All Forum Posts by: Adam Johnson

@Daria B. I will give it a shot.  I never "bought in" to the Fannie world for investment properties, so I will by speaking from the sidelines more than as somebody in that world.

As to your first question - I am almost certain that 2 properties would be considered 2 mortgages for Fannie.  I would also like to clarify the use of "quad".  Even though there are 4 units total, it would still be more accurately described as 2 duplexes, as I assume that they are different parcels of land.  If there are 2 buildings, each with 2 units on the SAME parcel of land, then they might then be considered a quad.

I think that your second question indicates a little confusion over the number of mortgages.  It is my understanding that you can have 4 or fewer mortgages.  Number 5 or more becomes more of a challenge.  I have heard that with heavy reserves of cash there are exceptions, but again, I am not in this world so I my information may or may not be accurate.  Not sure if that answers this question exactly.

Your last question refers to the 4 mortgage limit.  It is my understanding that it is 4 mortgages max with your name on them, regardless of who holds the mortgage.  This also includes any private mortgages too I believe.

Your best bet is to verify this with a mortgage banker or broker that deals with Fannie underwriting.  I'm pretty sure my answers are accurate, but because I don't work with it, I may be off a little bit too.  Hope that helps.

That is correct. If they are writing FF loans, they don't "like" my file, too many mortgages, owned by LLC's, etc, so I won't waste time going further.

Best of luck.  Stick with it.  There will be many days that it feels like you are going nowhere, but as long as you stay disciplined, you will get there ahead of schedule.

If you have the means to close this size deal, you may also consider finding out who the lender is so you can start "making friends".  It may prove beneficial in a couple years when the loan is due.  You may also find the lender wants the property.  Alternatively, you may find the deal the seller is offering improves closer to the due date.  Either way, dig deep in the due diligence to uncover any other surprises before you close it.

Assuming that the numbers are all accurate, I would be very concerned about the balloon coming up. Three years isn't that long to get over that hurdle. Looking simply at the NOI versus the note balance, at 100% LTV you are still at less than a 10 cap valuation. Finding a lender to do 100% financing on the refi will be a huge challenge, and coming up with the difference in 2018 might be a challenge too, unless you have really deep pockets.

You DO have potential upside, but that isn't guaranteed.  I think you are wise to focus on the balloon.  My guess is that the seller realizes he is upside down (or will be at refi time).  I would also guess that when they financed this, times were better and they had a juicy valuation.  Wonder where the money went that they probably pulled out when this financing was put into place?

The fact that they claim to only be spending $ 500 on marketing tells a lot about how it is being managed.  This is a runaway freight train.  The seller is in trouble and realizes it.  I would dig very deep on the due diligence to see what other problems exist.  I would be willing to bet there are even more surprises to uncover.  Tread lightly.

@Brooke Ray - what you are proposing is very speculative. Others have recommended against it but have tried to steer you toward SFH. I don't necessarily agree with going only SFH if you want to get into commercial, but there are a lot better ways to test the water. It appears to me that you are hoping for the "home run" investment. Go with the "base hit" first, swing for the fences later on when you can afford it if you strike out instead.

If you are looking for more passive type investments, notes are an option.  Certain commercial properties have different variations of net leases as well.  Make sure to educate yourself on commercial investing if you aren't familiar with it and don't be afraid to ask questions!  The only stupid question is the one that didn't get asked but should have been!

I am going to take a wild guess and assume that there was some freeze damage to the plumbing here and that is what you are concerned about.  We do property preservation work on foreclosures and your pictures indicate either a roof problem or plumbing problem MIGHT exist.  Is there a bathroom or other water using fixture above your picture of the bathroom with the ceiling down?  If so, plumbing damage is quite possible.

Here are a couple of clues.  I notice you are in Chicago, so I will assume the property is nearby.  If there are winterization stickers on any of the fixtures, what are the dates on the stickers?  If it shows it was winterized in October or November, it may have been winterized prior to freezing.  This is not a guarantee, only a clue.  This also assumes that it was CORRECTLY winterized.  Homes winterized in mid- to late-winter have a much higher chance of being freeze damaged before they were winterized.

If you are concerned about freeze damage, here is an easy way to check the pipes without utilities.  It will require a generator if the power is off, an air compressor, an adaptor to go from air fittings to female hose threads.  All of the fittings you need are available at the big box home centers, it will likely take a few.  You can also use a wheelbarrow type air compressor with a gas engine, but you will need enough hose so you can run it outside.

Find either an outside hose connection or a washer connection point.  If there is a laundry sink, sometimes those faucets are male hose threads.  Connect the the female hose thread end of your adapter to the connection point and the other end to the air compressor (or hose from an air compressor).  Reduce the output pressure to about 30-40 PSI and fire it up.  Walk around and listen for air hissing.  This works better with a larger air compressor that puts out more CFM, ideally more than 3 CFM is what you want.

Walk around and make sure all faucets are shut off.  You will also need to shut off the valves under toilet tanks and/or prop up the float in the tank to shut air flow off through the flush valves.  If the system builds pressure (can take up to 15 minutes depending on air compressor output, number of water heaters, and size of the home), build it to around 30 PSI, then shut down the compressor.  If you hear air hissing, see if you can figure out where it is hissing from.  That's one of your leaks.

Note that almost every house will have a few minor leaks.  If you can build pressure at all, you are probably looking at mostly minor repairs.  If it builds slow or leaks down quickly after shutting off the air compressor, you may have bigger problems.

Also note that if you have a tough time building pressure at all, if you can isolate the water heater by shutting valves off and get IT to hold air, you can use it like a big reservoir.  Fill the water heater to pressure (30-40), shut off your air compressor, then open the valves.  You will hear the air movement through the pipes, but you have a better chance of also hearing leaks because you won't have the noise of the compressor in the background.

If you aren't comfortable doing this yourself, you can hire a plumber to do it for you.  A HUGE advantage of leak testing with air as opposed to water is that air doesn't make a mess and doesn't damage anything (unless you blow through the pipes at 120 PSI).  This may be why the bank doesn't permit utilities to be restored.  It is also possible that there is a large water bill outstanding (common if the pipes burst) and the utility won't allow it to be turned back on  until it is paid in full.

Good luck!

My vote is all items, including the oven element, are normal wear and tear.  With a tenant in a unit for 3 years, I think you have done well if these are the only repairs that you have to do.

Regarding the element in the oven, when they burn out, it is not uncommon for there to be spot that either melted completely through or most of the way through.  I am not an expert, but have replaced my fair share of them to think that not cleaning the oven doesn't have a lot to do with when they fail.  They are a wear part and sometimes just plain wear out.

Carpet, definitely a wear item.  Dawn dishwashing liquid does a great job in a wet cleaner.  I actually learned this after cleaning carpets in a vacant unit using carpet cleaner.  The next tenant asked if I minded if she tried to get them even cleaner.  I told her to give it a shot, we had cleaned them 3 times already.  She showed me what they looked like afterward and I was embarrassed to see that she did a much better job than we had!  That was her secret sauce and it worked very well.  We now use that on most of our carpet cleaning jobs. 

@Assaf Furman - I don't have a BPO or appraisal done, but I should qualify that by saying that I am a broker and I am comfortable with my opinions of value.  I will go on to say that I always build in a decent cushion in case I am wrong on my opinion of value for the end financing, which I have been wrong about in a couple cases.

I am very particular about what I buy and don't shoot for high volumes of deals.  I try to make every deal count.  I will pass over 10 mediocre deals to wait for the "can't lose" deal.

It is not a bad idea to get a professional opinion of value ahead of time (BPO or appraisal) because it is dangerous to get trapped by your deal if you use this approach, unless you have extra funds to kick in to close on the refi in the event that the bank's appraisal comes in low.  Used correctly it can work very well.  Used as a way to "worry about it later" and you can waste time/money/energy trying to save it later.

I do this on a regular basis.  A few important things to know, however.  CAN you get approval from a lender to refinance?  If your credit score or other issues will be a tough obstacle, this can be a dangerous trap.  You may not know 100% for sure ahead of time, but you should have a degree of comfort.  Otherwise, your hard money may get REALLY hard and you may lose the property.

Another thing to know is how long the hard money lender will give you to take him out. If it is 6-12 months, this can be very challenging. I recommend having at least 18 months on the HML to refi, a little more is better. Also try to negotiate no prepayment penalty or at least no pre-payment penalty after 6 months or so.

I use this structure when buying distressed property at a heavy discount.  I fix the problems, which in turn raises the value.  This makes it easier to refi the original loan amount with a more traditional and softer lender with more favorable terms for a long term hold.

In nearly every case, the property will need to be rented and cash flowing prior to the 2nd lender committing to refi, so you will want to include that in your stabilization plan.

If you plan to buy a property at or near full price, this is an expensive option and I would not recommend it.  I think it works best when buying "unfinance-able" properties at a heavy discount.

Not sure if I answered all of your question or not.