All Forum Posts by: Randall Brown

A few more comments.

1) in California, the maximum a seller can keep "if the deal goes sdeways", is 3%. The most likely way this would happen is if the buyer removed all contingencies and then does not perform.

Any EMD over 3% is not really at risk, but it certainly is tied up for a while.

2) Why over 1% at all? During the most recent down turn, especially 2009-2011 around here, buyers would write offers on multiple properties, get into multiple escrows and would try to aggressively negotiate the price down after inspections. Maybe they would be in 3 escrows parallel, hoping for 25% reduction on one of them.

They would only have the means to actually close on one of the three.

Larger EMDs would limit these guys.

Yes, I have been the seller in one of those escrows. Buyer had loan docs in escrow and refused to sign without any reason or contingency to let him out.

We returned their EMD, relisted, and sold to someone else.

A broker told me "nobody has ever kept earnest money in California".

That is probably an exaggeration, but gives you an idea of what's going on.

Your sellers may have a 90 day time period after the tax sale where they can buy the property back for what it sold for at the auction. This varies by state.

The sellers could very well legally challenge the sale and achieve a recission of the tax sale. Grounds for the challenge was that they were not properly notified of the sale.

The new owner (who won the tax auction sale) might or might not fight back on such legal action.

If the seller is successful with their challenge, then they can deliver the deed to you.

Earnest money deposits vary by location. And the standards evolve over time.

In neighboring Santa Clara County (California), it has been 3% as long as I have been involved (20 years)

Here in Santa Cruz County, the standard used to be 1% upon acceptance of the offer and increase the deposit when the first contingency is removed to 3%.

I write "used to be", because at some time between 2007 (when I did my last contract with the 1% increased to 3% deposit) and 2012, agents in Santa Cruz adopted the Santa Clara style of full 3% upon contract acceptance.

I suspect that your agent calculated 3% = $3000 and change, and he rounded it up to $4000, to show financial strength.

That can make a difference.

I recall writing an offer in 2012 on a fixer upper that was listed for $540k (worth $800k after $100k repairs). My offer of $550k came with $16500 (3%) earnest money, with a photocopy of a check, and I expected to be countered, and was willing to go to $620k.

I never received a counter.

I found out that the winning offer had attached a cashier's (!) check of $100k (!) made out to the title company. He got the house for asking price of $540k.

The seller had received 20 offers and never bothered to talk to anyone else.. they were too impressed with the big EMD.

So they accepted his $540k offer and later gave up another $20k because of termite damage!!

My $550k offer had been 100% non-contingent..

What a joke this deal was!

No dual agency!

Not really.. the $7068 in 2011 were cap ex and should have probably been depreciated. I think at least $2000 of it was a special assessment by the HOA after a lawsuit.

I manage the property myself. By the low repair bill, you can see that I rarely get a call. 

The numbers would look slightly better without those cap improvements from 2011. And much better if there were no HOA.

The rent loss is maybe 25 days in 9.5 years.. what is that.. 0.7%? It may also be a sign that my asking rent is too low.

I may go through this exercise with another property.. maybe a 4plex that we have had since 2012.

I agree with Oscar's comment.. the 50% is probably accurate for lower-cost of living areas. I was suprised that it is supposedly accurate for New Jersey, but maybe I had the wrong impression of New Jersey.

I have one rental that has been rented out for 10 years now.. monthly rent started at $2000 and is $2300 now (market rent would be $2750, my bad).. let's look at tax returns, for annual (!) repairs,supplies, cleaning and maintenance: 

2015: $1870

2014: $750

2013: $0  (!)

2012: $650

2011: $7068 (complete new paint and some other stuff)

2010: $225

2009: $0

2008: $709

2007: $1835 (get rent ready)

Looks like $13k in 9 years.. averaging $1500 a year.. $125 a month.

So.. rent is $2300

HOA $350

Condo insurance $15

Property tax $300

Variable expenses $125

Total expenses: $790

790/2300 = 34%

If I would discount rent by 50% to figure out cash flow, I would NEVER buy any rental.

Vacancy is minimal. I frequently get the keys returned Saturday evening and sign the next rental contract the same or next day. For this particular unit, I had a few of those turn-overs with under 5 days vacancy except in 2011.. I think I had it empty almost 2 weeks while I had the unit painted and some upgrades done. It is still the same tenant since then.

"Is it permissible to allow tenants to pay the difference if I find her to be qualified?"

Not permissible. I think, if you accept payment on the side, the tenant loses the voucher.

What are the consequences for the landlord? I don't know.

How would they find out? I think this is why they may be permitted to review your books.

There is more than 1 way to make money. In response to the CA investor who rather invests $100k in the Midwest to make $1M, instead of $1M in California to make $100k, I think these numbers are exaggerated.

The simple fact is that the more desirable an area is, the lower cap rate you will have. 

Generally speaking, the chance of appreciation is higher in the low-cap rate area. The low cap areas were also more stable during the 2007-2011 meltdown.

That's why I said more than 1 way.

Some local investor friend said "never invest in Texas" because their high property taxes will never allow values to go anywhere. This person actually used to live and own in Dallas.

Well, another friend bought a primary residence in Houston about 4 years ago and it doubled in value (as of 2 years ago).

So, there goes another theory about expected appreciation.

I found that multi-family (with 5+ units) are a good way to buy reasonable cap rates (6%) in an area that has otherwise very low cap rates for SFR (3% and less), without having to go out of state.

I would agree that Section-8 tenants usually wear a unit down more than market tenants. Reasons are:

- usually more people in the unit e.g. a 2BR will never be occupied by a single person.. it's usually 3 people.

- no financial means to do even the most basic maintenance. Batteries for a smoke detector? Ceiling light bulb burnt out? Expect to be called for this kind of stuff if you rent to a section-8 tenant. Frequently comes with an entitlement attitude.

It's a bit of a downward spiral.  You are not supposed to take money on the side, and they determine how much the rent can go up, so you may rent below market after a few years. With rent below market, you won't be inclined to invest in capital improvements. Wait 3 more years, and now only section-8 tenants will want to live there. Don't ask me how I know this.

We formed a few with legalzoom.com and mycorporation.com

Don't fall for all their add ons! You can do it yourself. 

10 is the limit of government backed mortgages (Fannie Mae, Freddie Mac). That's what the big retail banks do.

There is no limit how many mortgages you can have, if you work with other lenders (those, who loan out their OWN funds). Their rates usually are a bit higher and more down payment is required.