All Forum Posts by: Philip Hernandez

 Two ways to look at it..

Just resurfacing, and the next is the huge burden.. Completely overhauling the pool. 
Resurface can cost about $8K
Redoing the pool, resurfacing, checking and confirming no leaks, redoing the heater/motor.. $20K-$30K..

@Philip Hernandez I missed this a few months ago and was psyched to read the update. Congratulations that is awesome. I agree you got off very light, especially with the new flooring. How did the legal steps go if you pursued? Smal claims?

What do you mean by “… option to pay back the principal and accumulated interest …”?

Yikes.

Not only should you avoid this loan, @Nick P., I would caution your colleague from buying the property. The $289k purchase price plus the $84k rehab estimate (your loan) total $373k. This is 96% of the $390k ARV which is basically a full-price purchase but with all the extra rehab work. Not only is there no profit in this deal but expenses such as property taxes, insurance, purchase and sales costs, legal, and interest expenses will result in a significant loss. Does your colleague have any experience here? Has he shown you an itemized P&L, with all the expenses, that show a profit?

FYI, as a quick rule of thumb, the purchase price plus rehab should not total more than 70% to 75% of the ARV. This will result in a 12 to 15% of ARV profit. (A detailed P&L will show that). Thus, your colleague couldn't pay more than around $189k to $209k. This seems like an unreasonable discount off the asking price.

Since your colleague must borrow the rehab money, I assume he will also be borrowing the purchase money. This would place you in second position, which is as dangerous as it gets. If the first forecloses, you would likely be wiped out. Can you afford that?

You’re located in AZ and the property is in Chicago. What would happen if you had to foreclose instead of the first-position lender? Could you pay off the first? What would be your plan to take over a house in Chicago?

We’ve been lending our money privately for years and I can’t recommend it any more strongly. If it’s something that appeals to you, I strongly suggest you stay local and loan only in first position. Here, you’ll get to know the borrower, see the house, and also have the safety of a first-position lien. I published our process in this thread several years ago: Becoming a Private Lender. It’s still about 90% current.

Don’t forget the personal guarantee.

There was no seller's agent (he can't force the seller to use an agent)...and he had home inspection done.  So, your recommendation is to bring a buyer's agent to a wholesale deal (which never happens) and that agent would have identified the lead paint, which is unlikely.

So he shouldn't have brought a selling agent to a wholesale deal on the basis that that "never happens".  Sounds prudent.  I've helped clients buy wholesale deals before.  I know plenty of agents who work for clients on wholesale deals.  And plenty of wholeaslers will work with selling agents.

And you're right.  You can't force a wholesaler or a seller to hire an agent, obviously.  But that's kind of the point here, isn't it.  Unless you really know what you're doing, or have special relationships to people you're transacting with, it's foolhardy to think you can just try to operate in the spaces where money is saved on agents and not think you're losing something.  Sure you the seller doesn't need representation, but maybe you should be doing the smart thing and buy from sellers who do have representation.

@Philip Hernandez - I assume the Lead Based Paint Disclosure in Ohio looks very similar to the one we have in Wisconsin and basically states that if the property was built before 1978 it is possible and the owner usually checks the box that says have not tested and do not know.

Sounds like he did know. We call this a known material defect and failure to disclose. So step one is to connect with the city and get a copy of what has been sent, so you can verify what the tenants reported. If it turns out the seller knew and decided knowingly to not disclose and misrepresent you have a pretty good case.

The smart solution for both of you is to settle instead of going to court. 

Legal fees on each side are quickly 5k-10k. This is where the demand letter comes in, you basically lay out the case and tell them you will litigate, present your case and then offer a settlement as a solution. If they know their legal fees will be 10k and on top of that they will probably loose and have to pay 25k for the remediation, maybe even your attorney fees - sending you a check for half of that starts to look like the better option.

Once you get the money have the issue taken care of. It's not that difficult. A lead certified painter has to remove all loose paint, basically lay out plastic everywhere to make sure nothing gets in the ground then scrape the loose paint until you have a solid base and then paint over it. Some contractors will quote you very high prices based on the fear factor of lead, but you'll find someone who is reasonable if you shop around.

@Philip Hernandez - I assume the Lead Based Paint Disclosure in Ohio looks very similar to the one we have in Wisconsin and basically states that if the property was built before 1978 it is possible and the owner usually checks the box that says have not tested and do not know.

Sounds like he did know. We call this a known material defect and failure to disclose. So step one is to connect with the city and get a copy of what has been sent, so you can verify what the tenants reported. If it turns out the seller knew and decided knowingly to not disclose and misrepresent you have a pretty good case.

The smart solution for both of you is to settle instead of going to court. 

Legal fees on each side are quickly 5k-10k. This is where the demand letter comes in, you basically lay out the case and tell them you will litigate, present your case and then offer a settlement as a solution. If they know their legal fees will be 10k and on top of that they will probably loose and have to pay 25k for the remediation, maybe even your attorney fees - sending you a check for half of that starts to look like the better option.

Once you get the money have the issue taken care of. It's not that difficult. A lead certified painter has to remove all loose paint, basically lay out plastic everywhere to make sure nothing gets in the ground then scrape the loose paint until you have a solid base and then paint over it. Some contractors will quote you very high prices based on the fear factor of lead, but you'll find someone who is reasonable if you shop around.

How do you research property citations? Is that public record? What similar issues are missed during DD? I.e checking building permits