see that you are almost overwhelmed by opportunity!  That's a good problem to have, and it's what happens when you maintain an abundance mentality (which you clearly have!).  

The first thing I thought of when I read your post is a good real estate book called "Equity Happens" by Robert Helms and Russell Gray ('the real estate guys,' who have an excellent podcast too).  There's a big focus in that book on finding "your personal investing philosophy" and as I recall there are some key questions they recommend you ask yourself. This could be a good book to read and go through these exercises; it could really help you shed some light on which angle of real estate is best suited for you and your goals.

Xavier, congrats on getting started! Seriously, taking action is the most important first step, so you should feel good that you are committed to doing so!  To answer your comments:

• I think it's great that you got that first credit card, to start building credit (and yes, I agree that it's necessary to do so before getting a bank loan).  I would use that card as much as possible, and pay it off in full every month.  In about 4 months, call the credit card company and ask for a credit limit.  Keep doing the same thing--use the card, and pay it off. 
• I'd say it wouldn't hurt to have a second credit account somehow, as well, and to use it well and wisely to demonstrate you have good reliable payment habits.
• I would recommend you go talk with a local mortgage broker, just to make the connection, ask some questions, and let them educate you a bit.  Ask a friend or family member if they know/recommend anyone, or simply Google one.  You might even do this 2-3 times; these little informational sessions will help a lot, and are free. They can take a look at your income, consider your newly forming credit, your cash availability and help you determine what you might be able to buy. 
• You also might keep your eyes open for "first time homebuyer" seminars, which lenders tend to put on.  At this point, the more educational sessions you can have, the better. 

Meanwhile, I'd also recommend you just start looking at as many properties as you can. This will help you create context and a frame of reference in your mind, and start to get a "feel" for your market.  Look at redfin.com or zillow.com or your local real estate listings, and just look at as many listings as you can.

Are you thinking that your first acquisition will be a home to live in yourself? You might also consider looking at duplex, triplexes or four-plexes, if you can get the loan for those; then you could live in one unit and rent out the others for income.  Here on BP they call this "house hacking"--look up more articles with that keyword.

Lastly I'll say that as you learn more and educate yourself, it will be important to learn more about a) buying properties that are off-market (not listed with an agent) and b) buying with private financing (not needing a bank). But for now, let's start you with a good diet of basic education and conventional real estate transactions. Then we get to the more advanced stuff later in due time. :)

GOOD LUCK!

@Guido Bertoli:  Great post--thanks for sharing! I'm salivating (on your behalf!) about this opportunity for you. To me, it's got all the makings of an excellent series of opportunities. The things that get me excited here are:

1. You have the exclusive relationship and the inside track to communicate with him directly; it sounds like the two of you already have great rapport
2. Nobody else appears to know that these properties are for sale (and I'd encourage you to do what you can to keep it that way!)
3. He owns them free and clear, which gives you a lot more options to work with
4. His rents are under market
5. There's an opportunity to do multiple deals with one person

These are the types of opportunities we're looking for.  Here are my thoughts:

• Use your existing relationship and rapport to invite him to sit down with you 1-on-1 in private. Tell him you've got an idea you'd like to run by him, and offer to do it over lunch--your treat.
• Tell him you're inspired by him, and it got your wheels turning in your mind:  he wants to sell a few properties, you want to buy a few properties. I'd recommend stating straightforwardly that you'd like to put a proposal in front of him to buy the properties he would like to sell.  I'm guessing/assuming perhaps he's older than you, so try your best to get him to see you as the younger version of himself...he will be nostalgic for that period in his life and may really like the idea of seeing a younger investor get his start.  
• Now, let's talk about deal structure.  This has all the makings of an amazing seller financed acquisition (or series of acquisitions!)  Your biggest lever here is going to be his likely significant capital gains tax obligation.  Ask him some questions about how long he's owned these properties, and what he paid for them. You can do this conversationally rather than in an interrogation ("you bought that property in 1989?! Wow, I bet you got a heck of a deal...") Open the door for him to tell you more, and let him walk through it...he probably will tell you all you need to know without you needing to ask directly. 
• We're hoping he would have a nasty, nasty capital gains bill if he sold these properties (ie he's owned them a long time and they've gone way up in value). Why? Because when you propose a carefully structured installment sale to him (a "contract" in REI street slang), you will be crafting it in a way that will greatly help him defer his capital gains tax obligation....WITHOUT needing to do a 1031 exchange. This is unbelievably powerful.
• You'll need to ask him some questions about why he wants to sell, so that you can use those answers in your eventual proposal to him. We're going to be listening closely for excellent clues like "I'm just tired of being a landlord," and "I've been hesitant to sell them because I don't want to pay the tax, but I just don't want to trade into yet another property to be responsible for." These are the problems you can solve with your proposal.
• Ultimately you're going to put a proposal in front of him that involves a small downpayment, with interest-only payments to him over time, with a balloon payment at the end.  The small down prevents him from receiving more of his gain than is necessary.  The interest-only payments mean he's not recapturing the gain each month (and means your cash flow is better, from your perspective), and the balloon payment date will reflect the year in which he wants to finally deal with his deferred capital gain.
• The fact that his rents are below-market is also fantastic.  That often means that the monthly interest-only payments you make to him will be very comparable (if not even more, perhaps) than he's currently netting as a landlord.  This makes your proposal hard to turn down:  he gets as much cash flow, without any of the management responsibility.  He gets collateral (a deed of trust on the property) and insurance (you make him a loss payee on the policy for the collateral), a reasonable interest rate (banks are paying almost nothing today) and an income stream...heck of a deal for you both!

I know there's a lot to unpack here, and I hope I haven't overwhelmed you.  But trust me when I say this is a relationship worth cultivating (and keeping to yourself!).  GOOD LUCK!!

@Shannon McKenna No, I've never hired an inspector before having the property in contract.  What I'd recommend is that you try to reach some kind of a shared understanding with the seller about what work HE THINKS is needed, and what HE THINKS it will cost to do. Then, you "agree" on that and price the deal accordingly, coming up with the purchase price together based on the shared understanding of what the place needs.  

Then, you hire your inspector and bring along a contractor to help you create a reliable estimate. What I'd say is highly likely is that a) your inspector will demonstrate there's more wrong with the property than your seller thinks, and b) your contractor will demonstrate the work will cost more than the seller thinks.  With these two items in hand--which didn't come from you, by the way, they came from objective third parties--you now have the information and leverage needed to adjust the deal so that it truly works.  

Hi @Matt Hazlett.  Interesting scenario! Here are a few thoughts and questions for you:

• Are you positive that a conventional lender will not loan on it, or is that an assumption (or maybe something you heard from another person)? I'm not entirely sure a bank would necessarily even find out about the zoning/use mismatch, let alone make that a deal-breaker. An appraiser might note it, but I haven't seen this be an issue before.  
• In my town, we have what's effectively considered "allowed non-conforming properties" which are exactly like you discussed...multi-unit buildings in single family zones, etc because of grandfathering. I've not seen it make a deal non-financeable. In fact, I'm working on one right now and it hasn't become an issue!
• Even if a conventional Fannie/freddie lender will not finance it, there are always portfolio lenders (who make their own decisions on a case-by-case basis), commercial loans (yes, they can be made on less than five units) and last but CERTAINLY not least, private individuals (a massively underutilized financing source, IMHO)
• I think your bigger issue might be insurance, rather than financing.  If your 4-plex were to burn down and zoning would only allow you to replace it with a single home, that could be problematic; ie what would the insurance company pay to rebuild? Most towns, I believe, have protocol for that situation, too--go down to your local planning office and ask about that

I think some time spent down at your local planning office with a well thought-out list of questions will help give you the answers you need to make a decision with confidence.  Go get 'em!

@Ethan Mckuhen Sounds like you're on the right track!  My take is this:  $30k is a lot of money and is probably quite enticing, but I'd encourage you to step back, reflect on all your options and most importantly, the bigger picture of the real estate portfolio you dream of having.  See the forest for the trees and then make a decision on this property in the context of that bigger picture. Happy thinking. :) 

@Shannon McKenna I'm so glad to hear that you researched the seller and reached out to him! That's fantastic, and I'm not surprised to hear that you learned a ton. The power of talking directly to a seller is huge, and is totally overlooked by so many buyers who only shop for listed properties. I'm glad to hear you're shifting your focus to off-market deals where you can make that happen more often!

I will offer a different perspective on your new findings, though.  Personally I actually would be a little MORE interested in this deal based on what you've learned.  For starters, it sounds like this seller is well aware that this may not be a conventionally financeable property (which would explain why he's offering seller financing). Secondly, now that you've spoken directly with him and are building rapport directly with him, you have the inside track.  To your point--"no wonder it hasn't been snatched up yet"--it seems to me that the "hair" on this deal (the problems, etc.) are excellent levers for you to be able to work directly with him to create a customized deal that works for both of you.  Most people will be scared off by these issues, but now that you've got the inside track with him, I'd keep the conversation going if I were you.   You may be just the person he's been waiting for to ride in on a white horse and help him solve this problem he's got on his hands...and solving problems/adding value is how you make money. :)