All Forum Posts by: David Weiss

@Nathan Ewert , every rehabber out there had a first rehab that they were scared of screwing up, because inexperience is intimidating. The thing is, wholesaling doesn't do much to teach you how to rehab....

Underestimating the amount and cost of the rehab is one of the biggest dangers for the newbie. One way to mitigate that is to use an asset-based hard money lender who will inspect the property prior to lending to see if your numbers are accurate. If you don't go down that route, sign the contract contingent upon property inspection and get a good GC to walk the property before your contingency period expires.

Another thing you can do to mitigate risk is to have a good relationship with an experienced local rehabber that you can ask questions and get advice from (or even partner with on your first flip)(or failing that, get advice from experienced rehabbers here on BP!)

Also, if you have a really solid GC in place, one who is experienced and highly regarded by your local rehabbers and who is smart and has built his business around rehabbing flips, that person can tell you what you should be doing with a house, what upgrades are worth the cost and what are not, what's popular with today's buyers and the best way to solve problems that come up. You'll want a GC who other investors say they would trust to manage the rehab without direction if they were out of pocket. There's nothing wrong with letting the guy who has done the renovating on 200 flips tell the investor with 0 flips to his name what should be done during rehab, as long as he's trustworthy enough to not take advantage.

Other rehabbers may have their own $0.02 to chip in....

Good luck!

Hi Jonathan. Welcome to the world of real estate investing!

I think all the time you've spent researching have paid off. You've realized that having multiple strategies in your toolbox will allow you to work more deals than if you only have a single strategy, and that's a serious advantage.

Just a heads up, the challenge you're going to run into is that even motivated sellers will not always be willing to do the type of deal that works for the circumstances.

You will probably find investors who will argue that any deal without significant equity is a bad deal. Their point (which is very rational) is that without equity you have limited exit strategies and if Plan A doesn't work out, you're S.O.L.

Other investors will point out that if you have appropriate cash reserves you can deal with the vacancies and repairs that can otherwise cause catastrophe for low/no equity investors without cash on hand. You'll have to decide if you're more conservative or more aggressive with regard to risk management.

You're going to find a couple challenges with wholesaling. First, it can be hard to structure a wholesale deal involving Sub2, LO and Short Sale deals. Second, it's hard to find a deal that's good enough of a deal to still be a deal for your buyer after you take your cut. (Of course, there are a lot of wholesalers who regularly solve these riddles.)

I was originally going to start out wholesaling, but a rehabber asked me a pointed question: when I finally found a solid deal, why would I wholesale it for $5k when I could rehab it for $30k? My response was that I lacked money and competency. He responded that he has to get (hard money) loans to finance his rehabs and that wholesaling experience doesn't really teach rehabbing. I decided he had a good point. You may or may not agree, but I thought I'd pass it along.

Knowledge is key. You're off to a great start. Good luck!

David

PS: I'm pursuing my first short sale, brought to my attention by an experienced Agent. She says that nowadays banks rarely discount the loan settlement amount by more than 10% or 15%. So short sales may be less of a way to significantly turn around the equity situation and more of a solution for a deal that needs a bit more equity to make sense.

Understood about the issues with a Wrap. Me, I'd prefer a risk of future costs than a certainty of a $10k hit now. Especially since I might be in a better financial position in the future. Of course different people have different considerations, but I would mention the idea to your friend and let her decide. If I was struggling with a low-paying job and I had a friend who had a strategy for saving me a $10k hit, I'd be pretty upset if they didn't mention it so that I could make the decision for myself. You may well be right about your friend's reaction, but....

This is my perspective. Your mileage may vary. ;)

Selling at a loss is of course always an option.

She could also go for a short sale. That will damage her credit and Fannie Mae guidelines do not permit her to buy another house for 2 years after a short sale if she has any 60+ day late payments on her record. That is possibly relevant because she's current and most lenders won't short sale on a loan that's current, so she may need to stop paying in order to get a short sale. Of course, if she already has a home and doesn't plan to move in the next two years, this may be a non-factor.

If I were her, I would sell it on the open market while offering Owner Financing (via a Wraparound Mortgage). Offering OF will allow her to charge a bit more than the market would normally bear so she should be able to get her mortgage payments handled this way. She could charge the same down payment she had to pay, which she would be able to pocket. She would be free from landlord responsibilities and wouldn't take a credit hit.

Such an arrangement does carry some risk. If her buyer stopped paying, she would have to foreclose on the buyer while making house payments on the property. She'd then have to resell the house doing OF again. (There is a significant silver lining to this, however: if that happens and if she can afford to carry the house during the foreclosure and vacancy, she gets to sell the same house twice, getting a second down payment and, best of all, after the original note is paid off, she gets to pocket 100% of the monthly payments until the Wrap note is paid off.)

Because there is a risk of needing to carry the house for several months if her buyer becomes unable to make payments, she would be well-advised to stick the buyer's down payment in the bank and leave it there as an emergency house payment fund until the original note is paid off.

I agree with Joshua that the true value of an REI Club lies in the networking opportunities they present. I've gotten some very good free mentoring that completely overhauled my business from REI Club networking and also found a hard money lender that meets my needs from attending local meetings.

I would also give your REI club another chance or two. While every guest speaker I've ever seen at these events has something to sell, every presentation I've seen so far has been a very insightful and educational experience that I was glad to have attended, with the sales pitch being overshadowed by the educational content. Maybe the clubs in my area are just higher quality than in yours, but I would try another one to test whether your first experience was the norm or an exception for that club.

I would also agree with Joshua that it's best to leave the wallet at home. Especially in the beginning, REI can cost you more money that it earns you if you're not careful. ;) Good luck!

I'm not so sure I'd be so quick to dismiss this deal.

Here's how I would do the analysis if I were in your shoes.

I would ideally prefer to have more than two comps, but since most parts of Dallas/Fort Worth are experiencing a very strong seller's market, I would have more confidence in my ability to sell for a good price than in a more balanced market. Therefore, if you aren't in a high-crime area, I wouldn't let the number of comps alone stop me.

Your first comp is a short sale, your second comp is significantly lower. This is a little puzzling, but the low comp might be because the second house was significantly smaller or had fewer amenities or needed more repair or was purchased by an investor.

I pay more attention to price per square foot than total price when I'm forecasting my After Repair Value. So I'd compare the $/ft for each comp. If they're within a few dollars of one another, I'd multiply the lower $/ft times the square footage of my investment property and use that as my ARV.

If the two $/ft numbers are significantly different, I'd carefully compare the comps to the investment property. Are they in the same subdivision? Do they all have the same number of bedrooms, baths and garage spaces? Do they have the same quality of counter-tops, kitchen appliances, flooring, bathrooms? Do they have the same presence/absence of other amenities like decks, patios, fireplaces, pools, etc.? Does either include things like new roofs, etc.?

If one comp seemed kind of not comparable to my investment property, I'd toss it and calculate my ARV by multiplying the remaining comp's $/ft times my investment property's square footage.

If both comps seemed equally legit, honestly in this case I'd just assume my low comp was a lowball offer given by an investor and accepted by a distressed seller, and I'd toss it and use the short sale's $/ft.

If my ARV came in at $136k or higher, I'd feel comfortable buying the house for $75k and putting $20k of rehab into it. Your total investment would be 70% ARV or lower.

And if you've got access to cash to handle the rehab plus two closings and paying the loan, insurance and taxes for several months, I'd totally explore getting the loan assigned to me (preferably) or purchasing the property via Wrap or Sub2. Why?

If you drop $95k into purchasing the house and sell for $136k, your ROI is 43% (before carrying/closing costs).

If you drop $10k as a down payment plus $20k rehab plus $5k in carrying costs, your ROI is 117% (before closing costs).

All real estate investments entail risk. I don't believe forecasting your ARV using comps is extremely risky, I think it's the most sensible approach. I don't believe the interest rate changes when the loan is assumed. The bank might refuse to assign you the note because you don't meet their requirements; if that happens, you can acquire it via a Wrap Mortgage or a Sub2 as long as you don't need a hard money loan and understand Due On Sale risks. Or you can just buy it outright, with your cash or via an HML. A title company can run a title search to determine if the estate has been resolved and can guide you in how to clear the title if it has not. Lastly, all rehab flips take time. Time shouldn't be a red flag to any rehabber. It is simply a risk to be managed.

If there is a particular term for such a clause I'm not aware of it. The experienced RE attorney who shared this tactic described it as providing the seller a contractual remedy that allowed them to give a 60 day notice for nonpayment and then taking title if the payments didn't resume, similar to a foreclosure, but without the credit hit or auction).

Said attorney recommended that I as a Sub2 buyer put this clause in for the seller so that if I become unable to pay, my seller will have a contractual remedy. The purpose for giving the seller a remedy is a) to increase the seller's comfort with the Sub2, and b) if things go south, having an alternative to litigation in the contract reduces my risk of litigation.

It simply occurred to me that you could use the same type of clause when selling.

I'm not a lawyer and I have never sold via Sub2; I underscore again the need to work with a really good lawyer if you or anyone else wants to go down this road.

I agree 100% with @Aaron Mazzrillo . Just because the note stays in the seller's name doesn't mean you're risk free.

Among other things, if your failure to pay screws the seller into losing his property to foreclosure, he can sue you.

And if that happens, who do you think the court will have more sympathy for, the homeowner who got screwed in the transaction, or the sophisticated investor who pocketed cash from the deal?

IMHO, the only safe way to buy via Sub2 is if your end strategy keeps you in the deal and you have cash reserves to carry the note while resolving any nonpayment issues downstream.

I'm not sure I'd agree this is categorically true. For example, if you have enough equity in the house you can require a large down payment (10% or 20% down or something like that--you'd want more than $5k) when selling Sub2 and include a remedy in the contract that allows you to reacquire title if they fail to pay. You'd then save enough of the DP to be able to make payments yourself while you reacquire your title and find another buyer.

Using this strategy, you can turn a Sub2 borrower's inability to pay into an advantage instead of a disadvantage (because you end up being able to sell your house twice, the second time with more equity). You also avoid the foreclosure, credit damage and deficiency judgment. Of course, this doesn't create a risk-free opportunity: the house might come back to you with extra damage, etc.

Note that based on the discussion to date, I don't think these buyers would agree to the above. My purpose is to speak in a more general way that a smart Sub2 agreement coupled with significant cash reserves can mitigate some of the aforementioned risks.

In short, get a good RE lawyer with deep experience in creative financing transactions to review your situation and you may find that (if no better options come along) it may be possible to sell via Sub2 with a level of risk you are comfortable with.

Your basis for continuing to commit libel against Mr. Dadlani seems to be based on nothing more than the fact that he charges incrementally more than traditional HML's.

Do you believe he should offer loans with zero-down, no inspection and no monthly payments and do so at the same 14% interest rate as other HML's? I certainly don't.

My conscience troubles me not at all to provide an objective evaluation of a business offer as I see it. Bottom line: Mr. Dadlani's money is the most expensive I've seen. But it comes with terms that I've not seen anyone else offer. If the terms are worth the cost, an investor should use him. If they aren't, an investor shouldn't.

My conscience does bother me a bit that this thread has been hijacked into a discussion on Mr. Dadlani's character. I think you are doing yourself a disservice by continuing to defame Mr. Dadlani, but whether you choose to persist or not, I am respectfully bowing out of this conversation.