All Forum Posts by: Justin Abdilla

I have absolutely no idea how the Bay Area market functions, so I'm not at all qualified to answer whether that's predictable.

I think it's equally risky to an investor putting up $100,000 on a property that the investor expects will generate $150,000 in profit. If I were to translate this to Chicago, it would be like putting $50k down on a wholesale for a property that's selling at $200k and needs $100k of work to sell for $450k. You just better be damn sure that the property gets to $450k for all the work you're going to put into it once all the expenses are calculated, or you're going to have done a lot of work for free. I'm not really worried about the $100k you've got in the game to get the assignment, but I'd be worried about the money you're putting in to rehab it as not generating 1:1 ROI.

Maybe the Bay Area is such a hot market that it's less risky than I think, but I tend to be risk averse as an attorney.

Tenant interviews are usually not permitted during due diligence because the prospective landlord tries to find out whether they can game the seller into a lower price.  I've had a bunch of these where they ask the tenants what they usually pay, how often they're late, whether the guy is a good landlord... etc, and then turn around and use that information against the seller.

It's not illegal by any means, but that's what the seller is guarding against.  I think you're actually well within your rights to do this, and to insist on it.  I would maybe even tell the landlord that the landlord can supervise you during these interviews if he wants, but you're just trying to get an idea of how the asset will perform into the future.

370 PSF in Southfield MI is a pricey property indeed!  I live near there half the year, and that's some good rate for commercial in Metro Detroit.  Some basic math tells me that's only about 5500ft2 of property, so that's three or fewer tenants probably?  It doesn't seem like a terrible request to make if there's only a few tenants, since any one of them going under will really wreck your margins on the property.

Good luck!

You don't want to put up an LLC for your first property. The Bank will usually look at an LLC buying the property and make you do a commercial loan. That means 20%+ down. My FHA clients are typically not putting 20% down.

LLCs are awesome for limited liability, for sure, but I think you and your brother could make a private partnership agreement between the two of you that defines the rights and responsibilities of the both of you. You won't have limited liability on the house, meaning that if tenants get injured on the property you could both be personally liable. That just translates to taking out GREAT homeowners insurance rather than putting together an LLC.

Once you've got 5-10 properties, at that point get an LLC and deed the properties into it. I would still see a lawyer for the partnership agreement, but maybe that's because I'm so conditioned to telling everyone I ever talk to about anything to hire a lawyer. Good luck!

Holy moly, you're taking all the risk!  You have 5% in the game, maybe even less.  That means 95% of the property is a margin sale.  The way to contemplate these margins is that you're paying $100,000 to take on 17x that in liability.  Once you sell the property, you have to pay off that 17x liability and your $100k that you have into the property.  If the property doesn't sell for over $1.8m, you are below your breakeven, and honestly it's probably a bit more than that because of all the money you'll have to put into a restoration job.

To increase your profits, you can do one of two things, you can either increase the sales price or lower your liabilities.  It will be hard to increase the sales price above the $2.2m you're asking, so I think you probably need to look for a way to lower the liability.  Is there a way that you can convince Bob to take a bit more of the risk here?

I would think of some type of contract where Bob pays you and your husband a rehab fee to be put onto real estate escrow.  I would want mine first in this type of deal, and maybe just agree that my rehab fee is $300k for a list of improvements.  Maybe bill your services as rehab/reno rather than wholesaling, but I don't know if there are state-specific laws for licensing and consumer protection that will apply in that instance that would stop you from doing it.  I just think having the profit secured for you, and making the cash flow a more predictable number will help you all mutually benefit from this transaction over you and your husband putting $100k into the game for an eventual $2m in liabilities and hoping to hit the break even.

All those numbers are purely hypothetical of course, but I would probably talk one of my clients out of jumping on this opportunity as you phrased it.  You're only looking at ~10% of profit margins once everything is all done, and you're in the property at 5% of its value.  That's narrow, but it can still be profitable if you work some guarantees into it.

I hope you, your husband and Bob all make a mint on this one, though!

This is going to be a really state specific question, because each state's laws on short term tenancy are going to be different, and the requirements for transaction volume without a license are going to be different.

This might be the point where you should call an attorney in California to help you set up the company, as they will discover most of the regulatory compliance issues in the initial research for putting the business together.  I know it's not necessarily applicable to your situation, but in Illinois if you did 5 transactions a year for real estate you need to have a real estate license. 

I actually think your circumstance is different from Illinois's circumstance.  You're not really creating tenancies, you're licensing the use of the property.  I think if you own the property you can license the occupants of your own property, like basically creating multiple tenancies out of a single front.  I think if you're referring other people as commercial tenants, however, you definitely need a real estate license because you're brokering tenancies in a property you don't own.

I can really only answer question 2 here, and under question 2, I think that is for sure practicing real estate without a license.  If you're receiving a thing of value for your services, and those services require licensing to protect the public, you're likely practicing that field once you get paid for the clients.  For example, I can't give referral fees to non-lawyers for bringing me clients because I can't have a controlled business arrangement with non-lawyers.  I can't get referral fees from my real estate agents because they're not able to have controlled business arrangements with lawyers.  I think if you're getting referral kickbacks from bringing in the tenants, even when someone else is writing the lease, I think you're acting as a procuring agent and need to get licensed.

Honestly, just go get a real estate license.  This idea sounds awesome and you couldn't possibly do any worse than WeWork, and they were good enough to make an IPO.

I'm an attorney who practices almost exclusively in probate, estates, real estate and foreclosures.  I can tell you it's way easier to just grab a list of Lis Pendens property from the County Clerk's office weekly.  They have to circulate notices of foreclosure and post them pursuant to forced sale constitutional rights.  In Illinois, I just call the county and ask them to reproduce the lists and fax them to me, or have a runner pick them up from the Recorder's office.

It's certainly nowhere near as convenient as buying a ready-made list of opportunities, but it will save you tons of money.  I was paying something like $800/mo for leads before I discovered where they were in the public record.  You could finance a freakin' property for that kind of money.

What an amazing breakdown of this.  This is good enough to be a legal article.  Great job!

The first question I have for you is what type of corporate structure you're going to have. Is this an LLC, a partnership, a corporation? Is it being held in trust? How are your partners resolving the shared tenancies? Is this joint tenancy or tenants-in-common? I think making sure that everyone is set up properly to succeed and profit at the get-go is the best first step.

I would agree with @Mary K.'s recommendation that you just tell the mortgage broker what you want.  The mortgage broker wants your business and they get paid based on how many closes they're able to effect.  I think you're going to be able to set this up as a joint tenancy with 3% down, but I don't see you as being able to get a corporate structure issued this loan without falling under commercial lending underwriting for 20%+ down.  

I think this is probably a situation where the attorney isn't going to be so useful.  Attorneys don't stand to make a bunch of money by persuading your insurer to replace some tile.  It's probably better to call in the adjuster and make really nice with the person who comes out to your home.  One of the fellows I work with consistently is an insurance adjuster and they normally try to find any reason to cover you and pay you for what you're complaining about, because they don't want you unhappy and it's not their money.

Good suggestion to maybe call the State Insurance Department though.  The threat of calling the board is often more effective than actually calling the Board.  I think you just need them to take a second look at it, because insurance companies, in my experience, have been all about keeping the customer happy to keep the retention up.

@Meg K.

Happy to help! Happy new year!!