Real Estate Investor · Sacramento, CA · Member since 2010 · 41 posts · 11 votes
Hey all....
I'm just starting out. I'm basically just looking to get bigger pockets :)
Northern California based, I do not currently own any property & have zero debt. I have about $500k cash liquid + 100k/year++ job.
I come from a family of DIY'ers, and a couple of my family members are retired (who are very handy) are interested in helping rehab houses. Mostly for something to do... lucky me! I'm also looking for something for myself to buy and occupy.
Any hard learned tips or words of caution for the cash buying newbies here?
Also, I've noticed there are many bank sites out there that list their REO's.... are there any good (free or pay) sites out there that routinely aggregate this data? If not, I'll put something together soon (programmer!) ;)
Assuming you are prepared to buy (i.e., you've done your research, have a plan in place, etc), the best advice I can give if you want to focus on REOs is to find a great buyer's agent who is experienced in working with investors and is experienced with REOs.
This person should be able to accomplish a lot of things for you:
1. Teach you the process of buying REO properties. REOs are a different beast than typical sales, so understanding the complexities of these transactions is very important;
2. Help you find properties. Most REOs are listed on the MLS, and your agent will likely understand the importance of acting fast when it comes to buying REOs. So, s/he will likely send you a daily update of the properties available, those with price drops, etc;
3. Provide comps. This agent should be able to provide you detailed comps for the houses you are considering. S/he should also be able to perform the comp analysis for you (if you don't have the experience) to help you determine an accurate ARV;
4. Due diligence. This agent should be able to help you through the due diligence process, from beginning to end.
5. A really good buyer's agent will help you evaluate specific investments and areas, and should be able to point you to properties that will prove to be good deals.
So, my best tip is to find a great buyer's agent. To do this, talk to other successful investors in your area, and be very diligent when you interview potential agents. There are a lot of bad ones out there, but the good ones are worth their weight in gold...
Assuming you are prepared to buy (i.e., you've done your research, have a plan in place, etc), the best advice I can give if you want to focus on REOs is to find a great buyer's agent who is experienced in working with investors and is experienced with REOs.
This person should be able to accomplish a lot of things for you:
1. Teach you the process of buying REO properties. REOs are a different beast than typical sales, so understanding the complexities of these transactions is very important;
2. Help you find properties. Most REOs are listed on the MLS, and your agent will likely understand the importance of acting fast when it comes to buying REOs. So, s/he will likely send you a daily update of the properties available, those with price drops, etc;
3. Provide comps. This agent should be able to provide you detailed comps for the houses you are considering. S/he should also be able to perform the comp analysis for you (if you don't have the experience) to help you determine an accurate ARV;
4. Due diligence. This agent should be able to help you through the due diligence process, from beginning to end.
5. A really good buyer's agent will help you evaluate specific investments and areas, and should be able to point you to properties that will prove to be good deals.
So, my best tip is to find a great buyer's agent. To do this, talk to other successful investors in your area, and be very diligent when you interview potential agents. There are a lot of bad ones out there, but the good ones are worth their weight in gold...
So I realized there could be some instant capital gains here (see example below) -- how do you guys structure things to minimize tax liabilities?
Example:
ARV: 250,000
Bank List: 225,000
Offer accepted: 175,000 (.70*ARV)
Rehab materials: 10,000 (+my labor)
Total invested $185,000
So, assuming this is something I want to keep & live in a couple years, I would "Own" it 100% from the cash purchase, but I would want to finance it (or would this be REfinancing at this point??) quickly after rehab in order to get my capital back to work with.
So if after its rehabilitated its worth $250k... I would finance (and sell it to myself??) from $185k invested and have a $65k capital gain? ... is that even legal? Sorry, see topic. Newbie questions.
I would need another 20% cash down to finance as well?
Get someone you know/trust, preferably not related to you. Have them buy the property, give them a first trust deed (a mortgage) for 100% of the purchase plus rehab.
Get the property fixed up, and buy it from that person on an owner-occupied FHA loan with 3.5% down.
Refinancing a property is extremely difficult in the current lending market. EG: it will take you 6-12 months of seasoning to get cash out. Depending on your taxes you might be able to get HELOC at 70% of the value or purchase price (whichever is less).
Get someone you know/trust, preferably not related to you. Have them buy the property, give them a first trust deed (a mortgage) for 100% of the purchase plus rehab.
Get the property fixed up, and buy it from that person on an owner-occupied FHA loan with 3.5% down.
That's good info to know. In this case it would almost have to be a relative that would buy it then - does that disqualify a FHA 3.5% loan?
Outside of the owner occupied scenario, if it were being sold to a new buyer (and if I were to do this a few times a year), what would be the best structure to minimize taxes on gains?
For your first question, I am not sure...maybe someone else can answer. If you aren't in direct chain, father, son, and have a different last name, they probably wouldn't know.
Tax Structure (least taxes)
1. Hold the property over 1 yr - long-term capital gain, or 1031 exchange.
2. Pay full taxes on profit... don't use an LLC in California for retail flipping (they have Gross Receipts tax). S-Corp is fine. This is what I do.
So I realized there could be some instant capital gains here (see example below) -- how do you guys structure things to minimize tax liabilities?
First, I'm not a tax professional, so take this for what it's wroth...
Capital gains aren't triggered until you sell.
If you sell within one year, you will incur short-term capital gains, which are equivalent to your marginal rate.
I'd talk to a CPA to discuss your personal situation, but in my experience, the best way to minimize taxes for these types of transactions is to minimize your FICA taxes by electing s-corp taxation treatment (either by creating an s-corp or creating an LLC taxed as an s-corp) and paying part of your gain as dividend instead of salary...
If you hold the property for at least one year (without trying to sell it in that first year), you will incur long-term capital gains.
If you live in the property for at least 2 out of 5 years prior to selling, you can avoid capital gains up to $500K. This is the best way to avoid paying taxes, but obviously requires the most time commitment.
Of course, your situation may be different, and you may have more (or fewer) strategies to employ, so again, talk to a tax professional.
So, assuming this is something I want to keep & live in a couple years, I would "Own" it 100% from the cash purchase, but I would want to finance it (or would this be REfinancing at this point??) quickly after rehab in order to get my capital back to work with.
This would be considered a refi, and specifically it would be considered a cash-out refi (since you're taking cash out). These days, you may be able to immediately refi for about 75% of your purchase price (not including rehab costs), or you''ll likely have to wait 6 months to refi at 75% of appraised value.
So, if you plan to refi, you should expect to either wait 6 months to get all your cash out, or expect to contribute at least 25% + rehab costs of your own cash until you sell.
So if after its rehabilitated its worth $250k... I would finance (and sell it to myself??) from $185k invested and have a $65k capital gain? ... is that even legal? Sorry, see topic. Newbie questions.
No, you wouldn't be selling it to yourself. You'd be refinancing. Again, you can refinance immediately for probably 75% of the purchase price, or wait 6 months to refi for 75% of the appraised value.
The capital gain doesn't come until you sell, and refinancing doesn't count as selling.
What you might want to consider in this case is just to buy it with an FHA loan, put 3.5% down on the purchase, and then rehab with your own cash. On a $175K purchase and $10K rehab, you would be contributing about $16K, plus any closing costs.
Another thing to note -- I've never purchased a home. Are "First time buyer" discounts counted out once I've been a 100% cash homeowner, or does it really mean "First time borrower" and I would be able to get discounts there at some point in the future still?
Just want to be cautious not to leave any money on the table and do this right.
Are "First time buyer" discounts counted out once I've been a 100% cash homeowner, or does it really mean "First time borrower" and I would be able to get discounts there at some point in the future still?
Not sure which "first time buyer" discounts you're referring to, but if you're referring to FHA loans, they're not just for first time buyers...
Here's a suggestion for financing your first deal. Go to your local bank and tell them what you are trying to do. Tell them you want to do a Home Equity Line of Credit (HELOC) on the property once you have renovated it. The HELOC will let you borrow on a line of credit against the house for future deals, and you won't have to worry about moving title around.
Yeah... I looked into HELOC's. Forget about it... interest rates are super high. I think the only/best way for any deal I'm going to live in is to have someone else buy, then rehab, then get the loan. A bit discouraging there.
Per your comment about buying from a relative, be very careful. You may have to check to make sure the transaction that you propose qualifies as an arms length transaction (a real sale, with the buyer and seller not related and not working together). Otherwise, you might get blacklisted by potential lenders.
What J Scott proposed in his second reply:
"What you might want to consider in this case is just to buy it with an FHA loan, put 3.5% down on the purchase, and then rehab with your own cash. On a $175K purchase and $10K rehab, you would be contributing about $16K, plus any closing costs."
is probably one of the best ways to do this deal. From the sound of it, $10,000 in repairs doesn't sound like much, especially for California and if the property is deemed inhabitable, FHA lenders should loan on it.
With the REO gem's I don't think you're going to have time to buy (initially?) with a FHA (and ideally it should need just enough rehab to where nobody will finance it?).
I have cash - I want to use it for leverage to get the best possible discount.
I need to investigate the specific details of the "arms length" requirements. So far I haven't found much. If violation of this is something that can truly get you blacklisted from lenders, then the specifics should be well documented.
Ok, I found some information on non-arms length transactions and dealing with FHA ... I just want to be sure we all know the specifics so we don't discourage anyone (like me!) with misinformation ;)
Long story short... unless the rules of changed considerably since 2003 (very possible), then it seems that if family member purchases home, then I lease and occupy for 6 months on formal lease, then buy with stated intent of primary residence.... all good. maximum LTV (3.5% down?) !@#%$ Awesome :)
I have cash - I want to use it for leverage to get the best possible discount.
As long as you're willing to lock up that cash for at least 6 months, that strategy is fine...
I need to investigate the specific details of the "arms length" requirements. So far I haven't found much. If violation of this is something that can truly get you blacklisted from lenders, then the specifics should be well documented.
They are well documented, but they vary from lender to lender. Talk to a specific lender, and have his underwriter provide you the details.
I think in this case I would do a FHA loan... seems like the most reasonable deal on the block for primary residence?
I realize each lender will be different, but they'll probably stick to the guidelines of the FHA for the most part?
6 month cash lockup is fine for my primary. I the market is going to tank a bit more during that time anyway... which is why I want REO at deep discount (cushion) - my lease is almost up and I need to move closer to work.
As suggested here, I'll also look at straight fix-and-flip purchases where I would just buy->fix->sell then pay gains using an S-corp or something. A couple of my retired family members are very handy & have expressed interest in this, so will try with my primary first and see how it goes :)
That sounds like you're putting your money into a CD. That's not really locked up. You'll pay a penalty to take it out, but you can get it out on a moment's notice. Not so if its locked inside a property.
To date, I've never needed this sum of money all at once for anything, and for this first transaction (to be my primary residence) it would only lock up ~40%, so not that big of a deal.
Worst case scenario, the money "locked up" in the house during the waiting period isn't really locked up either -- can always get something back if you have have title in hand, and buying a REO with maximum cash discount would help cushion (perhaps just a little) any loss that was forced to take there as well.
Btw -- with banks, "moments notice" doesn't really exist. You're going to deal with banking hours, and delays depending on how you want the money & how much you want. If you need cash.... forget it, it will take my bank a business day (or a lot of escalation) for anything over $5000 cash. If you just need a cashiers check, sure... they'll write that on the spot.
Just saying, real estate could be liquidated pretty quickly if you are willing to take a hit... isn't that what this whole REO thing is about anyway? If a bank will sell at 70% of post-rehab value & it needs some rehab, investors will fight over who gets it first... no?
Now to find the right property! I'm finding out that REO agents don't return calls. I'm going to try to use my newly learned terminology and see how it changes things....
I'll go from:
"Hi this is Jay... I'm calling about a bank owned property you have listed at [address] and I'd like to take a look at it. Please give me a call at xxxxxx"
to:
"Hi I'm interested in making an all cash offer on a house you have listed on behalf of [bankname]. Proof of liquid funds available & would like to close as soon as possible with little to no contingencies. I'd like to have a quick look inside before submitting my offer. Please give me a call at xxxx"
Now to find the right property! I'm finding out that REO agents don't return calls. :)
This is just one reason that you should be using a buyers agent to look at REO properties. I know a lot of people advocate going throughh the listing agent but most REO listing agents I know would rather give up the second half of the commission if it means not having to deal with buyers making shotgun offers on properties.
J SCott:
I have had the problem withlisting agents not returning my calls and began using a buyers agent. Amoung other things the buyers agent makes sure my offer is submitted to the bank. My experience with the buyers agents I have used is they want me to bring them the properties. I have only had a buyers agent "bring" me a property twice and thsoe were so far outside my desired property profile as to not be worth the effort for me to look at them. Do your buyers agents bring properties to you?
I don't use buyer's agents, only because my wife has her license, so we have access to the MLS and we have good relationships with many of the big listing agents around here.
That said, if I were to use a buyer's agent, I would expect that person to send me deals that met my criteria and help me obtain those deals. A buyer's agent that doesn't want to be bothered to help you find potential deals sounds like someone who shouldn't be working in this field. Dump them and find someone motivated to actually help you find houses.
Sounds like the buyer's agent you are working with is lazy and/or doesn't have experience working with investors. Find someone else.
...
I have had the problem with listing agents not returning my calls
...
They get lots of calls from "posers" rather than "closers", and from most phone calls it's hard to determine whether the caller is one or the other, so I guess they decide to not waste time. Once you can prove you're a "closer", then your calls do get returned, and you will even get access to the properties ahead of the MLS. But you have the "chicken and egg" problem to overcome first: how do you prove you're a "closer" when you can't get the time of day? Not easy to do.
Originally posted by Doug Haisten:
...
Amoung other things the buyers agent makes sure my offer is submitted to the bank.
...
This is true if the bank is using an online access website for receiving offers, and where the buyer's agent gets access to that web portal. If only the listing agent has access to that portal, or if there is no such web portal, then your offers still have to get past the listing agent.
Originally posted by Doug Haisten:
...
My experience with the buyers agents I have used is they want me to bring them the properties. I have only had a buyers agent "bring" me a property twice and thsoe were so far outside my desired property profile as to not be worth the effort for me to look at them. Do your buyers agents bring properties to you?
...
Well, the agents are happy to do as little work as possible. I have used MLS automated searches for this, and you'll get all kinds of crap mixed in with the goodies that way. But it's usually best for yourself to be the filter, rather than somebody else; imagine that your agent filters something that you would really have wanted, but the filter ensured you never even saw it. Food for thought: if a property is a really great deal, and the agent also is a buyer, do you think the agent might prefer to buy stuff like that themselves?