J Scott - Author of Flipping/Estimating Book - Ask Me Anything!

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I have looked at some houses that I am interested in flipping. The big reason that I am hesitant is because I look at the comps which seem good but I don't feel as though I know what type of rehab I should do to the houses to make them worth what the comps are. Any help for a new guy would be awesome!

Originally posted by @Michael Burch :

I have looked at some houses that I am interested in flipping. The big reason that I am hesitant is because I look at the comps which seem good but I don't feel as though I know what type of rehab I should do to the houses to make them worth what the comps are. Any help for a new guy would be awesome!

If you're looking at good comps, those should tell you what type of rehab you should be doing to attain that value.  Remember, comps are houses that are similar, in similar condition and located in the vicinity of yours.  If another house is like yours and in the area, in order for you to achieve the same resale value, you need to have similar condition.  If your comps have hardwood and granite, you'll need something like hardwood and granite to achieve the same value. If they have updated mechanicals, you'll need updated mechanicals.  If they have finished basements, you should consider a finished basement.  If they have a pool, you'll need a pool (or something of similar value).  Etc.

Of course, your doesn't need to be exactly like those.  But, if they have something that is worth resale value, you need either the same thing or something equivalent to achieve the same value (assuming the other aspects of the comp -- similar size, type, location, age, etc. -- are the same).

Comps don't mean, "This is what your house is worth..."

Comps mean, "If your house is like this one, then this is what your house is worth..."

Does that make sense?

Originally posted by @Vijay T. :

@J Scott

I own and have found both of your books extremely helpful!

My apologies if this topic is covered elsewhere. If so, feel free to point me to it.

We are about to acquire a 21 unit multi-family residential building in Chicago built c. 1970, and are exploring options for updating the HVAC.

There is currently a hot water boiler (three actually, and the original ones) for baseboard heat common to the whole building. Also, there are common domestic hot water tanks (gas paid by the owner), and a single gas meter so all tenants' cooking gas is paid by the owner as well.

We are exploring options for reducing the high gas-utility expense. Ideally, all of the tenants would pay for their own gas use (they are currently metered individually for electricity). The cost of doing so is the main question we are exploring.

The main unknown: the logistics/cost of running individual gas lines to each unit and giving each a separate gas meter.

Here are some of the options we are considering:

1) Keep the system basically as is, but update it for greater energy efficiency.

- Install two new high efficiency condensing boilers, and update windows and insulation for better heat loss performance.

PROS - a) minimally invasive; b) can provide 15-30% reduction in heating costs (we are told).

CONS - a)total gas expense is still paid by the landlord; b) individual units won't have individual control (except for a thermostat controlled shutoff valve for heat/water in each unit); c) AC would be available on with in wall/window units.

2) Try to individually meter each units' gas and provide each with a traditional forced air heating/cooling system.

PROS: a)gas expense could be completely removed for landlord (huge)- even tankless hot water could be installed in each unit; b) each unit would have their own climate control.

CONS: a) constructions costs of running new gas lines and soffiting sheet metal duct work. b) highly invasive with collateral construction costs; c) future costs of maintenance on multiple systems vs a single building-wide system.

3) An electric based heating system

- This is tricky in my mind because of the high cost of electric heat. We live in Chicago with harsh winters and expensive electric supply costs. I can't imagine shouldering that expense as a tenant, although I've been told that there are a number of nice buildings that utilize primarily electric heat.

- Also, we would have to run 220 lines to each unit.

4) Mini-split system.

PROS: a) minimally invasive; b) individual unit and in-unit-zone control; c) high efficiency

CONS: a) given Chicago's extreme cold snaps in winter, they cannot be (according to code) used as a "primary" heat source.

- One possible solution would be to keep the existing boiler/baseboard system for backup and/or use in extreme cold (possibly triggered by an outside temperature sensor). Then, of course, we haven't eliminated the heating gas expense, only reduced it. To what extent, is the question.

- Another solution would be to supply supplemental heat via electric baseboard heaters.

There a few moving parts to figure out here.

I'm sure that many people have experience with this very issue, and I'd love to hear about it!~

Thanks!

Hey Vijay,

Unfortunately, whether a whole lot more information, I wouldn't be able to tell you what the right solution is for this specific property.  

My recommendation would be to sit down with a reputable HVAC contractor and explore your options.  

Here are the things I'd want to know if I were you:

  1. What are the cost of each solution?  
  2. What is the increased value to the NOI (or even the cap rate!)?
  3. What is the impact on the tenants?  
  4. What are the risks?

Once you have all of this information, I imagine you'll be able to easily narrow the decision to one or two of those options, and hopefully one will stand out.

Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.

I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.

My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.

Originally posted by @Huong T Nguyen :

Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.

I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.

My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.

I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil , any idea?), but this could certainly be an issue when you eventually go to sell...

The Maryland Property Disclosure Statement has the following question:

16A. If you or a contractor have made improvements to the property, were the required permits pulled from the county or local permitting office?

Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits.  That poses two risks:

1.  The buyer won't move forward or will require you to retroactively pull permits for the work; and/or

2.  The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.

Personally, I'd do it now, while it's still relatively easy.  But, if you don't, you should at least have a plan in place for when you go to sell...

Originally posted by @J Scott :
Originally posted by @Huong T Nguyen:

Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.

I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.

My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.

I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil, any idea?), but this could certainly be an issue when you eventually go to sell...

The Maryland Property Disclosure Statement has the following question:

16A. If you or a contractor have made improvements to the property, were the required permits pulled from the county or local permitting office?

Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits.  That poses two risks:

1.  The buyer won't move forward or will require you to retroactively pull permits for the work; and/or

2.  The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.

Personally, I'd do it now, while it's still relatively easy.  But, if you don't, you should at least have a plan in place for when you go to sell...

 You just disclose that the job was done w/o permits. The demand in Rockville is high enough, and so much work has been done w/o permits that buyers by and large dont care.  Addition of a bathroom w/o permit is slightly bigger deal in that then there is a discrepancy from actual to the tax records, that a lender might look into...but thats rare.

The only real concern is a fine from the city/county if they find you mid construction doing the worl w/o permits. Remember the county govt and all its inspectors are located in Rockville, so they will often see a work truck and pop into what they suspect is a job happening w/o permits.

I bet 75% of properties I sell in the area have at least some work done that the proper permits were not pulled. DC it is a much larger concern.

and rental wise...nothing comes up. Rental, you just pay your yearly rental license fee and thats it.

Originally posted by @Russell Brazil :
Originally posted by @J Scott:
Originally posted by @Huong T Nguyen:

Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.

I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.

My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.

I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil, any idea?), but this could certainly be an issue when you eventually go to sell...

The Maryland Property Disclosure Statement has the following question:

16A. If you or a contractor have made improvements to the property, were the required permits pulled from the county or local permitting office?

Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits.  That poses two risks:

1.  The buyer won't move forward or will require you to retroactively pull permits for the work; and/or

2.  The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.

Personally, I'd do it now, while it's still relatively easy.  But, if you don't, you should at least have a plan in place for when you go to sell...

 You just disclose that the job was done w/o permits. The demand in Rockville is high enough, and so much work has been done w/o permits that buyers by and large dont care.  Addition of a bathroom w/o permit is slightly bigger deal in that then there is a discrepancy from actual to the tax records, that a lender might look into...but thats rare.

The only real concern is a fine from the city/county if they find you mid construction doing the worl w/o permits. Remember the county govt and all its inspectors are located in Rockville, so they will often see a work truck and pop into what they suspect is a job happening w/o permits.

I bet 75% of properties I sell in the area have at least some work done that the proper permits were not pulled. DC it is a much larger concern.

Great info...thanks Russell!

This is a good reminder that real estate has a lot of VERY LOCAL components to it.  I live 30 minutes north of there, and in my county, if you disclose that work was done without permits, buyers will walk unless that information is factored into the price.  I've seen differing results in other states/counties as well (and have seen loans not go through because of it), but I'm probably more conservative about that kind of stuff than most people...

@J Scott 

Do you have any recommendations for me on how to do put a professional cash offer proposal letter together and send to a bank for an REO listing? (What kinda of formate? Template?

 Do research on conservation easements. I essentially throw away a large amount of cash every year in return for a much larger tax write off.

 They are starting to crack down on this.

From Forbes "Abuse of the tax benefits of conservation easements has reached a fever pitch as easement donations are now syndicated at multiples of nine to one and above. Put $100,000 into the syndication black box and take out a charitable contribution of $900,000 a year or two later. And wrap yourself in a green flag to defend the travesty."

Originally posted by @Michael Burch :

I have looked at some houses that I am interested in flipping. The big reason that I am hesitant is because I look at the comps which seem good but I don't feel as though I know what type of rehab I should do to the houses to make them worth what the comps are. Any help for a new guy would be awesome!

 It can be very helpful to pay for an interior designer's consultation on a project.

The Ask Me Anything question I am curious about is what is your mix of income in recent years re: flipping vs book sales?

Originally posted by @Jeremy Roach :

@J Scott 

Do you have any recommendations for me on how to do put a professional cash offer proposal letter together and send to a bank for an REO listing? (What kinda of formate? Template?

I assume this is a small bank or a bank you have a relationship with.  Otherwise, you'll want to go through the listing agent instead.

Ultimately, the bank is going to want a state-approved contract, along with their addenda.  My recommendation would be to use a state-approved contract to submit your offer.

Thanks so much for your quick reply and insightful advice. I have just found out that in Rockville MD, homeowner can apply for a permit and then do the work him/herself, so I will let you know if I would be able to pull the permit myself.

Now that you live in Maryland, could you please give me an idea how much labor costs for a gut reno of a 9'x12' kitchen in the DC Metro area, and the cost of roof architectural shingle replacement (both materials and labor) for a 12 -square roof?

I bought your 2 books in 2015 under a different moniker. Extremely helpful and I think I will buy the new books soon. 

Originally posted by @Eric M. :

 Do research on conservation easements. I essentially throw away a large amount of cash every year in return for a much larger tax write off.

 They are starting to crack down on this.

From Forbes "Abuse of the tax benefits of conservation easements has reached a fever pitch as easement donations are now syndicated at multiples of nine to one and above. Put $100,000 into the syndication black box and take out a charitable contribution of $900,000 a year or two later. And wrap yourself in a green flag to defend the travesty."

Absolutely...  If you're not dealing with a reputable syndicator or if you're doing syndications where the appraised values don't support the deductions being offered by the investment, you're going to risk taking a big hit in the audit.  This is why I don't recommend conservation easements to most people, and the ones that I do recommend them to both:

-  Understand the risks associated with these types of investments; and

-  Have the ability to scrutinize the Prospectus and the investment deal being offered to be comfortable that it's not over-promising on what it's delivering.

If you're not in the position to do both of the above, my recommendation is DO NOT investment in conservation easements or other real estate tax shelters.

Btw, I'm starting to see these 7:1, 8:1 and even 9:1 deals.  Crazy.  I've not invested in anything greater than 4.5:1 and most of mine are 4:1.  

Also note that these investment vehicles are only available to accredited investors, so that should cut down a bit on people doing bad investments.  Finally, note that apparently there are a lot of people in Congress who use conservation easements as their preferred tax shelter, so it's probably less likely that they'll ever be outlawed...  :-)

All that said, I'm not a tax or legal professional, so don't take my word for any of this!

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Russeel Brazil: Thanks so much! Great info! 

As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.

Thanks! I did use a template off of a website service called Lawdepot.com. I am learning as I go.

Could an attorney handle things like submitting documents and offers? Also one more question from your experience, so it is a small bank and they are not using a listing agent. I am working with a real estate agent for my other research and shared the location of this off-market REO. Is she allowed to share that information with other investors? and steal the deal? or are Real Estate agents sworn to some clients privacy information?

Originally posted by @Eric M. :

The Ask Me Anything question I am curious about is what is your mix of income in recent years re: flipping vs book sales?

I feel like people ask me this question a lot just to see if I'll answer it...   :-)

As my accountant can attest, it changes by a LOT every year -- I get bored easily and change up what I focus on pretty often (shiny object syndrome, but in a good way, I believe).  So there's no "average" of how my income breaks down each year, but happy to provide as best an answer as I can...  

In terms of books...  Book income has been pretty steady the past 5 years, even as I write more books.  That's because the new books provide a "pop" in income, while the older books are generally selling less year over year.  Book income is certainly a passive income vehicle that I hope to use long-term (along with buy-and-hold real estate).  I didn't write anything between 2013 and 2017 because I was burned out from writing, but I really felt like writing last year, so I did a bunch of it.

In terms of flipping...  Our flipping income increased from 2008 through 2015, and has been dropping since then, simply because I haven't had the desire to work harder to keep up the income (deals are obviously tougher these days).  Most of our flipping income these days comes through partnerships with other investors who are doing the bulk of the work.  Our other real estate income has increased from 2015 through now -- this include rental/multi-family income, lending/note income, partnership income, etc.

In general...  For the past several years, up until last year, books made up about 30% of our total income.  The other 70% was real estate (see above), other investments (business investments, racehorses, etc.) and other business income (non real estate businesses we run).

Last year, I really felt like writing, so I took most of the year off from doing active real estate to focus on writing (update the flipping/estimating books, update my negotiating book and write a book on economic cycles) and some other business stuff.  So, last year, income percentage from the books was much higher (over 50%). 

This year, I'm hoping to finish up writing in the next 2 months (I'm tired of writing again, but have one more commitment to complete) and then not write anything new for at least another year or two.  In the near-term, we're focused on building a note portfolio and are hoping to pick up a bunch more rentals or multi-family deals this year.  I don't expect we'll be doing much flipping.  And my wife and I are excited about a new business we'll be launching in a few months (a passion project that's real estate related).  The last passion project business I started (outside of real estate) lost a lot of money; hopefully this one will go better...  :)

Originally posted by @Huong T Nguyen :

Russeel Brazil: Thanks so much! Great info! 

As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.

Again, can't speak for Russell's area, but in my county (and in one or two other places I've invested), it's not crazy for inspectors to see a 30 yard dumpster and knock on the door to see what's going on or to put up a stop work order if there are no permits.  Certainly not common (never happened to me), but it happened to another BP member I know here (I won't mention his name here)...

Originally posted by @Jeremy Roach :

Thanks! I did use a template off of a website service called Lawdepot.com. I am learning as I go.

Could an attorney handle things like submitting documents and offers? Also one more question from your experience, so it is a small bank and they are not using a listing agent. I am working with a real estate agent for my other research and shared the location of this off-market REO. Is she allowed to share that information with other investors? and steal the deal? or are Real Estate agents sworn to some clients privacy information?

Note that I've purchased a few REOs directly from small banks, but I certainly haven't done enough to call myself an expert on this.  Perhaps other banks work differently than the couple that I've worked with...  

That said, typically, if you're working with a small bank on REO deals that aren't being publicly listed, you're going to be working directly with their VP of Commercial Real Estate (or someone who works for that person). You should be able to talk to this person directly and handle negotiations in an informal manner. When you come to an agreement, they'll have a contract/addenda for you to sign.

Not sure why you'd be submitting offers through an attorney for something like this, unless we're talking about a bulk package or a really large deal that would start with an LOI and some more formal negotiations.

Can you provide more info on the situation?

Originally posted by @J Scott :
Originally posted by @Huong T Nguyen:

Russeel Brazil: Thanks so much! Great info! 

As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.

Again, can't speak for Russell's area, but in my county (and in one or two other places I've invested), it's not crazy for inspectors to see a 30 yard dumpster and knock on the door to see what's going on or to put up a stop work order if there are no permits.  Certainly not common (never happened to me), but it happened to another BP member I know here (I won't mention his name here)...

 Thanks. I don't have a dumpster in my driveway. I can call the city trash collector to come and collect bulk trash 6 times a year for free, each time no more than 500 lbs in theory. i know that quota is not a lot but my kitchen is small so that is what I am doing now. I know the city might give me a warning if my neighbor complains about construction debris lying in my backyard as part of it is still visible from the street.

As a government contractor being affected by the shutdown for almost the entire month of January, I am not taking in any income at the time when I need to spend a lot of money on my kitchen, I am counting every penny I have in my pocket right now.

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