All Forum Posts by: Sean Cole

DON'T!  NOT EVER!

Now that I've had some time to take a few deep breaths and count to 10... There's a few common issues that come up with these types of proposals:

1.  The contractor never offers to do their portion of the work for free during the rehab.  They want to charge their normal rate AND get a piece of the profit at the end.

2.  The contractor usually still wants regular payment throughout the job.  You ever get paid as an investor during the rehab?  Didn't think so!

3.  Contractors in my area generally have terrible design sense but don't realize it.  Light beige walls are out of style!

4.  As others have said, what happens if he walks off or does a terrible job and you have to fire him?

5.  Related to #2, IF (big one) you can get your average contractor to agree to not take payments during the job, he's probably going to have a cashflow problem, leading him to take on other jobs during your rehab to pay his bills.  This isn't good for your timeline.

Of course, there are exceptions to every rule.  The ONLY way that I'd consider this kind of arrangement would be if the contractor was also contributing significant hard cash to the deal, just like any other equity partner would be expected to do.

Jacob, I use Chuck Vonderhaar in Reading for my business and personal returns.  He teaches a class to the local realtor board about maximizing your real estate deductions as an agent.  He's done the same for me on my investment properties.

If you call him, please let him know I referred you.  I don't get anything for it - just like my business partners to know that I'm referring them for when I ask for referrals back :)

Their disposition options will depend on how their loan was secured. One local HML uses land trusts, so they just change the beneficiary of the Trust to themselves (they're the trustee, too) while they try to find a new rehabber, finish it themselves or list it on the MLS.

Our HML loans use a different structure, but we'd still not wind up on the courthouse steps if the rehabber didn't perform.

I come down on the "it's location-dependent" side of the discussion.  Here in Cincinnati, I've had more than a few customers ask questions about my vehicle because it's a more conservative town.  When I got into the business, I was driving a 6 year old Range Rover (when I bought it) that I paid $21k for.  Funny enough, I got fewer questions when I brought a brand new F150 at more than double the price.  Last year, I bought a 3 year old E350 and the questions have started again.  Doesn't matter that I paid $30k for it.  

Other parts of the country are less conservative and you'd find people that wouldn't work with you as a realtor if you showed up in a 3 year old E-class because it meant you weren't successful enough.

The questions about my vehicles are enough that it will impact my decision on my next personal vehicle.  I'd hate to have to buy 2 just to make my customers happy when I meet with them, but I already know that I'm constantly being questioned about how much money we're making...  

On a related note, my wife and I have started discussing ways to hide the ownership of the next house that we buy in case some customer or potential customer wants to look that up.  Net/net, I work very hard as a small business owner and have demonstrated that I'm pretty good at what I do.  Some people spend money on vacations and clothes.  I tend to spend it on cars and houses.

We use "cash offer" to mean a couple of different things:

1. I'm taking cash from my checking/savings/HELOC, etc. account to pay for the house.

2. I'm purchasing the house without a financing contingency, so if my lender says "no" for some reason, I'm still stuck with the house or losing my EMD.

I've had to point out to several highly experienced real estate agents in this area that no checking the boxes for financing is NOT the same as an offer that I'll be paying cash for.

To OP, it's possible that your HML's POF letter is written sub-optimally and that some minor modifications would satisfy the seller/AM.

If I were acting as a rehabber in this case, I'd be very concerned about the ability achieve the Chip/Jo look at a price that would allow you to make a profit by selling at market value when finished.  Chip/Jo take the 2nd approach - the homeowner buys the house and pays for the construction.  Why do you think they buy so many $30k houses and put $200k into it!  

I had 1 deal where a nearby renter wanted to enter into a purchase contract before I'd even closed on my purchase but she wanted to make a few "suggestions."  Of course, her ideas were crazy and would've left me with much less profit (as just 1 example, she wanted me to rip out brand new granite kitchen counters because she didn't like granite).  I wound up turning her down because I didn't want the hassle.

How much is "a lot"?  As Tim asked, if you let us know whether your're trying to wholesale them or just sell them, we can be more assistance.

@Michael D., what is it that you're looking for a REALTOR in Cincinnati to do for you?  All of us REALTORs can list out our accomplishments and make promises about what we can do for you, but without knowing what you're looking for, it's not possible for us to ensure that what you're looking for matches what we're good at.  As an example, if you want to buy farmland in rural parts of town, I'm probably not the best resource for that.

It seems that OP is looking for a proverbial leprechaun riding a unicorn - this is, a 0 risk investment that pays returns better than junk bonds back in the 80s.

I have all of my commissions paid to an LLC that's taken the S-Corp election, but it's mostly a tax issue. I don't believe that I'm getting any extra liability protection by doing so, and I'm not sure that you can transfer an agent's license into an LLC (in Ohio), anyway.

What would someone buy if they were buying your LLC that had your personal real estate license in it?  The value is really just your client database, but in Ohio that technically belongs to the broker if they've created a brokerage relationship.

Also, we're required to have the broker's logo at least as prominent as our name or other branding on the sign.  

Net/net, I'd look at it from a tax perspective and seek legal advice to see what you can do to protect yourself more if you're not happy with your E&O coverages. Remember, there's not much you can do to prevent being sued!