All Forum Posts by: Tom Mole

@Account Closed should be thinking about how much less she should offer since no one is willing to inspect this place. A bad reputation is a marketable commodity!

So, Katrina, go back to your seller and ask him how much of a discount he's offering you to buy despite the proven fact that no one is willing to inspect this property. And don't even think of smiling when you ask. If you can keep in mind that this reputation deserves a discount in the price since it involves you taking a greater risk and you do it with ultimate in confidence, you just might get a reduction. It's worth a shot.

Cheers!!

Basically what I hear you saying is that you want to wholesale the property. Some states are pretty particular about that. Ohio has all but outright outlawed the practice of wholeselling, which they consider acting as an agent without a license. 

This issue is over intent. Do you as a buyer INTEND to actually consummate the purchase? It sounds like you do not. Hey, no judgment here. I don't see a problem with that, but some states do. Ask a competent RE attorney familiar with the attitude in your state. You may want to contact the BRE in your state for the prevailing opinion as well.

The main question is whether or not you are a principal in the transaction, meaning do you own the property and are you selling it on your own behalf or are you planning to own the property eventually? At this point I would say that it doesn't much sound like you are. Do you imagine that your seller would partner with you through an entity such as a land trust to get the property sold?

A properly written trust could be just the thing to make you into a principal for the duration of the transaction. Once created the title could be transferred to the trust, then a portion of the beneficial interest could be granted to you while you look for a buyer to purchase "your" property. BUT, talk to your RE attorney first. I'm not an attorney and I'm not telling you that this is legal. I'm just giving you something to consider.

No state allows you act as an agent without an RE license, even if the seller agrees to allow you to sell his property for him. However, in most states you become a principal in the transaction when you become the buyer under contract, even if you later assign that contract to someone else. If NC is not one of these states, then you'll be best served to discuss your options with a competent RE attorney that specializes in North Carolina. The expense will seem small compared to standing before a judge and trying to explain your actions.

Cheers!!

Hi @Katrina P.

Have you considered that the inspector may not be afraid of the bugs as much as he may be afraid of the liability. If he tells you that there are no bedbugs, which is damned hard to determine with any degree of certainty, then you find the infestation persists, he could be held accountable for your problem.

You might talk to the inspector to determine if this is his real issue. He may be willing to inspect for everything else as long as he can get a waiver for any liability against this specific issue. You can have an actual pest guy inspect and remediate. Those guys are the experts in this arena.

I'd love to hear how this turns out for you.

Cheers!!

@Dawn Roof. about comping your project when there are not realistic comps available, this happens all the time with apartments. Your two triplexes constitute a six plex, which in the real estate biz is technically a small apartment. As a performing apartment you should start with an income valuation. It goes like this:

• Determine the market cap rate and vacancy rate. (A good commercial broker can help a lot with this.)
• Determine the market rent. (A good property manager is your best source for this.)
• Figure your Gross Scheduled Income (GSI). (Generally, this is your total rents if you had no vacancy, concessions or tenants that fail to pay.)
• Figure your Operating Expenses. (This should include Taxes, Insurance, Management, Maintenance, Utilities and Repairs.)
• From your GSI subtract your Operating Expenses and the market vacancy rate times GSI to get your Net Operating Income (NOI).
• Divide the NOI by the market Cap Rate to get the current market value (aka The Price)

Do not buy the lie that they don't know the trailing 12 before they bought the place. They got that information from the previous seller, so they know. If they deny having that information, they are lying. You can get past this tactic as well.

Here's what I do: Whenever the seller fails to provide data that I need to do my due diligence, the offer price goes down to compensate. For example, if I can't determine how much rent the tenant has paid and how reliably it has been collected, I let the seller know that I cannot consider some or all of that tenant's rent in my income valuation. This effectively lowers my maximum allowable offer. Take it, leave it or provide the necessary information.... period.

If the seller's claiming that he doesn't have trailing 12 data, often enough he will conveniently forget to transfer security deposits. You gotta keep an eye on these guys. As @Neil Schoepp points out, VERIFY EVERYTHING, including and especially getting estoppel letters from every tenant. You'd be shocked how many nice, honest looking sellers there are that will lie to you on Saturday and go to confession on Sunday. That's just how they figure the game is played.

I hope this helps.

Cheers!!

@Christopher Persaud, I agree with everything @Chiagozie Fawole said. The formula is:

Net Operating Income (NOI) / Cap rate = Value

The formula for NOI = GSI (Gross Scheduled Income) - Operating Expenses.

Operating Expenses = Taxes + Insurance + Management + Maintenance + Utilities + Repairs (TIMMUR). Oh and DO NOT forget vacancy. Some add that as an expense, others subtract vacancy from GSI. Either way is fine, but make sure that you budget for this significant nasty. The market determines the vacancy rate and no amount of wishful thinking will change that, so do your homework.

Cap Rate is not something to assume, but rather it's something determined by the local market for similar properties in the area. Do not assume that your 8 unit cap rate will be the same as the 100 unit on the right or the 30 unit on the left. Those building may serve a different market segment. Again, do your homework. I good commercial broker who knows your area could be a great help. Do NOT settle for a residential agent that says he can handle a commercial deal. There's too much at stake to leave this to amateurs.

Are you sufficiently uncomfortable yet? That's OK. Don't be discouraged. You can do this thing. Everyone wants you to succeed and so wants to be sure that you don't make a costly misstep. 

Good job finding this opportunity! I like the way you see the best and highest use and you're unafraid to pull the trigger. Also, you are wise to bring this situation to the forums before things get tangled. Very wise! 

I look forward to hearing how this all comes out.

Cheers!!

Welcome to the BP community! I think you're gonna find RE investing pretty different from stock market investing. However, like the stock market, do not dabble. Take it seriously.

It's so cool that you're getting started at such a young age. You could have quite a bright future in this industry.

You may want to start with the "Ultimate Beginner's Guide to Real Estate Investing". Then check out the blogs at Starting Out in REI.

Register right away for the weekly webinar and attend it online. @Brandon Turner explains many aspects of real estate investing often targeted at the newbie all the while making it fun and interesting.

Generally, the house you live in NOT going to be an investment. A big exception is a technique that Brandon Turner calls "house hacking". This may be something you'll want to learn about before you decide on buying the place you live.

There lots of other things to do to get a good solid start in RE investing, so when you get through these step come back for another dose. I hope you find this stuff fun and exciting like I do. If you have any questions, please feel free to post in the forums. If there's something in particular you'd like discuss, feel free to contact me. I'm like the Helpful Honda Guy of real estate investing.

Cheers!!

Send me a PM. I have a suggestion for a broker in Rosemead that I trust and repect who is VERY investor friendly.

Cheers!!

Welcome @Colin Hall to the BP community. It's awesome to have you out here with the rest of us.

You said you want to learn as much as possible, so I'm guessing that this whole field is pretty new for you. Would you take a few suggestions from a guy who's been here for a while?

#1 - read the primer, "Ultimate Beginner's Guide to Real Estate Investing".

#2 - start listening to the podcasts. You can download them into your iPod or MP3 player and listen to 'em all day. Believe me it's worth it!

#3 - sign up for and attend @Brandon Turner's weekly webinars. Brandon explains so many awesome topics, many targeted at those just getting started and he makes it fun. The perfect environment for you to learn and you don't even have to leave the house. Just log in every week.

#4 - Go to the Education tab above and scour every link, and when you think your head's gonna explode, click the Community tab and start perusing the forums. Ask questions, see how others answer questions and send Colleague Requests to people who like to get to know better.

#5 - Under Education find the Blog Topics and start with "Starting Out in REI", then work your way down the list.

#6 - Lather, rinse and repeat..... often!

There are lots of other things you could do to get started, like looking on meetup.com for local REIA's and Cashflow clubs, etc. but I think this should get you a good start.

Does it seem like a lot work? Cool. No one is saying this is easy, but it IS worth it and it can be a lot of rather lucrative fun. Just make sure you're enjoying journey.

I look forward the hearing about you more as you become successful! Keep me posted!

Cheers!!

Wow, @Josh Obregon. How did you get into this mess? No matter. It's not important. What is important is what are you going to do about it.

Just going by what you said in your post it sounds like you're on the wrong side of the appreciation curve. Options #2 and #3 would suck for two reasons. One, you pointed out that haven't the inclination to vet a GC to affect repairs. Two, throwing good money after bad in nearly always a bad investment.

Let's take a look at option #4. You just finished explaining that this property is not performing well at this point and is located in a declining market. You can't find a buyer that will offer more than half what you want for the property. A reasonable investor would decline any offer you could afford to make. You'd be asking your investor to throw his good money after your bad money. Likely, you would just lose your investor's money. That's bad ju-ju!

OK, that leaves option #1. How do you feel about cutting and running? One of the hallmarks of a newbie investor is a desperate unwillingness to admit defeat and take a loss before it gets worse. (Ask me how I know that. :(  ) Don't be that guy. This is a tough position, but it happens to everyone sometimes. Just based on what you said in your post, I'd be thinking hard about conserving capital by taking the best offer you can reliably close. This way you live to fight another day. 

I know this is sucky plan, but there's a reason they put lifeboats on ships. If your ship in Alabama is truly sinking, then get into the lifeboat. On the other hand, if there's something positive that you might have left out, be sure to mention that as soon as possible so we can take another look. Section 8 probably won't save you this time around, nor will throwing money at the problem, not based on your statement of the situation.

Sorry about your situation, but I wish you the best luck possible.

Cheers!!

@Scott Leezer, absolutely there is a way to structure such a deal. First of all, toss the word "fair". Fair is whatever all parties agree to. In fact, trying to split a deal you found right down the middle with a money partner is really not "fair" at all to you.

OK, so how do you do it? There isn't A way to do this deal, there are MANY ways. The choice depends on you, your partner and the specifics of the deal. Lacking clarification on these points, allow me to take a shot in the dark.

First, I'd like to ask you to take a deeper look at your numbers on the deal. Did you make sure you've taken into account every expense? Have you factored in vacancy? If the tenants are paying below market rents, why weren't the rents raised before now? Are you sure you can raise the rents without increasing vacancy? How long will the rehab take and what will that do the revenues?

Frankly, I'm kind of doubting your $28k/year cash flow on a 4 unit plex with $400k in debt service. What sort of rents are you expecting to get on this property. I'm assuming that you'd be looking at about $1200/month per unit. If there were no vacancies for a year and your other expenses amounted to about 1/2 of gross income. You would end up with a Net Operating Income (NOI) of somewhere around $28k, but that is NOT cash flow.

Assuming you got bank financing at a really great terms and had mortgage payments of, say, $1800/mo, which would add up to $21600. That amount would come out of the NOI, leaving only $6400/year in cash flow. Of course, maybe all my assumptions are wrong. I just don't have enough information.

OK, so let's assume I've gotten pretty close and that you split the cash flow with your investor who put up the entire $196k (because he has the money and you have little to no capital to invest.) Your investor would get $3200/yr, which amounts to an ROI (return on investment) of only 1.6%.

So, let's assume you're correct about generating a cash flow of $28k and that you split it 50/50 with your investor. In that case he would have an ROI of about 7.2%. Better, but still pretty sucky. So what does your investor want to make on his capital outlay?

Let's say your equity partner wants nothing less than a 10% return and you really do have $28k to play with. He'll need $19600 of the cash flow. That will leave $8400 for you. My for you in this case is this: Is this enough compensation to justify the time and effort it takes to generate it? If so, then this could be a good deal, but make sure your number include everything that's real today. Future appreciation and other hopeful thinking should NOT be included just to make the deal look better. 

If, after all diligence, the deal doesn't produce what you thought it would, then be willing to renegotiate with the seller or back out of the deal. Don't fall in love with what "should" happen nor what you hope will happen.

I had to make A LOT of assumptions to work out these calculations. My results could be highly skewed. If you'd be willing to share more details about this particular details, I'll help you dial in the valuation. Let me know. I hope this helps.

Cheers!!