GDNIP Ep 45: Doing Real Estate Rehabs

One of the ways to make a profit in real estate is to do rehabs. A real estate rehab is done when an investor acquires a property then sells it to make a profit. Chris and Gail talk about their experiences doing rehabs and let us in on what we can learn during the process – doing cross-country, dealing with contractors in renovation, and dealing with potential buyers. They also state some of the important things to note when you start getting more notes in your portfolio in dealing with rehabs, such as making sure you budget correctly and have reserves. Get ready to learn more about doing rehabs as Chris and Gail dive into the subject.

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Gail Anthony Greenberg & Chris Seveney Doing Real Estate Rehabs

Doing Real Estate Rehabs

What has happened to you, Gail? Is there any new and exciting news in your world?

After a grueling application for Historic Tax Credit on a property that I am renovating down South, I got a preliminary, “Maybe we’re going to give them to you.” I forgot that was the state application. It’s a good thing I asked what happens because there’s the federal program too. I thought it was automatic that they would send on the application, which was many parts of tons of photographs, architectural drawings, elevations and HVAC plans you deal with every day but it’s completely foreign to me. It turned out that they needed another package. I was running around like a crazy person getting Walgreens to reprint the photos and getting the architectural plans re-outputted.

There are two things I’ve got going on. One is I had a property that I took back at foreclosure that got under the agreement and ended up getting that sold. I’ve got the check on that property. It’d be in a nice little return to the investor on that one.

What state was that one?

It’s in Maryland, Baltimore. The other thing I’ve got going on is I’ve got these two properties that are not in horrible shape. They’re livable, but they need some cleanup, some painting and new flooring. I’m in the process of debating to go back and forth, “Do I renovate these and increase the price? Do I sell it as is?” I got this one in Fort Wayne. I got a price from the guy with no breakdown. My agent said, “You had two showings and you’re going to expect an offer.” It’s always like, “Do I wait a few extra days? Is it going take me a while to negotiate with this guy?” I don’t think he knows what he’s getting himself involved in when I start putting a scope together for it.

Since you are a professional manager of construction projects, I imagine working for you these handymen in these quiet towns that never know what they’re getting into.

You can never return my calls after proof of work. It’s good in a sense because the people who won’t respond are probably the ones I don’t want to deal with. There’s nothing in there that’s extremely overburdening.

It’s the 80 pages of details and accountability.

I break it down. I try and keep it under seven. It’s like, “Let’s take the living room. Let’s replace all the receptacles, remove and reinstall the base after installing the flooring. Here’s the type of flooring I wanted. Here’s the paint color of the walls. Here’s the trim. Here’s the ceiling color.” That ends up taking a third or half a page when you itemize it. When you’ve got five, six it’s got three pages of scope.

As a non-gay man, do you choose your own finishes or do you consult with someone who’s known to have the ability in that area?

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I have zero ability. Fortunately, in my full-time job, one of my coworkers has a Master’s in interior design and architecture. If I needed something, I’m like, “Katie, give me this paint color.” I typically do not upgrade properties. I’d rather dump them, the whole velocity of money thing. In this instance, I still have all the paint colors from when we built our house. I have all the in them. Sherwin-Williams 2021 is where I can pick as well.

I have a variation, a Venetian fading plaster look on my walls. I have to restrain myself. I have a contractor in Indiana who took a house that realtors told me I would get $10,000 for. He moved in for a week because he wasn’t local, he and a partner. They renovated like crazy. They surprised me by putting laminate floors through. Laminates have gotten better, but every time I see a beaten up house, it’s got laminate floors peeling and it looks like contact paper. I’ve not ever been a fan of laminate. It was also bold colors in a way, like brown. I would have gone with something much more subtle. When I first saw it, he was excited to show it to me. I didn’t want to say, “Remove these floors.” The house ended up selling a week later for almost $50,000. I put $5,500 in beforehand. No sell for $10,000. Now it’s under contract for $50,000. He also is not a gay man. I don’t agree with his choices, but the thing was sold right away. Maybe I should stay out of it. He’s renovating another house with me. We got into a discussion about the kitchen cabinets and what color they should be. I thought to myself, “He’s from Indiana.” He renovates for other people out there. He probably knows what people in Indiana like, which have been completely different from Philadelphia.

That’s the hardest thing. From my full-time job, I worked for a company that owners want to build this building and they want to pick all the finishes that they love, which it’s their money they should be. If you’ve got to think about it, they’re trying to build a building for Millennials when they’re empty nesters. There’s a generation gap. Something they like isn’t what Millennials may like. It’s challenging in that sense. If you do floors, I always recommend a luxury vinyl tile, the wood-looking.

Do you do the plank or the tile?

It’s the plank. If you’re doing rentals, do that. Get the thicker one. It’s nine millimeters. That’s a little heavy duty. A lot of the time, it’s waterproof as well. Every developer is putting those in apartments and almost getting rid of carpet because you don’t have to worry about it for years.

You put it in the bathroom and you don’t have a different floor. Put it in every room and it looks great. It’s scuff-resistant. It never has to be refinished. It’s waterproof. I clarified this with my contractor. I was like, “That’s fine. We’re selling these houses. You can put laminate.” In my rentals, we’re doing luxury vinyl planks.

I noticed the King of Rehab is on.

Is it the man from up north?

Our neighbor to the north was on. I’m sure he could add a lot to his renovation stories. The topics, if people want to ask any questions pertaining to anything regarding notes, feel free. We’ve been talking about to renovate or not renovate. I’m curious about the opinions out there, what their sense is and what their business plan is to increase the value or get rid of it and move on to the next. There are a lot of pros and cons to both.

The place in Fort Wayne, do you have a realtor already showing that house to investors as is? How bad is it? Is it disgusting or does it just need updating?

Real Estate Rehab: It’s amazing how many investors who know how inexpensive it would be to fix something will still not offer you the fair as-is price.

It’s not disgusting. It needs work. The other component to it is the city also is sending me five violations on the shed. I have a guy to take the shed down. The house needs to be power washed inside. It needs new floors throughout and new kitchen. It needs to be rehabbed. I wouldn’t leave it as a rental in its current condition. The price I got though, it was to power wash and paint the outside of the house, put a new roof on it. It’s an 800 square foot house, it’s small. We need to paint the outside, replace two windows, put a new roof, put vinyl plank flooring throughout and paint and redo the kitchen. It was $15,000. It was not extraordinarily expensive. The challenge is going to be, “If I put in this $15,000, will I get $20,000 back?” I don’t want to break even on it. I’d want some incentive on it.

What did the realtor say about the value now and what it would be after you did that?

I’m waiting to hear back from her on that. She’s supposed to get back to me. That’s a challenge that we’ve had many episodes with realtors. She originally told me I could get $25,000 to $30,000 for this thing, and every offer I’ve gotten is between $10,000 and $15,000. I did have another realtor originally who I talked to also mentioned that it’s probably worth about $20,000 to $25,000. A lot of investors and fix and flippers are wholesalers, trying to low-ball it because they know it’s an out-of-state investor. If I can get it market-ready, then I probably have more people involved and also even investors may be looking at it for a rental. For the rental purposes, they said I’d probably get $600 to $700 a month.

It’s amazing how many investors who know how inexpensive it would be to fix something will still not offer you the fair, as is price. They still want to low-ball it to such a degree.

Some of them offer owner financing. It’s like, “I’ll sell it to you in $15,000 cash or I’ll do owner financing, $5,000 down and $500 a month for five years.” I’m like, “That’s basically $35,000 for $15,000 cash.” I understand like, “You mark it up. Your owner finance price is a little bit higher. Not that much higher.” I may add $5,000. If I had a $20,000 property, I might make it $25,000 with the financing, but I wouldn’t make it $30,000 to $40,000 and then get people who I reach out to and I’ll be like, “What are your owner financing terms?” They’re like, “I’d love to tell you. Give me your phone number and your contact information and I’ll call you.” I’m like, “Are you really doing this to me? Forget it.”

I would like to ask for the whole group. You’ve all had experiences with realtors. Do you think realtors give you these higher-than-you’re-going-to-get prices? Do they do that because they’re not paying attention, because they believe it, or they want you to sign the listing agreement and then they will drop the boom a few weeks from now? You’re not going to get $25,000. You’re only going to get $12,000.

Here’s another one that I get from them, “What are you looking to get for this property?” I said, “That’s why I’m, one, hiring you. I’m 1,000 miles away. I’ve never seen the property. I’ve never been inside the property.” Some of these properties, I tell them, “I want this thing sold in 30 days.” One of them I said, “Here’s the deal. I won’t sign for six months. I would only sign a 90-day agreement. If you don’t get this under agreement in 30 days, your commission gets cut in half. Tell me what the sales price is on this house.”

Do you write this into listing agreements with realtors?

I tried.

We should have done that in Bryant. We have a lackadaisical realtor. We got him for way too long.

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Trying to look at this, I’d say take a step back. It’s a $10,000, $15,000 house that was dirty. The guy isn’t going to make anything off of this. Was it $2,500 for his fee?

He gets $2,000 even if we sell it for $5,000, which is the last offer he brought us. I said, “We’re selling it for $5,000. You’re not getting $2,000.” We have three taxes and code enforcement.

This was part of Gail and I’s purchase where we bought six completely blind.

That was the most impetuous thing I’ve ever done.

I chuckle because we always preach everyone to do your due diligence and get eyes on the property and everything. There may come a time when somebody calls you up and says, “Can you buy these properties for $1,000 a piece? We need to close tomorrow.” You go online and you look at one of them, and it is in decent shape. “I’ll buy all of them.”

It’s valuable to do something stupid once in a while, take a chance and take a big leap. It’s good to confirm to yourself that you can be spontaneous and feel free. On the flip side, many of you are crippled by fear and concern. They’re analyzing everything to death. It felt like such a breath of fresh air. We did extremely well on that. We are down to the ones that were easy to sell and exit from. We’re down to the hard stuff that we have to scrape off the bottom of the barrel.

You’ve got to weigh the risk versus reward that we had involved in this. It was a no-brainer. Some other people were looking at these. They wanted to try and cherry pick some and the seller wouldn’t let it.

That’s why we got them, a lesson to all. We said, “Yes,” instead of, “I’ll take these and not those.”

You were a little hesitant. I had to twist your arm a little bit. One of them was a two-acre property. I was like, “The land itself has to be worth something.”

Thank you for dragging me into that deal. It’s been educational and fun. We’re trying hard to sell the last two. We have one in Oklahoma. We’ve talked about this on the regular show. It has been the most difficult place in terms of paperwork and the title company. The title companies question absolutely everything. We had a quitclaim deed from a prior owner who had a land contract, but even though they have a land contract, the harbor still had them quitclaim deed the property back to harbor. This was in 2015. The title company came back and said, “It doesn’t say on the quitclaim deed from this couple whether they were married or not.” I said, “They have the same last name. What difference does it make since they both signed it whether they were married or not?”

Real Estate Rehab: If you’re going to lose money on a property, definitely go for rehabbing it to make at least something.

They kept not agreeing with me that it wasn’t a big deal. They kept insisting that they needed that. It turned out their concern was not that the people weren’t married, but they might be married to somebody else. They both have the same last name, but maybe they’re married to two other Mr. and Mrs. Jones. The woman is a widow. I had to find her, get her to go to a notary in a little tiny town in Oklahoma and sign an affidavit of marital status saying the time they quitclaimed deed this, they were married to each other and not to other people.

Here’s a question. This is Gail versus Christine. Gail brought them to me. There were fifteen items on the title they wanted to be done. Gail’s like, “I’ll do this,” or the option gave them my $1,500 back. The first thing that pops in my mind is, “Give them the $1,500 and get it over with.” Stubborn Gail is like, “I can do this.” Within a week and a half or two weeks, you’ve almost crossed the finish line.

The only man holding us up is as usual NAA and Harbour. He’ll have to sign some paperwork. I was going to say, “I’m that annoying woman that you’re behind in the checkout line.” I’m not. I do value time. There’s something about these quests to get certain things. It is like the grail story. I’m intrigued by it. I love treasure hunting. I love the challenge. I probably do more things that I should. I don’t have a 60-hour week job. This is my 60-hour week job.

If you have the option of spending extra hours over the next few weeks to get something done or give some money back $1,500 on a deal and you’re going to make money on the deal, what would you do? I’m glad you took care of all that stuff because it paid off. I thought it’d be much more difficult to get it done, but you cracked the whip and got it done. I’m curious about people out there what their opinions are on things.

That is another reason that I do it. It’s like I’m at a big console and I know which buttons to push to get it done. How many houses will most people in their life buy and sell? It’s maybe two or three. I sold three houses in one month. These things become ordinary. When they first generated this list of what was needed to get this thing closed Oklahoma-style, everyone freaked out, including the realtor. I looked at the list and I was like, “I only see two things on here that look challenging at all to get.” That’s the other thing. I get impatient with how fragile and timid people are.

I’m on the goal of attempting to have a property in all 50 states.

You’ve got Montana. You’re going to do a cross-country. This was okay before devices in cars, family road trips, trying to see one of every license plate from every state. That’s what you like.

We used to drive from Massachusetts to Florida two to three times per year. We have a Chevy Mark III van. I have two sisters. This was back in the mid-’70s, ’80s and up to early ’90s until I went to college. This was before electronic devices. I look back now and I think there is no way I would drive 1,200 miles with my kids without electronic gadgets.

You’d have to talk to them. They’d probably be in the back touching each other. Here’s a memory, South of the Border. Do you remember that place and Stuckey’s?

As you get to the South of the Border, about 120 miles until you get there, you’d see, “Pedro says,” and all these billboards on top of the border. It’s like, “We’re getting there.” We’d stop. It was not that exciting.

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It was a big gift shop with a diner attached to it and is the worst Hispanic clichés.

I don’t think those would go in nowadays society.

Is it still there?

I don’t know. Christina answered our question. She said she would still do it herself if it speeds up the process. I’d give them $1,500 over spending all my time on that. It’s hard to say because we like to treasure hunt too like you.

Realistically, I spend a few hours. That’s $500 an hour. It’s not what you make.

Matt agrees with us both. If he enjoyed doing it, how much time he spent. What it comes down to is how much time are you going to spend and whether or not you can get it. In this instance, I did not think you’d be able to reach out to that borrower because this is middle of nowhere Oklahoma.

I have an excellent skip tracing database. It’s so good that my friend who’s an investigative reporter at the Philadelphia Inquirer asks me for skip traces because of what he has access to at a major newspaper is not as good as what I have.

Is it PLL services?

He’s doing a great series of interest to real estate people about scammers in Philadelphia. I’m sure they exist elsewhere too who steal properties of deceased people or situations where there’s an abandoned house, they file false deeds. They have crooked notaries who are in cahoots with them. Someone even went so far as to do a quiet title by sending the certified letters to allies of his. These people would sign for them, pretending to be the people.

That is crooked. Someone’s deceased and you forge a deed into your entity name, and then quiet title it as well. I don’t know if you can go any lower in the pond than that. That’s pretty bad.

Real Estate Rehab: There is no borrower outreach. The demand letter is the borrower outreach.

It turns out there are multiple people doing this.

I would ask the people who are on back to that question of, “What’s your magic number if you had to do $10,000 to $15,000 in rehab. What would you want to gain on that based on assuming you have to spend some time, you’re out of state, and make sure you vet the right people?”

We need to get Chad on here to talk about how he decides what he’s going to do.

Are you talking ROI?

Do we know the rest of the story about that one in Missouri that Chad had, where he was going to go see the code enforcement? Welcome, Chad.

It’s not scientific, but if I can double my money on the rehab, I’m going to put into it, I’ll go for it. $20,000, it can do that act on top of whatever it is I’m going to get in the first place, then that’s what I do. If I’m going to lose money on a property, I’m definitely going to rehab it to make at least something.

Have you ever rehabbed property to break even?

The one I discussed the last time, yes. I’m hoping to break even on that. I was hoping to make $5,000 or $10,000 but it’s listed for sale. Everything around it is selling except for mine, although it’s only been listed for a week-and-a-half.

When last heard from, you were going to go see that code enforcement guy? Were you going to go talk to him?

Finally, they had the contractor that cleaned it out. I don’t know what was with the contractor. He couldn’t get his acting and then go down to the city. Allegedly, he went down twice. Both times he went down there, no one from the city knew what he was even there for. The inspector was nowhere to be found. I’ve called him umpteen hundred times. He never answers his phone and never responds to the email in a timely fashion. A few times, the contractor did go down originally. They didn’t even know what he was there for. The third time, he was given all the info. He finally released the ban on the property for people entering it. However, he had the contractor go down and meet with him there, which she did and released the ban. However, while he was in there, he found some electrical that was not up to the code that the previous occupants had meddled with. He’s got an open permit pulled for that. He proceeded to tell me that all the subflooring needs to be replaced.

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Why?

He had it soaked, apparently. That is not a permit or a code issue. I said, “We’re not replacing the subflooring. We are selling it as is. We’ll put the electrical thing in there because that is a permanent issue.” He wanted us to put that in the remarks in the listing. I said to the realtor, “Let’s just put the electrical thing in there because that’s the only thing that’s permittable.”

To be clear, to replace the subflooring means taking out the flooring.

This was original hardwood flooring throughout. I’m like, “I don’t think so. We can re-sand those.” Those are valuable hardwood because they don’t make it like they used to.

I had a house where they had a lot of animals and they had carpet over the subfloor. I thought we were going to have to replace all of that. It turns out that KILZ is effective.

You may have to go down a quarter of an inch, but you sand it all down. That old hardwood is durable. You sand it down. It kills it first and then that gets rid of the majority of the bacteria and the smell of it, and then you sand it off.

I have a question for both of you and this is not the case in this situation. Say you had a deal that you’re in for $20,000. It wasn’t selling or was about to break even. You can renovate it for $15,000 and make $30,000 in it. You also have a JV partner. The JV partner comes in and says, “I don’t have any money to contribute to the renovation.” You need to contribute to it. How would you handle that situation?

I had that situation. I was ripped off by a contractor to the tune of $8,000. My JV was using IRA funds and was pretty much tapped out. The combination of having made that mistake, I felt responsible and knowing that it would be hard to impossible for her to come up with the additional $5,500 to pay a real contractor to fix it. I paid for it. When we sold the house, that’s the one that we were told we’d get $10,000 for, we got $50,000 for it. We each got paid back first before we split anything.

I’ve not been in this, but I’ve contemplated this in the past where all of a sudden I possibly have as much money in this deal as my partner. They’re getting 50% of the profit. They’re getting all this upside from the renovation where they haven’t contributed a thing. It’s going to happen to investors out there where you’ve got a deal. It’s a $20,000 deal. It can sell for $20,000. You may have to put $20,000 into this thing and begin it for $40,000 but then it sells for $60,000. Both have as much money in it.

You did all the work.

Real Estate Rehab: If you have a house that’s vacant with a blue tarp on the roof, then more than likely, you’re going to have more expenses.

Chad, have you ever run into that?

I have specified in my joint venture agreements that if and when we do a rehab, that we split it 50/50. I’ll make it clear up front. I also have a clause in there that’s like what you’ve done, Gail. It’s more or less a proportionate share. In your case, Chris, if you’re putting in as much as them and you’re both in it 50/50, you should get 75%. That’s how mine is written.

There’s some language in JVs about stuff, but if I have to money in a deal and it’s more than a certain amount, some deals I front $500, then it’s considered a loan to the deal that collects an interest rate. It’s how mine’s written.

I had an investor who was in a deal in Michigan. It was disappointing and frustrating. It was a contract for deed. The woman had not paid for a few months or something. She didn’t reinstate, but she started paying again. She paid some upfront money quite a bit, considering her circumstances. She paid for two months and then she stopped paying again. We got a chunk of money, we got two payments, and then she stopped. It took quite a while to start the legal process. She reached out and it turned out it wasn’t going to be sustainable for her to stay. There were many months without payment. The house was such a mess. I didn’t feel like there was a choice. We would have gotten nothing for it. We also wouldn’t have been able to put anyone in it. This is around a 1,300 square foot house.

To do what you were talking about, Chris, all new floor, kitchen, bathroom, paint, it was an $11,000 job. I told my JV that and he’s like, “I don’t have it.” He’s a doctor. The problem is he was fully invested. All his money was tied up. He said, “Not only do I not have the money, but I’m also having issues. My ceiling caved in at home. I’m struggling to pay for it.” I decided to say, “Do you want me to find another investor to buy you out of this deal?” He immediately said yes. I felt bad in a way because we did renovate it. The JV who stepped into his shoes made an instant 35% in a few months.

That’s one thing as we talk about some of these topics like this is as you start to get more notes in your portfolio, making sure you budget properly and have reserves is imperative. There are stats out there that 95% of businesses don’t go out of business because they don’t make money. It’s because they don’t have cashflow because they don’t manage. Always make sure you have plenty of reserves for something that could happen, like an unexpected water bill or whatever it may be.

I prepare JVs, particularly if it’s a contract for deed. I always tell them at the beginning like, “I don’t want you to give me $15,000 extra in case we renovate this at some point. I want you to know that if it goes that way, you need to be prepared. Don’t invest that money with somebody else.”

I’ve got a CFD where the borrower’s payments are $220 a month. They’re two months behind. The reinstatement is $450. Here’s the reality. You spend the money and send the demand letter, which can get added to the loan and stuff. Am I really sending somebody a demand letter over $400 type thing? They’re behind, but you don’t want to wait six months. At what point on some of these other loans would you do a demand letter?

Didn’t you ask on Facebook if people do any borrower outreach themselves? That was the perfect example of something where you either pay somebody $100 to send a demand letter or you can just make the call.

A question did come through for reserve amounts you recommend percentage deal, fixing up per deal or some other guideline. It’s like the question of, “How much does a house cost to renovate.” It has many major factors. I never do anything less than $2,000 as a reserve. It varies between $2,000 and $5,000. Each investor is different because some investors will take $5,000 to $7,000. It depends. If there’s $6,000 doing taxes, I’m going to say, “We probably have to pay these taxes,” but if taxes are paid and the borrowers made a payment in the last 90 days, I’m not going to ask somebody for $5,000 or $6,000. I’ll say, “Let’s put $2,000 or $3,000 in reserves for now because they are still boarding,” and there are all the costs you had upfront and stuff.

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Once that goes through, it’s one of those things where I don’t want to have all that money sitting in my bank account in a sense. I’d rather have you hold onto it. I know other people are a complete opposite on that and say, “You should get the money from them, so you don’t have to go back and ask them.” It’s how you set it up upfront in the initial conversation, which is, “I’m going to get $2,000. If this or this happens, we may have to go back to the well.” I’ve to go back a few times on some foreclosure deals where an attorney charged me a ridiculous amount in a certain Southern state. I haven’t added him on the list yet. The foreclosure did cost more, so I did go back to them and said, “Here it is.” They knew upfront that the foreclosure was going to be $5,000 to $6,000, end up running about $8,000. It’s a few things. One is it depends on the asset. If it’s an Ohio nonperforming note, you’re probably going to want to have $7,000 to $10,000 because of foreclosure costs. If it’s a CFD in Indiana, you can get all your due diligence, all your upfront costs. You’re in and out for $3,000. It’s a big difference in the type of what you’ve got going on.

I try looking at the deal to get an intuition about what the likely course of it will be. When you have a borrower who maybe they’ve made one recent payment. We have one like this. She made one payment in December, but prior to that had not made a payment in a few years. That is someone to get ready. You’re going to have a lawyer involved. When someone’s a few months behind or they’ve been making their sporadic payments and stuff, it feels a lot less likely that you’ll be immediately in court. When you asked the question about borrower outreach, a lot of the more experienced people instantly start legal on everything. There is no borrower outreach. The demand letter, that’s the borrower outreach.

Here’s a scenario. This is one of the reasons I jumped on the call. I had one of our favorite servicers. That was the reason I don’t get them to do much borrower outreach. They have a handful of loans that are doing it. This loan, in particular, was part of the beginning of the year. Within a month, I got in contact with the borrower or the servicer did. At that point in time, they hadn’t paid in about a few months. The servicer said, “Let’s get a financial package out to you and fill that out.” This was a couple of months ago. I’ve been hounding them like, “Have we got it yet?” I finally got it. No payments have been made whatsoever. It’s several months behind. In the financial package, this borrower has not a great income but steady income, full-time. The mortgage payment is around $500. Her deficit is $500 a month.

Although she’s got a $150 cell phone bill every month, cable bill $89, and the internet was $60, there’s almost your mortgage payment right there. The servicer asked, “What do you want to do?” I said, “She’s obviously in a deficit. Tell her she only has one option. That’s to sell the property.” There was some decent equity in the property. What will you do in this scenario? There’s no demand letter sent yet. That’s the only recourse, send the demand letter and tell her to sell the property. What do you guys think?

This one tops yours. I’ve got a property that had about $3,000 in back taxes. The borrower makes sporadic payments. The servicing notes are like, “They want to keep the property.” I work something out where it’s like, “I’ll pay the taxes. I’ll get them on a loan mod.” The attorney in North Carolina I’ve been using is as slow as a turtle, so it’s been painful. It’s gone on over about a few months to get them to draft this. There’s going to be a cancellation on land contract and a new one to update it to the laws in North Carolina. I finally get it from the attorney. I sent it to the servicer and they say, “Get the borrowers to sign this.” The servicer comes back and says, “I don’t know where the borrowers are. They’re not the ones who pay anymore. They gave the house to somebody else who has been the one who’s been paying sporadically.” I’m sitting there thinking, “I could’ve foreclosed on them a few months ago. Your note person wants to keep the house. The person who wants to keep the house isn’t even the person on the land contract and the person that’s even making the payments or paying any of the taxes.” I’m like, “Are you serious?”

The servicer never revealed any of these details?

The person paying the bills and the person they’re talking to isn’t even the person. In your option, Chad, I’ve got a similar situation too where I’ve got a borrower who was responsible for the taxes. The taxes are over $10,000 because it’s in my favorite state. The taxes are high. He’s on a payment plan. The house is worth $100,000. The UPB is $30,000 on this thing. The guy doesn’t have a lot of income and the wife doesn’t have a lot of income. The tax payment on the past due and the new tax payment is $800 a month. Their income per month is only $1,400. I’m like, “You can’t afford a mortgage. I can’t even charge you anything because you’ve got other expenses and stuff. Your taxes alone are 46% of your income.” They’re like, “We need to keep it.” I’m like, “I’m sorry, but you’re going to have to sell the property.” They haven’t accepted that yet. That’s a challenge you’re going to have is getting them to accept it. You almost got to have to force them by sending the demand letter and starting that process.

What I’d do in your situation, Chad, is say to them, “Your situation is unsustainable. I think you recognize that. If you were applying for this loan, I would not legally be able to sell you the house because you don’t have enough income to qualify for the loan that you’re in.” I’d give them a chance to come up with a plan so if they have an extra bedroom or whatever, you could rent out a room. You can explore ways of increasing your income, cutting your expenses. I’ll give you a week to get back to me with a comprehensive plan for how you’re going to be able to afford the house. In the absence of that, there isn’t a choice.

That’s what I presented back. I said, “Cut your cable, phone and internet.” That’s $300, $400. I had two separate drive-bys. There are five, six vehicles in the driveway at all times. Maybe some of the other people should be contributing to the rent. In short, the guy got to sell the property. Plus, she’s $5,000 in arrears.

The conversation becomes like, “Either you can sell the property, you can sign the property back over to me. If you sign it over to me, I will give you some money. If I have to go a legal route to resolve this, then there will be nothing for you. I’d rather give it to you.”

Here’s the challenge you’re going to face too. I’ve had this in the past. If you let the borrower sell the property, it’s never going to sell.

I would get my own realtor on it for sure.

They won’t let the realtor. They’ll say, “You can’t come now,” or they’ll schedule an appointment and we can’t come. I had a property in Mississippi that I use the agent. We had the house sold. I was a note holder. It was a note, not a land contract. The borrower refused to sign the documentation. We sent mobile notaries and she refused to sign.

What would she sign?

The sale. We were short selling the property. It was on the title. I was like, “We’re going to allow a short sale and sign over the deed.” We were giving her a few weeks to move out from the date it was signed. She refused to sign it. I ended up having to foreclose on her. Nothing was ever her fault. Anything that happened was because of bad luck and not because of anything for a cause.

Was there no Cash for Keys in the offing there to motivate her?

There was. She would’ve got $1,500 to sign the paperwork.

I don’t know if people cannot accept the reality of the situation, or they feel that stalling has worked in the past and they say, “We want to keep working now.” I have a borrower in Indiana who has ignored everything. She ignored every outreach effort. There’s a contract for deed. She ignored every piece of legal paperwork that came. I even sent someone over there to talk to her and that person was able to talk to her college-age son. This woman has never responded. Her land contract has been canceled and eviction is being arranged, the sheriff lockout. In fact, I need a lockout person in Gary, Indiana.

I had good luck with Safeguard Properties. They’ve got an . You go on there and you put in your service. I need some grass cutting on some different properties. They had done it within a couple of days. You go there and it’s à la carte. You can pick whatever service you want. They call you back immediately. You pay for it online and they do it within a few days. I had some different properties for the grass to get cut. They sent an entire report and it only cost me $45 to cut the grass. When I’m buying a property, I’m going to send them up to cut the grass because it was unbelievable, the detail they put into this thing.

Are they national in scope?

Safeguard Properties are huge. They’re all across the country.

I signed up with Sand Castle a couple of months ago because I had an urgent need for locks changed, photos taken at a property. You get in touch with them like, “I would like to become a customer.” They’re like, “We will have someone call you back.” A week goes by and I’m like, “I still would like to be a customer.”

SGPNow, they call me an hour later and they had the grass cut in a couple of days. Go on their website and fill in the stuff, register for an account. That’s the quickest way to do it.

This eviction, this sheriff lockout is being arranged. I was petrified thinking, “What if she’s older?” I knew she had a college-age son. I always picture these decrepit old women who don’t understand what’s happening. I don’t even know if this woman realizes what’s going on, if she has the capacity to understand what this is. I found out she’s 38 years old. I thought, “Forget it. She can handle it.” Someone’s going to knock on the door and I don’t know if she’s sitting there. They’re going to tell her to get up and walk out. I don’t know if they’re going to put her stuff outside or if they’re going to have my guy changed the locks and then she has to make an appointment to go get her stuff.

Christine mentioned to reach out to .

I love Gene but the last couple of times I’ve asked him for suggestions he was like, “I don’t know.” He’s getting tired of being the Indiana guy.

SGPNow, they’ve got that service. They’ll change the locks, but they’ll do a clean up for you as well. It’s $50 a cubic yard so careful.

I’ve always had better luck on clean outs, finding a local guy.

Property managers are usually the best.

I just need a lockout at this stage. I’ll figure out this stuff. I imagine this woman will want her stuff and will want to move it.

It depends on the county. I’ve never done one in Gary. Some sheriffs will require you to have a moving crew there.

That’s what I’ll find out.

I’ve done way too many lately. They want you to have a moving crew.

We did have a few other questions jumping back on the reserves on deals. One was the $2,000 to $3,000 of money being funded by your JV partner to deal going to reserve. The way I structure my deals is there’s the acquisition price. If I bought it for $20,000, this is what the price is. It was $20,000 plus an extra $3,000. They fund $23,000. Your bookkeeper will say it doesn’t matter that the $3,000 “is reserved,” it’s how you manage it. At the end of the day, it’s a liability for $23,000. It depends on the expenses in the state and house. If you have a house that’s vacant and with a blue tarp on the roof, then, more than likely you’re going to have more expenses. You have to have the grass cut, you’re going to have to get it winterized, and you’ll probably want to do something with the roof. The county is going to be chasing you down as well to fix it or they’ll start fining you as well.

What are some of the things that you all out there want to hear about or have us talk about? We’ve got plenty of stuff to talk about. If there are certain things that people do want to hear about, we’re happy to discuss those or provide more input on or share more stories or case studies. We’d like to hear from you guys, also participate. What do you want to hear from us? For case studies, Gail, between you and I, I closed on probably fifteen plus assets that I could talk all day long about. You’ve got some as well that we can easily start talking about some of these case studies.

I have a 700 square foot house sitting vacant in Indiana. I got an $800 electric bill from there. It’s interestingly a place where there’s one utility company that provides both electric and water. There’s zero water usage and there’s all this electrical usage. They think maybe I let somebody stay in the house or something. They think there’s something fishy about the way I’m talking about this. I’m like, “Seriously, no one has been there with my permission. I don’t know if anyone’s broken in, if they’re cooking meth. I don’t know what is going on.” They indulged me by removing the meter and doing an autopsy on it. They reported to me that it’s not 100% great. It’s 102%. They threw it back at me, you and your claims of no electrical use.

This is from Christine. She said, “If there’s an episode that explains how we work together on our partnership deals. Who does what? I’d love to hear more, especially since Scott was talking about combining forces with others to accomplish more.”

He’s the overlord. He sits in his office and calls people and makes demands. I’m the hardworking, sincere worker bee.

On the deals we’ve done, Gail has absolutely done a lot of the heavy lifting. Here’s the thing about combining forces on deals. I view it almost like roommates. It’s good if you have two roommates. Two gangs up on one. I’ve had conversations with people about trying to go down and take a tape or get three, five people to go take a takedown. It’s a lot of work and risk in factoring in who gets what and stuff. For partnering with other note investors, I would definitely make sure you have conversations with them. I would meet with them. I would talk to them about what would you do in this situation, and make sure you’re both similar in your values in regards to how things possess. Gail and I are similar in values. Style-wise, we are the complete opposite.

Christine said, “Maybe not necessarily in deals, but on your business at least.” For business, I highly recommend that you don’t have to partner with people but have conversations with people on how they run their business or how they do things. If I have a deal and somebody said, “Can I see how you do this?” There’s no secret formula or secret sauce to how you do this stuff. One of the episodes that we should do is things you do on a monthly basis, or how you manage your portfolio. I was going to pop up on the screen and show how I do things. People can follow it or they can’t. From a business perspective, it’s valuable to have conversations with people throughout. I talked to Chad for an hour. I’ve had conversations with Adam Adams on some things as well. Dave called me. We had a conversation. I learned stuff about hearing other people’s stories.

It’s like a buddy system. It doesn’t have to be the same person all the time. It’s helpful. Before I was in the notes, I would see women at real estate investing conferences. They were almost always the spouses of the guys who were investing. When I see couples that work together, I always feel like a little wistful because my husband has never been interested in real estate. It’s helpful to know someone who is battling the same dragons that you are and learning from the experience and as open and generous about sharing as Chris is. That’s clear in the way he conducts himself on social media and here. You can say a few things to normal people who aren’t in this world, but after five minutes, they’re done with this topic. Chris and I talk virtually every day, probably for an hour while he’s sitting in traffic going home at the end of the day.

You’re right about the buddy system because we both learn a lot from each other. Christine’s husband is on the sidelines and wrapped up in his businesses. It’s the same thing. My wife is busy and doesn’t get involved. It’s almost like a buddy system of talking to people and running ideas back and forth off of things. There’s a lot of stuff back and forth between Gail and I. I was going down a different path and she was like, “Why don’t you do this?” I was like, “You’re right.” It’s things that you can definitely do. One other question we did get is, “How often do you keep a note and buyout the investor to keep as long-term cashflow?” It depends on the investor. I’ve done it in the past where investors wanted out on the deal. I was going to hold it. We agreed on a price. I kept that in my portfolio. A lot of times though, if the investor wants out, I may look to sell off that asset as well at a point in time. It’s a case-by-case. It depends on you, what your goals are and whether you want to cash to take it and reinvest it, do you want to buy them out, or they want to stay in the deal. It’s not a specific percentage.

If you’ve been JV-ing on something, your IRA cannot buy it from your regular company?

No, it’s a disqualified transaction. If you had a note, you can’t sell it to your mother’s IRA. Anything that you have, you’ve got to be careful of all those disqualified.

Can you sell it to an intermediary and then buy it with your IRA?

Yes, if it’s a legitimate transaction. Let’s say I have a note I sell with you. If you hold it for a few months and then my mother buys it in her IRA, that wouldn’t be prohibited because you’ve held it, you’ve managed it. If I sold it to you at $950 now and later she bought it, that would be frowned upon. If you bought it, held it, worked it, and there’s no set time period but the reality of it is I probably still wouldn’t do it but wouldn’t look as bad. You’ve got to be careful about that. Christine mentioned disqualified descendants and ascendants. Laterally, brothers and sisters, aunts and uncles are fine. That’s my understanding, that those are okay. Fiancés also are not disqualified.

If you’re not married, then work it through that avenue. One thing we should talk about in an upcoming episode too is I had an issue with somebody about this whole Detroit issue. I don’t know if others have experienced it. In some of the deals I’ve done with people in Quest, Quest is still an excellent company. They tighten your belt. Things have changed where I find it a little more cumbersome to get funding pushed through in a timely manner. Part of it could be because some of the people I’ve been dealing with, it’s their first deals. They may not have filled the paperwork out properly. I’m curious for people out there as well. Request their other IRAs. I’ve dealt with equity in the past. That’s something we can bring up as well. I’d like to thank you for joining us for another episode of the show. Gail, do you have any last and final words?

No. Thank you. Go out and do some good deeds.