All Forum Posts by: Thomas Franklin

@George Frye In any Joint Venture, the ultimate goal should be to create a Win-Win Situation. It is important to know and understand the needs, of your Joint Venture Partner. All Vested Parties should feel comfortable and happy, when everyone leaves the Closing Table. Be sure to “Paper Up” meaning everything is in writing, with Ironclad Agreements. If you and your Joint Venture Partner will be forming a Corporate Entity together, you will need to have an Operating Agreement crafted. All documents should be created, by a Real Estate Attorney.

1 Vote

@Maricruz Romero As a seasoned Investor, I propose that you ask the following questions, when seeking a contractor. Even though it costs more, I always use a General Contractor.

1. How many homes have you rehabbed and/ or renovated? What was the magnitude, of your projects?

2. How many projects is your company currently undertaking?

3. Do you work with Investors that need to adhere to strict timelines and scope of work?

4. Do you have multiple Sub Contractors, for similar trade skills, such as plumbers, electricians, flooring crews, painters, etc.?

5. Would you be willing to provide a copy of your GC License, your Certificate of General Liability Insurance, and your Certificate of Workman's Compensation Insurance?

6. Are you bonded?

NOTE:

To be “bonded” means the Contractor must purchase a Surety Bond, which serves as a form of Insurance to protect the Contractor’s Customers if he or she fails to complete the job properly or fails to pay for permits, subcontractors, or other financial obligations.

7. Are all of your Sub Contractors Licensed and have Workman's Compensation Insurance? Would your Sub Contractors be willing to provide such information, or would you be willing to sign a waiver stating "All your Sub Contractors have Workman's Compensation Insurance?"

8. Do your Sub Contractors have the ability to verbally communicate, with English Language Only Speakers?

9. Do you pull all necessary permits?

10. Do you provide a written warranty, for all labor? If so, what is the length, of the warranty? (a minimum of 1 year)

11. Do you provide all applicable warranties, for materials?

12. Who is in charge of the job site, to ensure timelines are met and the Scope of Work is properly completed?

13. How do you handle dirty work such as debris disposal and clean up?

14. Would you be willing to receive four draw payments that would correspond to four phases of the rehab project?

15. Would you provide references, from past clients?

2 Votes

Philadelphia, Pennsylvania

@Daniel A. Abreu Notes are evaluated and graded in four areas. These areas are property equity, seasoning, the payor's credit history, and the payment history. If a person is looking to create a note that investors that purchase these types of investment vehicles would look favorable upon, the following guideline are suggested.

Investors look for at least 20-30% of real equity (down payment plus principle reduction) in a property. This minimum level of equity serves to help protect their investment. The 20-30% of real equity (down payment plus principle reduction) in a property is a rudimentary guideline, in the equity area of note evaluation, to reduce the amount a note would be discounted. The majority of Note Buyers will purchase notes with a 10% down payment.

Many Note Buyers will consider the Payor’s credit score closely because it can help predict the note’s potential for foreclosure. Credit scores are indicative of performance with past and current debts, so it makes sense to assume that a Payor who has been responsible in consistently paying back other debts will be a good note Payor as well. With seller-financed deals, most Payors will not have stellar credit, but most buyers still prefer Payor credit scores above 575. However, a higher interest rate may entice an investor to purchase a note with a payor having a weak credit history assuming the other areas that I mentioned above are strong. With that said, the minimum interest rate that note buyers will consider is 8%. Most notes that I have seen have an interest rate of 10-15%. A competitive interest rate is important because it will make it easy for the buyer to purchase the note and yield the desired profit without much of a discount to the Note Holder. ALWAYS CHECK THE STATE USURY LAWS, FOR THE STATE IN WHICH THE NOTE IS CREATED, TO KNOW WHAT THE MAXIMUM INTEREST RATE THAT CAN BE CHARGED.

A note’s “seasoning” describes the number of payments that have been made overall. The more payments that have been made, the more money the Payor has invested in the property; therefore, default is less likely. Most Note Buyers look for 12 or more completed payments, but exceptions are made for notes with a large amount of equity or a Payor with a high credit score. I have sold notes with as little of 6 months of seasoning. In such cases, all payments were made on time during this six (6) month period.

Please keep in mind that people typically prefer notes that follow a traditional term (amortized over 120 months, 180 months, 240 months, etc). A two-year, interest-only balloon term is a perfect example of a note that many buyers would avoid. But remember, all notes are good notes at the right price.

The note payment history takes any late payments into consideration. Understandably, most buyers prefer a consistent on-time payment history. Perfection isn’t required or expected – one isolated occurrence of a missed payment a few years ago won’t necessarily dissuade a potential Note Buyer. Sufficient equity also serves to counterbalance a history of occasional slow payment.

Of course, there are no absolute guarantees of a quick sale. But it is always easier to obtain an attractive offer for the Note Holder when the note is written with the buyers’ needs in mind. Please keep in mind, that structuring a note with the intention to sell is all well and good, but if the payor cannot afford the monthly payments, then you may face the possibility of having to foreclose. Therefore, you may need to find a balance between the two. The points described here are only a rudimentary starting point for note creation; buyers often examine many other factors.

I hope the above information useful. If I may be of further assistance, please feel free to reach out.

2 Votes

Miami, Florida

@Cardell Beasley I only use General Contractors (GCs), on Flips. To vet GCs, I always ask the following questions:

1. How many homes have you rehabbed and/ or renovated? What was the magnitude, of your projects?

2. How many projects is your company currently undertaking?

3. Do you work with Investors that need to adhere to strict timelines and scope of work?

4. Do you have multiple Sub Contractors, for similar trade skills, such as plumbers, electricians, flooring crews, painters, etc.?

5. Would you be willing to provide a copy of your GC License, your Certificate of General Liability Insurance, and your Certificate of Workman's Compensation Insurance?

6. Are you bonded?

NOTE:

8. Do your Sub Contractors have the ability to verbally communicate, with English Language Only Speakers?

9. Do you pull all necessary permits?

10. Do you provide a written warranty, for all labor? If so, what is the length, of the warranty? (a minimum of 1 year)

11. Do you provide all applicable warranties, for materials?

12. Who is in charge of the job site, to ensure timelines are met and the Scope of Work is properly completed?

13. How do you handle dirty work such as debris disposal and clean up?

14. Would you be willing to receive four draw payments that would correspond to four phases of the rehab project?

15. Would you provide references, from past clients?

You want to check there license, with you state Department Of Business And Professional Regulations, that their license is current as well as there are no liens, judgements, complaints, etc. filed against their license. In addition, you want to call their Insurance Carrier to verify their policies are current and their Insurance Coverage Limits.

0 Votes

@Dina S. I would strongly suggest you establishing a Corporate Entity such as a S Corp or a LLC. This is a relatively inexpensive process. I invite you to Google "Creating a LLC or S Corp in _____," "Division of Corporations in _____," or another phrase. You can go to http://www.sunbiz.org and see how Florida does things, to give you and idea what to look for, in a website. I invite you to please consider the following, from a Federal Income Tax Filing Perspective. I cannot stress the importance of finding a very good Investor Friendly CPA. Below are some things you may wish to consider, as to which Corporate Enity is best, for your Business Model as well as your REI Goals and objectives.

Flipping Properties

If the primary objective of your real estate business, or one of your real estate businesses, is to buy, potentially fix up an existing property and resell it within one year, the Internal Revenue Service can consider that to be an active trade or business. Unlike passive rental income, the income from an active trade or business is subject to self employment tax (a nasty. If your goal is to reduce that self-employment tax to a minimum, an S Corporation is the best entity to use. Why?

It is the only entity structure whose rules allow the business owner to take a "reasonable salary" (subject to social security and medicare) and then take the remaining profit (often as much as 50% of the remaining income) out as distributions not subject to self-employment taxes. Correspondingly, all business income taken from an LLC under similar circumstances is subject to self-employment taxes.

Holding Properties

When holding properties as a cash flow investor, the LLC (or LP) is generally the better choice because an LLC has more liberal distribution rules. The key here is flexibility. LLC distributions come out of the LLC at cost basis. The members of an LLC are issued K-1 Form and have to pay taxes on all profits as though it were income, which could expose the owners to high employment taxes. Also, an LLC can elect to be taxed like an S Corporation.

While there is never only one answer that is correct for all circumstances, there is a general rule that is almost always the correct choice. So remember, for legal and tax planning, a good CPA will recommend that clients hold their properties in an LLC or Limited Partnership and run their businesses as S Corporations to avoid self-employment taxes.

0 Votes

@Jeffrey Marshall I would strongly suggest you establishing a Corporate Entity such as a S Corp or a LLC. This is a relatively inexpensive process. I invite you to Google "Creating a LLC or S Corp in _____," "Division of Corporations in _____," or another phrase. You can go to http://www.sunbiz.org and see how Florida does things, to give you and idea what to look for, in a website. I invite you to please consider the following, from a Federal Income Tax Filing Perspective. I cannot stress the importance of finding a very good Investor Friendly CPA. Below are some things you may wish to consider, as to which Corporate Enity is best, for your Business Model as well as your REI Goals and objectives.

Flipping Properties

If the primary objective of your real estate business, or one of your real estate businesses, is to buy, potentially fix up an existing property and resell it within one year, the Internal Revenue Service can consider that to be an active trade or business. Unlike passive rental income, the income from an active trade or business is subject to self employment tax. If your goal is to reduce that self-employment tax to a minimum, an S Corporation is the best entity to use. Why?

Holding Properties

While there is never only one answer that is correct for all circumstances, there is a general rule that is almost always the correct choice. So remember, for legal and tax planning, a good CPA will recommend that clients hold their properties in an LLC or Limited Partnership and run their businesses as S Corporations to avoid self-employment taxes.

1 Vote

@Maugno Mora I have read several of the comments, in this thread. I can speak, from Personal Experience that you DO NOT want your wife owning a percentage, in any LLC or other Corporate Entity. What happens if your marriage ends, in divorce? Your wife will be entitled to equitable distribution of ALL assets acquired (WORSE CASE IS 50%), during the life of the marriage. Depending on your wife’s Skill Sets, you could hire her as an employee and issue her a 1099 at the end of the year. This would be a Business Deduction, for you, and her Income would applied to a 1040 Federal Tax Return and possibly a State Tax Return depending on whether or not your state requires such and depending on what state your Corporate Entity is registered. I hope you find this information useful, in guiding you how best to move forward.

1 Vote

@Harley Fowler Since you are interested in fix and flips, I propose the following action plan. The first step would find an Investor Friendly Realtor assuming you do not have access, to the MLS. I would suggest that you interview several Realtors and ask them the following questions, to ascertain if they are truly Investor Friendly, or if they are throwing you a sales pitch.

1. How many investors do you currently work with and how many investors have you worked with, in the past?

2. How many transactions have you closed, with investors?

3. Do you currently own any Investment Properties? If so, what type do you own?

4. Are you a member of any REIAs?

The next step would be to work with the Realtor and determine the hot markets, in your County, with the greatest number of sales over the last 90 to 120 days. Personally, I would prefer 90 days because markets are always changing. This list would contain the zip code and corresponding name of the municipality. In addition, a breakdown of the number of SFRs, Townhouses, and Condos, with corresponding ADOM (Average Days On Market), and Median Sales Price, for each municipality. This will be your Farming Area. From this data, you can utilize a website bestplaces.net that will give you a breakdown of the percentage of homes that sold, in various price ranges, for a given zip code. You can identify the two highest retail price ranges, in greatest demand, per zip code where you can list the rehabbed property.

You can use the Realtor to help you find deals and also use Wholesalers. If you acquire a property, from a Wholesaler, once the property is rehabbed and ready for the Retail Market, allow the Realtor that provided you the zip codes, to list the property for sale. This creates a WIN-WIN Situation and gives the Realtor incentive, to work harder on your behalf.

Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.

0 Votes

@Stanford Neal Mead Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.