All Forum Posts by: Brad S.

@Joe Colmen Hey Joe, many times it seems like that. Many years ago I thought like that also...that there were few, if any good deals to be had. Either the market was too competitive or the inventory was low, etc. But, as soon as I started to focus on what I wanted, deals would pop into my awareness.

One of those deals came when I was too busy with work to focus on finding a deal. But, I realized I wasn’t really open to finding a deal, since I was too busy focusing on working. So, I started to change my outlook and “open up” to finding a deal. It was at a time when it was very competitive and it seemed there were no deals to be had.

It was a very quick couple of days that a good prospect showed up in the mls. It didn’t seem right. It was an 1800sf, 2 bed, 2 bath, in a great location, very close to me, which didn’t seem to need any significant amount of work. And it was priced well below market, somewhere in the mid 300’s, when comps were in the high 400’s and in the 500’s.

I thought it would need a lot work, but was surprised when it was in really good condition, had a nice layout, big rooms, actual master suite, nice yard, and a large den which could easily be converted into a 3rd bedroom, by adding a wall and closet. It was actually too good to be true. This was exactly the type of deal I was looking for!

But, so we’re a lot of other people, apparently! 9 competing offers later (in 3 days), I got a call from the listing agent, stating that I beat out the other offers by $700! I’m sure I didn’t sound excited to the agent, because I hung up the phone and my first thought was “Oh, s###!” Now, I have to figure out how to pay for this and find someone to do the work of converting the den to a bedroom, etc!

But, I also couldn’t figure out how this was a losing deal, there seemed no way to lose-it was significantly under market value, needed very minimal work, I could rent it for good cash flow, etc. I remember when I purchased it, my appraisal came in at $555k. The sellers were just motivated to get rid of this liability. This was their previous home they had a difficult time selling before, due to a soft market, when they bought there newer house, and now, they just wanted to move on.

Although, I was concerned that I was in over my head, things came together pretty easily. I was able to pull together the 10% down payment, get a good loan and found out someone I worked with was working construction with an experienced person and could do the den conversion. Total cost for the den to bedroom conversion was around $2,000. It took just a couple days to do the work and I had it rented for around $700 positive cash flow (not including vac, collections, or capx), within a couple weeks.

I didn’t have to worry about any maintenance, since my tenants ran a developmentally disabled home at the house and needed to keep everything in good working order, to keep their license and business going. I never heard anything from them, they just deposited the rent early in my account every month!

Then, as the 2008 downturn was approaching, looking at the stats and figures, it was obvious we were inflated and there was going to be a downturn locally. So, I decided to sell and exchange into out of state properties.

I put around $35k into a straight forward rehab, from a heloc, bought a car with the heloc, and still managed to profit around $400k, when I sold it for $835k, after a little over 2 years of owning it.

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There are deals to be had in any market . I have a couple other examples I may post about later. And Joe, these are in the LA area and I know your market fairly well, so I know there are probably some deals not far from you .

There was just one I just missed right near me. I didn’t realize they put it back on the market, since they took it off when the Covid lockdown started. It sold for $730k, probably could do a full major rebuild/rehab for $250k-300k, and resold for 1.4m+. And I could’ve easily gotten investor or hard money to do most of it. I’m kinda bummed I missed it, but am looking at others that may make sense.

@Ricardo Flores So technically, if you don’t have an agreement with the first lender to pay for the second appraisal, then you aren’t responsible for that, since the lender is the Appraiser’s client, and they should pay the Appraiser.

As a licensed Appraiser for over 23 years, I do think the appraiser should be paid, but my comments above are the reality of the situation.

@Ricardo Flores In your transaction, the lender is the Appraiser's client and due to confidentiality, per USPAP (Uniform Standards of Appraisal Practice), the appraiser cannot just "release" the appraisal to any one. They need specific permission from their client (the lender).

But, even if they did release the report to the new lender, it is likely the new lender would require the report be changed to reflect their name in the report. Which cannot be done by the Appraiser. Technically, it would be considered a new assignment by the Appraiser.

The first lender messed up by not requiring you to put up a deposit for the full appraisal, but they do have a right to require payment before releasing it. The easiest way to deal with this, is have the new lender ask the Appraiser to do a new report, and ask them for a discount, since they have all the info from the previous report. They can do a retrospective appraisal, which would keep the same effective date as the other appraisal. They wouldn’t have to reinspect the property.

But, the new lender has to be willing to accept it and if the appraiser hasn’t got paid by the old lender, they will probably want full payment for the new report anyway.

@Charlie Anne Can you refi after the rehab? That should be able to get you half the 50k back @ 75% ltv refi, with an arv of $160k. Then work out the return based on the new #’s. Also, you could do a lease option, in order to increase your rent and increase your cash flow, as well as possibly get some of the future appreciation, depending on your lease option terms.

@Alexander Jenkins.

I would’ve hoped it would’ve been under market, or maybe have another built in value, like it’s hard to find other similar properties in the area. Basically, where’s the value in this deal for you? Is it just that it is a convenient opportunity that happened to come to your attention, because one of your colleagues got it?

Because if that’s the reason, then this particular deal seems to lose its significance, due to the current time constraints and ability to work out the funding details (partners, etc). Especially, if you can find a similar property later, once you have those details prepared. I’m not saying don’t do it, but just to realize this may not be the optimal situation for you. I have had many times, where I “let go” of deals that weren’t right, for timing reasons or other reasons, only to find better ones appear soon after, when I was in better position.

In contrast, there have been those deals that it made perfect sense to struggle to get, since the potential payoff was so much greater than the hassle to get there. But, that is your decision to make.

This deal is more of a purchasing an asset to start business, than it is a real estate investment. Also, how much are long term rents, if the str doesn’t work out or they suddenly change the rules? And have you run the #s on a lower occupancy, to make sure it still looks attractive, if your projections are off.

@Alexander Jenkins Is this a "deal," meaning, are you buying it below market value, in your opinion?  If so, what do you think the market value is?

Also,if you do it "above board," and register with the county (which I suggest, you don't want the liability, if you don't), there are fees for that, as well as the taxes they require (sales/use tax and hotel tax).

@Alexander Jenkins

Yes, and do your homework to confirm your projections. There's a lot of money looking for a better than average return. You should be able to find someone interested with those numbers.

Good luck, and let us know how it goes.

@Alexander Jenkins Ok, got it. Those #'s sound pretty good. I personally don't have any experience with str's yet, so I can't say if 65% occupancy is realistic or not, but it seems reasonable, depending on the location. Have you checked the usual suspects; airdna, airbnb and others I don't know about, regarding occupancy and rate. Also, I would get in touch with str managers that work in that area, and pick their brain, even if you don't plan on using them. If they have str's they manage in the area, they are probably the best source of factual info about that local str market. You can check with itrip (They have franchise owners in different local markets and I've heard good things about them generally-they are who i am going to use on 1 of my units) , vacasa ( I heard mixed reviews of them), and whomever else you can find. Many of them will do a proforma based on your specific unit, to show you the potential. I would do that just to confirm your original projections and/or you may decide to use them, since they already have the highest ratings on the usual sites and they have all the moving parts in place (supposedly).

Also, don't forget you need to provide all utilities for str's, including internet, cable or other tv service, etc. And you most likely will still need to do or add some items to the unit, even with the "second home" accoutrements. Like dishes, silverware, towels, toiletries, wifi entry lock and other potential items. It may add up unexpectedly, so just fyi. In either case, make sure any of those existing personal items (furnishings, etc) are specifically written in the contract. Since they are not permanent fixtures and aren't real estate, they typically, are not part of most contracts unless specifically written in and detailed. You don't want to count on those items, only to show up after closing and find they removed all the furnishings and decorating.

 Now, you may have all that taken care of, but thought'd i'd point those out, just in case.

As far as the deal itself, it seems interesting with those #'s, but a concern is your lack of funds and reserves, to cover unforeseen circumstances. One way to mitigate this to is to find a partner to split the risk, maybe just a money partner. You can show them your projections and what you are basing them on and show them the #'s and the projected return, hopefully making it attractive to them, as compared to their other investment opportunities. You can explain that you will put up some of the monies needed (getting some skin in the game), and you will manage the deal and/or the str (or str manager), and they would put all the other money needed to acquire and get it ready for str, as well as put up the reserves you decide on. Since you did all the groundwork already and found the deal, etc, that is a reasonable agreement, although, you'd have to decide how you are willing to split potential profits (50%/50% or?). That is a safe way to get into the deal, while reducing your individual risk.

Example based on your #'s:

mortgage $1,070/mth

 insurance - $750/yr or around $65/mth

taxes - $800/yr or around $70/mth

total piti = $1,205/month

Let's estimate utilities around $300/month (electricity, gas, water, internet, tv service, etc)

Total - $1,505/month

Now, you are estimating $35k/yr for gross revenue, so that is about $2,900/month, so you may want to put 10% or something toward repairs/maintenance, etc. $290/mth (I'm not sure if that is high for an str or not, but, you need to use your own estimates)

So, that works out to around $1,800/month for expenses, leaving $1,100/month net. If you offered 50% to a limited partner ("money person"), they would get $6,600/year

If they put up the 10% difference needed for the down payment, that is $13,500 and you can have them pay all the closing costs and fund the bank account with reserves of around 3-6 months or $6-10k. Let's just say they put in around $20k total and they can get $6,600 annually for that or 33% return on their money! 

My point is you can vary this to suit your needs and your return goals, while limiting your risk. You can also work it so you can pay the investor off in a couple years with your portion of the profits, then you will end up with the deal solely yourself after that time period, while you mitigated the risk to get there.

make sense?

Need more specifics, like all the usual #'s, projections, etc.

Purchase price ($135k)

down payment $

mortgage payment and terms (11% and monthly payment, etc)

insurance and tax amounts

property management estimate or do it yourself

current market value (Is $135k under market value, etc)

Any repair/rehab costs needed after purchase?

What are your plans with it - str, longterm rental, rehab, value adds, etc

At $35k, it sounds like an str

And all the other pertinent info, basically, why do you think it's a good investment?