All Forum Posts by: Ethan Giller

Jeffrey, be careful if your intention is to buy a single family property in Philly and "turn it into 3 units".  This is not a trivial process (even assuming that the property has the correct zoning designation for 3 units), as you will need architectural plans approved and will have to pull a major alteration permit (which will trigger the need to bring everything up to fire code - sprinkler system/fire alarm with pull stations/fire-rated doors and sheetrock, etc.).  Not something I would recommend for your first investment.

It's a great idea to house hack but find a property that already has the right number of units and verify that it's legally zoned for the existing setup.  Just because there are 3 units already in place does not mean it's legal.  L&I is really cracking down on this now so be careful.

As @Brandon Turner wisely advises, find your "unfair advantages" and use those to guide your investing strategy.  For me, when I got started it was a) access to cheap private capital (family & friends), b) a willingness to house hack and live with roommates, c) location in a city with a cheap real estate inventory, and d) a friend who was also investing and could help me with some contractor contacts.

Yours will be different, for example maybe you know a certain area of the city very well and can recognize underpriced MLS properties, or you have the time to send out direct mail and take phone calls, or you have the temperament to knock on doors of potential sellers, or you are very handy and can save money on the rehab, or you have a very long-term investment horizon so you can buy in marginal areas, or you love networking and can convince someone to JV a deal... you get the idea. Your niche will evolve but the most important step is to identify what unique things you bring to the table, and then take action!

Based on your name, I would definitely say that your niche should be in West Philly.  ;-)

Armando, congrats on your first potential wholesale deal!

Now for the bad news, I invest in those areas and based on a quick search, I think that $40K is already at market value (or likely even above, depending on condition).  You're not going to have much luck wholesaling at that price.  To generate real investor interest, I think you need to be at half of that price.

City-assessed value, Property Shark, Zillow, etc. will give you a good idea if you are in the right ballpark for your pricing, but you really need to run comps using the MLS.

They tell you that because without a HUD-1, it's difficult to really prove that you are the legal owner (that you have closed with the sheriff) until the deed is recorded. When they say "you can't do anything" they really mean that if there's an occupant, you may have trouble filing an eviction/ejection action until it's recorded. If you're trying to sell or refinance, you will have trouble until the deed is recorded.

In my experience, and from a practical perspective, it's ok to enter the property at this point.  99% of the time you will not have a problem.  If you want to worry about the remaining 1%, then you can wait the 6-8 weeks.

Risk is that L&I cites it for being unsafe (requiring repairs, somewhat likely) or vacant (requiring a permit, not that likely) or for having boarded up windows/doors (requiring repairs, not that likely).  If you buy, get a U&O first to see if there are existing violations that you will have to deal with.

And also that you hold it for a few years and the area doesn't turn around and it's not worth the holding costs.

And also make sure you're getting clear title, so the title insurance fees and deed filing fees and fair market value transfer tax will probably be $500-$1K.

Mike, I usually advise my friends in this type of situation to sell... and believe me, I'm generally all about buying and holding real estate!

My thought is this: according to the rule of thumb advice on this website, the bare minimum rental investment you should look for is 1% monthly gross return on your purchase price.  (i.e. you shouldn't buy an investment property for $250K that will rent for $1,800, it would need to rent for at least $2,500).  But if you hold onto your property, that is exactly what you would be doing (since you will net around $250K if you sell for $275K).  If you wouldn't buy it for those terms, why would you keep it at those terms?  Even the best-managed rental property will cause you some hassle and concern and headache eventually, and there are a lot more expenses that crop up over time beyond just the mortgage payments.

Not to mention you will have to get a rental license, rental suitability cert, lead inspection (for kids < 7), pay Philadelphia BIRT and NPT taxes, keep records for your tax returns, etc.  These things are honestly fairly easy to deal with with some basic research, but they do take time and attention and it is probably not worth it for the minimal returns.

You typically can't typically operate a rooming house rental in Philadelphia like that without a zoning variance.  People certainly go ahead and do it anyway, but if you are caught by L&I then you will get in trouble.  It will also be harder to finance, even if the use is consistent zoning.

If you are new to Philly and/or you're not an experienced investor, be careful.  At that price it's probably not be worth the additional risks and management hassle.

David, I'm an investor in Philly, feel free to send me an email if you want a second set of eyes on your deal.  Based on your situation and the types of questions you're asking, I think that a seller-financed mixed use property might not be the best choice for your first purchase.  Especially if you are not used to dealing with commercial leases.

@Rey Grabato

Thanks for the detailed reply!  I do remain a bit skeptical regarding certain claims, but it does seem plausible that your company could be involved in some big projects in Philadelphia.

From what I can tell, your overall business model is to develop large-scale developments in Philly using loans secured by private investors.  It's my understanding that the standard model would be to fund a project like this (acquisition and construction costs) with your own financing, generally via construction loans with personal guarantees of the principals, thereby taking on all of the risk in the event of poor project performance but also capturing all of the return if the properties are sold for a high profit.  Instead, your model effectively pre-sells the properties by bringing in novice investors/buyers early in the process.  By having these investors provide the personal guarantees for the funding, you are offloading most of the risk to them and in exchange are locking in fixed profit for yourself (in the form of your management fees), while giving up some of the returns that you theoretically could have made by selling the properties at their completed market value.  You can presumably build much larger projects this way too because you have a lot more individual collateral and guarantees for the banks.

If this is actually the case, it's hard for me to find anything intentionally nefarious in your setup since it's possible that you are actually creating sufficient equity in your developments by managing your costs, and building in scale.  Although your marketing certainly does have the potential to be a fairly deceiving, so long as your investors actually understand the risk profile of their highly leveraged purchases, it may not be an out-and-out scam.

If I'm right.

Relevant articles:

http://www.businessinsider.com/national-realty-the...

http://www.businessinsider.com/national-realty-say...

Ray, thanks for sharing some of your numbers and addresses.  Looks like you guys are building some nice houses!  But as a fellow investor in Philadelphia, I have a few questions:

1) You manage a 630 unit portfolio work $400M, so you average price per unit is $635K?  Those numbers seem off.

2) Your start-to-finish timeline varies from 12 to 68 months?  It looks like your average time from your 6 recent transactions is over 3 years, is this all build time?  Why the variability and why the lengthy timelines?  It's been my experience that ground-up construction in Philadelphia should ideally take < 6 months.

3) How are you fees calculated, and at what stage are they included?

4) I can't figure out if your investors are selling these properties or holding them for rental. From the spreadsheet it appears that they are flips but you also talk about rental returns. Do you self-manage your units and if so, what broker do you use? If not, who do you use for management?

5) Most importantly, I can't figure out why you are offering novice investors a turn-key service that produces such great returns instead of simply borrowing the money yourself from a local lender at a ~5% construction loan.  If you have a $400M portfolio under management, and a 9-year track record of 600+ transactions, I would think that you would be generating enough profit to qualify for some preferred financing without needing $12K of investor capital and new investors to qualify for these loans?

There are just a few things in your statements and numbers that appear 'too good to be true'.