All Forum Posts by: Jerel Ehlert

This is why many lenders pick an asset class and location, and stick with that (to start).  

Best way to learn to underwrite: flip one or two properties of that type yourself.  Because if things go sideways, you will be taking over the property and it becomes your job to assess what needs to happen.

If you pick your niche and get good, underwriting becomes efficient. Once you mastered that first sliver (e.g., 2/1s w/ ARV $75-100K in 55555 zip), you can expand to an adjacent niche (e.g., 3/2s w/ ARV $100-125K in the same zip). Your learning curve for the next asset class is shorter and flatter than the first, and easier for the 3rd and 4th.

You get in trouble when you try underwriting an asset class/location you are unfamiliar with without sufficient checks.

Talk to a LAWYER who drafts docs for these types of transactions, licensed in the state where the property is located.

Most private lenders I've worked with forego a loan agreement, but could be useful when there is a lot of complexity.  Most only use either a personal guarantee OR a business purpose affidavit, but not both. If they are borrowing in their personal name, it already is a guarantee for that person.  If the borrower is an entity, no need for a business purpose affidavit.  In Texas, we can put a vendor's lien in the warranty deed.

Again, check with a lawyer in the state where the property is located, because that is the law that controls.

Buy sub-2 and then what?

Many sellers, desperate to get out of the house/loan, will thank you today. But in 3-5 years, after you make on-time payments and their credit is improved because of it, they will want to buy another house. The loan on the one they sold you will still show up and underwriters won't let them with the DTI ratios. Now they will try to pressure you into refinancing by messing with your relationship with their lender.

If none of that happens, but there's an insured loss, making a claim will be challenging. Even with a PoA, underwriters and banks can throw up hurdles requiring the seller's cooperation.

If, after reading all that and others' posts, you are still interested, I can walk you through the process if you need it.

You should do all the due diligence you would as if you were going to be buying, fixing, flipping the property yourself with your own money - because if the borrower fails and you have to foreclose, this is what you will be doing.

Borrower should be paying the fees for appraisal, inspection, title policy for lender, and attorney's fees for drafting.

As an attorney, I drafted hundreds of doc sets for closings in Texas and the rest is specifically limited to practices in Texas.

In TX, my doc sets include a Warranty Deed with Vendor's Lien, promissory note, deed of trust (the lien instrument), lender's instructions to the title company, attorney letter of non-representation, and either 1) a personal guaranty (if an entity borrower) or 2) a business purpose affidavit (if borrower is/are individual(s)).  There can be additional riders for certain situations.

Close at a title company/fee attorney office (depending on local custom). 

As for early repayment killing ROI, you can have a minimum interest clause to guaranty yield. Rates and terms are a balance between local market and your goals.

As a business model, it takes a around $2-3M to make it a full-time adventure (depending on geographic and asset class restrictions). But overall, pick a niche and get very efficient at that.

If you take money from others to lend out, that becomes a security (a la, SEC and state regulators). That model can work too, you just have to comply with similar rules as syndications.

For getting a property under contract, it does not take a lot of creativity IN TEXAS to use the TREC 1-4 on sub-2 transactions.

When it comes to closing, you will always be better off closing at a title company. Sometimes not always possible if you are trying to beat foreclosure.  But, with the number of notices and disclosures needed you should pay well for an attorney to draft your docs.  Even then, understand that the deal terms may/will affect what you do.  Assuming that your one tool is good for all sub-2 transactions will eventually come back to bite.

Insurance will always be a sticking point on sub-2 deals, especially if there's a covered loss, because the seller has to remain on the insurance policy. Even with a statutory durable PoA, it can be difficult to get a payout.

Quote from @Xueling Xu:

Dear investors,

I just signed up BiggerPockets today. I was searching seller financing in San Antonio, TX. I am in real estate, buy and rent out since 2020. beginning level. I am planning to sell one townhouse. and want to do it seller financing in Nov. 2023.  I watched the forums had one post asking the same question but it was like 5 years ago.

currently, with the good credit like 740 above, the 30 yrs loan is 6.75%. I am thinking of asking 10% of interest. maybe no balloon payment?

 can be 25 or 30 years loan. with 10% down at least. I also thinking the buyer should have minimum credit score above 580.

Can SA investors give me some steps, and paper works,  escrow accounts, etc. recommendations? I did talk to some real estate attorney and their price for seller would from $650-1000. is it reasonable price?

any advice, suggestions...

Appreciated your help and advice!

Xueling Xu

Assume selling to a consumer - 
You need to review the requirements under Dodd-Frank and CFPB.  There's a chart that will identify a "high cost loan" based on interest rates on a given month. Your scenarios qualify.  Use an RMLO. Appraisal and inspection are no longer optional. Close at a title company, get title policy.
Loan docs include (typically) a Warranty Deed with Vendor's lien, promissory note, and deed of trust. The prices you got are not bad, depending on what all is included.

KYC is a legitimate issue, but I would not trust that information to a random unlicensed person you don't know in real life.

There are plenty of people who can fund real deals that you can meet in real life.

Credit reports have racial and gender bias.  Some cultures also shun use of credit. With the pandemic, lots of people got dinged or outright damaged from the effects.  https://www.marketplace.org/shows/marketplace-tech/credit-sc...

Same with evictions.  

Not saying you should not use these, but use them intelligently.

What any landlord should look for is a tenant who will pay rent, in full, on time, and not destroy the property (wear and tear are on you).

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First, check the lease.  There should be *some* clause about being left "broom clean".  

For massive junk removal, hire a professional and pay from deposit. Remit balance to forwarding address within 30-days with itemized deductions and invoices.  Don't try to do it themselves and deduct. That way leads to liability.