All Forum Posts by: John Franklin

@Lee Bell is most correct. Fair is a subjective term and different for each party involved.  Undervalued is really what I think you mean here.   (BTW NOBODY complains about overvalued appraisals until after a market crashes).

In the US, if you find your appraisal results unfair and quality declining, with your appraisers coming from 4 counties away to do the work, there is a simple reason.

The appraiser was the lowest cost appraisal provider the AMC ordering it could find, who would do the work in the fastest timeframe.

AMCs have a vested financial interest in paying the appraiser the least they can because they get paid on the difference between the appraisal fee and what the lender charges the borrower.

This is simply a race to the bottom and history has proven that quality is the ultimate victim and the most talented leave the industry.

@Alexander Felice is right, to improve your odds, you need to do the work and bring the best listing and sales comp data, with repair/rehab budgets and a copy of contract to the appraiser at inspection.  Pretty face optional, but reccomended.

States have different methods of arriving at property assessments.  It would be helpful to call the county and let them explain how they arrive at the tax assessment and what exemptions would apply to investor owned properties.  Some give exemptions for homeowners but not investors.

Also ask if a purchase triggers a reassessment.  Those assessments can change drastically if reassessed, but it’s different between states and counties as to how they arrive at assessments, exemptions and tax rates.

The answer is No. 

Never solely rely on a county’s tax assessment to determine the market value. And don’t make an offer unless you actually know the true market value.  

To determine market value, obtain an appraisal from a certified RE appraiser or, at a minimum, multiple opinions from different agents/brokers (CMA), and not from selling broker.

Market value is always changing, like the stock market. Could be going up or down this month.  Counties generally assess value no more often than once per year, some every four or five years, or at the new sale.

Also understand how your tax expense will increase 40% if you buy at $259k and your assessment rises to your purchase price next year.

You can call a local certified appraiser and ask them to do a drive by appraisal on the property. Ask the appraiser to assume that the interior is in good condition with average wear and tear.  You have no obligation to share the info with the seller.  I’d provide them with unit mix, any operating history you have and a rent roll summary.

This should cost you less than $1,000 and could save you multiples of that if your ARV is overstated.

An appraiser does not have to inspect the property interior (or even the property) if they’re appraising it for you.  It’s your call.

For a BRRRR Long term appreciation should be a secondary or last plus point, it's also impossible to quantify. Tenant quality and problems will be commensurate with the rent price point.

As far as cash flow, I wouldn’t expect any as a new investor.  I’ve looked at a lot of deals in those markets and I’ve yet to see a $150k price range property, this year, listed on the open market where a newbie investor can positively cash flow the property, when accurately considering the costs of rehab/make ready, true vacancy allowance, correct taxes, insurance, management, leasing commissions, repairs and reserves.  

I'll just add, there are a good number of different retail NNN investment options out there and they each have strengths and weaknesses. You'll usually find them if you carefully read the lease and understand the underlying tenant credit. I don't trust broker pitches or promised returns because I've seen too many that were just wrong. The numbers are based on the lease and I've seen all sorts of owner responsibilities in "pure" net leases. you need to run your own numbers, with the agreed lease in hand.

If you don't want to go through all that and want a safer no brainer NNN, just buy ground leases. I love to participate in those.

Most current cap rates for NNN RE can be found here.

https://www.bouldergroup.com/research.html

I agree!  It’s tough not to love a pure net lease to an investment grade tenant who typically pays above market rents and signs 30-40 year leases with another 20+ in options.  What’s not to love?   Well...

First, the leases do not typically have annual bumps, track market rates or inflate consistent with CPI.  So there’s a rent trap waiting a few decades down the road.  No problem if you’re in and out on the first 10, but buying one with an older lease can get tricky quickly.

Second, the financing you’re getting from the bank will seldom lock In your interest rate more more than 3-5 years.  So, if/when rates rise, you can possibly get stuck in a flat rental rate that won’t cash flow.  Plus, you can’t get out of or resell the thing without a discount and much higher cap rate. 

Lastly, I’ve seen a small number of leases with little quirks like termination options in the second or third decade, purchase and redevelopment options, or just things that get buried in fine print.

So would I buy one?  Absolutely, but not without clearly understanding the entire lease agreement and downsides.  Then, we can talk about the cap rate.

I realize a lot of excited new RE investors first go out and get licensed but what they fail to realize is that In TX, as far as the state is concerned, you are now considered a RE expert when you deal with the public and you can no longer be a simple member of the public/investor.  This is why I believe TX RE investors should not get licensed 

To your original question, it doesn’t really matter whether your offer is “fair” what matters is whether the seller walks away happy, without ever filing a complaint.

That’s too much risk for me so as a broker, so I started hiring a different broker or attorney to represent my interests when I transact personal RE deals directly with the public, still noting I’m licensed in any ads/contracts.

I recommend any TX licensed Investor actually read through the entire Texas Real Estate License Act (TRELA).  It addresses many of these issues.  I can also refer you to attorneys I know who have defended agents in cases like this and there are also some excellent TX RE attorneys on BP who can give you true legal advice, of which mine is not.

I’d say first talk with a TX licensed attorney before you write that contract.  I’d never do it.

Based on my read of the TRLA, it says that in TX a licensee has a fiduciary duty to their client but you are also required to always deal fairly with the public.  If you knowingly negotiate directly with an owner and buy a property at a price well below market, and the seller gets mad later (for any reason) and files a complaint, you can expect to lose your license.  The state protects the public, not licensees.

But that’s not nearly the worst part because if the seller sues you and they win an award you can’t or won’t pay, they still can recover their entire award from the state’s “recovery fund”.  If that happens, you can expect the state to come after you for the money they paid out and they won’t stop until you leave TX or die.

I’ve seen this situation with several agents/brokers over the years.  IMO, the simple solution is to hire that lawyer and let them offer and negotiate the deal with the owner for you.

I vote both.  

I had a TX RE Law professor who once told the class “there has never been a 20 year period in history when TX RE didn’t go up in value”.  Of course he followed with, “but there have been many, many 10 year periods when it went down”.

If you can find a solid rental property that stays leased and actually cash flows well above current/future expenses and debt service in today’s market, Buy it!  Also develop a strategy for a downturn as it will come.

I can’t speak for other states but personally, I’ve seen 4 significant crashes/downturns in the TX RE market in the past 33 years.  In all cases values dropped at minimum 35% from peak and all lasted a minimum of 2-3 yrs.  This dropped rents and occupancies, commensurately.

I know many investors who built their entire portfolio in a couple years during downturns because they had cash available to buy at 25-50% of prior values.  So, that is a legitimate RE investment strategy and a contrarian play on today’s extended market cycle. 

An investor who socks away savings for a downturn or fire sale, and takes advantage of any current opportunities to buy with solid ROI, will profit in either scenario.

As always, Your mileage may vary...