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Investor funding falls through, now what?

Question:

How can I keep my credibility intact with REO agents when submitting offers if my investor decides for what ever reason not to fund a deal I was expecting him to cover. This could also apply to rehab contractors I suppose.

Is this just the risks that go with using equity partners?…Any thoughts….

-M.

Answer:

To minimize the possibility of destroying your relationship with an REO agent before you even get started, you MUST make sure that you’re investor/partners are solid and committed. One of the ways you can do this is to have a joint venture entity and bank account that they have committed funds to prior to submitting your first offer. However, no amount of legal paperwork or promises are going to hold someones feet to the fire that becomes consumed with fear over their inability to choose wisely. You must spend time with your fellow investors, especially if they’re new to the business, to make sure that they understand the reality of this business and the true profitability of your proposed deals.

The worst thing you can do to yourself is to get anxious and partner up with just anyone because they have a fat bank account. The responsibility of making good decisions falls squarely on YOUR shoulders. You’re the one that has to be aware of who you’re dealing with. You’re the one who’s responsible for your team showing up and doing what they have to do or at least being prepared with one of several back up plans.

If you’re going to hunt bears, you better have more than just one high powered rifle and one bullet. If not, when you’re head’s rolling around on the ground, and your body’s still standing…you’ll have no one to blame but yourself for being way too optimistic.

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Hard Money vs. Private Money

Question:

What’s the difference between a hard money lender and a private investor and does using one have an advantage over the other?

Answer:

Hard money lender – higher costs/fees, higher interest rate, tougher qualifying.

Private investor – Individual, typically no fees, better rates; longer term.

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Purchasing with an entity, no witholding tax

Question:

I’ve heard that if you buy using an entity, you don’t have to pay some great, big witholding tax (from California)?

Answer:

Questions regarding tax should be directed to your tax person, or attorney. I do not give legal tax advice.

http://www.ftb.ca.gov/forms/06_forms/06_593bk.pdf

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Exchange REO to another property to defer taxes

Question:

Is it possible to exhange an REO into another property in order to defer taxes and if so what would be the minimum time frame?

Answer:

You’re speaking of 1031 Exchange Rules. This is really a question for your tax person as we do not give any tax or legal advice.

However, that being said, it doesn’t matter the source of the property, whether it’s an REO or Short Sale, or owner-seller. Whether or not a property qualifies for 1031 Exchange depends on whether it complies with 1031 Exchange Regulations and your INTENT!

I suggest you do the research by checking with your tax person or the internet (such as the IRS website) for these regulations.

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Unpermitted room or addition

Question:

When a house has an unpermitted room or addition, does one still purchase it and how does one handle this situation?

Answer:

This is a complicated issue. Typically, you’d want all the square footage in the home to be permitted. However, it has to do with the quality of construction, compliance with building codes, if it’s structurally sound and safe, how it will affect your financing such as, whether your intention is to keep it and rent it and refinance it in the near future or whether your exit strategy is to flip it immediately and expect the buyer to get new financing, and whether the code enforcement office has already red tagged your house and wants you to tear down the illegal addition or if illegal additions are typical for your market.

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Precautions/Concerns with Condos

Question:

Do you write offers on condos and apartments? And what precautions/concerns does one have to take if you do?

-W.G.

Answer:

At this point in the market, I’m not making offers on condos because it doesn’t make sense in my market. I’m buying houses way too cheap.

Some of the things you want to watch out for when you are buying condos:

1. First and foremost is the percentage of owner-occupied units to rental units in the complex. In other words, how many units are occupied by owner-occupants and how many are rentals. You need to know if you’re buying a unit located within a nice, quiet, well-maintained building that reflects pride of ownership or whether you’re about to buy a unit within a building full of low income subsidized tenants which is the equivalent of a zoo. This also affects your financing, whether you’re going to keep it and refinance it or flip it.

2. Homeowner’s Association dues may be excessive. HOA dues are tied to expenses and reserves for major repairs such as replacing the roof in the future and will only increase over time.

3. Location of the unit within the complex. For example, in high rise buildings, the higher the unit’s location, meaning the higher floor the unit is located on such as a penthouse, the higher the value. In smaller buildings and townhouse type units, end units with one common wall are typically valued higher than interior units with more common walls. Whether they have views of the ocean or whether they have views of the back of the building parking area affect the value. Everything affects the value. You’re basically buying an apartment.

4. Whether utilities are master metered, or if they’re individually metered to each unit and whether you have electric as well as gas or if it’s just electric.

5. Type of parking facilities that come with the unit whether it’s an actual garage or a subterranean parking structure, how many parking spots come with the unit (one or two), whether they’re side by side or tandem – all of these factors affect the desirability and ultimate marketability.

6. Whether the building is actually converted as a condo or co-op ownership type.

As far as apartments go, I assume you mean apartment buildings and this is considered a whole other animal than single family’s individual condo units. And if that’s correct, depending on the size of the apartment building (meaning the number of units) they are typically valued on either net income and Cap Rates (capitalization rates) or Gross Rent Multipliers (GRM), or a combination of both. There are many factors that go into calculating these values and they include but not limited to:
• Unit mix (as in number of bedrooms & baths)
• Square footage
• Year built of the building
• Quality of construction
• Desirability of location
• Amenities (pool, Jacuzzi, laundry facilities, etc.)
• Master or individually metered buildings
• Gated and security building
    

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Getting a RE License

Question:

Do you recommend getting RE agent license? If not, what is best way for newcomer to get direct MLS access vs. just getting listings emailed to me?
    
-Student

Answer:

1. Real Estate License – YES!!

2. Get friendly with starving buyer’s agent and get approved as assistant. Get password for access.

3. Money talks – make it worthwhile for someone to cooperate with you and give you access – usually an agent.

NO BRIBES!! What’s wrong with having them work for you? Regardless if an agent does research for you – you must get your own access and learn to do research yourself!

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Finding Vacancy Rates

Question:

How do I find a vacancy rate for a particular neighborhood? I have found vacancy rates on city websites, but they don’t have it broken down by neighborhood?

-Student

Answer:

There are various ways to get vacancy rates both free and paid

1) Internet Resources Include:

Free:
www.rentbitz.com (info, not broken down) www.redfin.com (info, not broken down)

Paid:
www.loopnet.com
www.costar.com
www.grubb-ellis.com
www.marcusandmillichap.com

2) The best way to get free LOCAL information is basically doing what appraisers have done for years; it’s called a Rental Survey. This includes first calling your local newspaper for rental ads and calling on individual landlords and interviewing property managers that rent in your area and then driving your chosen neighborhoods, writing down information on rental signs and inquiring on the rental as if you were a tenant.

-TA

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What is a “wrap” transaction?

Question:

What exactly is a “wrap” transaction?

-Student

Answer:

A wrap transaction means you’re buying a property that typically has an existing first loan. The seller carries a second loan and you wrap both of them to make one payment. That is a simplistic explanation of a wrap. Wrap around loans are used in many different creative way. Creative financing is a world unto itself. Back in the 80’s it was just about the only way we could get deals done. I suggest if you ever have a chance to listen to Bill Tan, Shawn Watkins or Aaron Mazzrillo, this is exactly what they attempt to do every day.

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Original Owner regaining ownership

Question:

Does the original owner reserve any rights of regaining ownership?

-Student    

Answer:

Whether an Owner/Seller has actually reserved any rights has to do with how the actual sale was consummated and whether the law was violated in the process. The law that governs how to approach a seller in default in California is extremely specific and detailed and if you intend on pursuing sellers in default I strongly urge you speak with an Attorney who specializes in this area before attempting to do this on your own. The California Association of Realtors CAR) has a purchase offer form called, “The Notice of Default Purchase Agreement” which highlights the items that must be addressed. Also Tuesday Forms sells a an offer form that is also customized for this specific use.

Having said all of THAT, I must warn you, this is a highly sensitive area of real estate especially inside this real estate storm we are experiencing. government agencies, as well as, lenders are extremely sensitive to protecting Homeowners’ rights because it is being perceived as being politically correct. Their regulations, restrictions and (protectionist) laws are going way beyond anything we’ve ever seen before in the real estate industry. Keep in mind that just because something is legal, it may not be perceived as fair and prudent by controlling government agencies or by the courts.

-TA