All Forum Posts by: Christian Carson

$1262 monthly rent!

12.4% cap rate!

31% cash-on-cash return!

This is the nicest duplex on the street, and the tenants love it! It's been consistently rented with continuous history dating to 2013. Located in the heart of Cleveland's North Collinwood neighborhood, this property is steps away from the beach in the north. Due south is the new Waterloo Arts & Entertainment District and the Beachland Ballroom, an ever-popular music venue surrounded by eclectic shops and fine eateries.

This house has been upgraded:

1. New windows throughout house

2. New furnace

3. Newer breaker boxes and upgraded electrical

4. New appliances on first floor

5. Concrete driveway in excellent condition

6. Brand new roof (going on as we speak)
 

Tenants: This property is fully tenanted. We manage it ourselves, since we also live in the area. We would be happy to put property management in place for the new owner's transition, as we have several contacts in the area. The first floor tenant has lived here since 2013 and the upper floor tenant since February. All of the tenants have been on time every month with no issues at all.   Why we're selling: We're currently in the process of liquidating a partnership that owns this property and a few others in order to pursue larger investments. We maintain our properties in top shape and screen our tenants heavily. If you're interested in hearing more about our portfolio, just ask!

Cap rates and cash-on-cash, calculated the RIGHT way:

Revenue, annual: $15,447

Vacancy: $757
Property taxes: $1,801

Insurance: $1,000
Property Management: $1,439
Utilities: $1,200
Maintenance: $1,200

Total NOI: $7,747

With 20% down at 5% interest for 30 years and $2000 in closing costs, this equates to a 31.22% cap rate!

Call now to get this good deal before I turn this over to a realtor (then the price has to go up!)

I can't resist this thought experiment. @Matthew Kreitzer, what about subsection (A)(4) of the cited rule when applied to tax accountants? Assume our nonlawyer tax accountant is engaged to provide a memorandum of opinion on the tax consequences of a proposed corporate structure. Would it not be professional malpractice to fail to inform the client of a tax court memorandum directly on point that disapproves of the structure? Considering that revenue agents often cite to TCMs and other legal authorities when making post-audit determinations, it seems that this information would be absolutely crucial to recommending the appropriate tax structure.

Of course, the situation would be different if a client, already mired in a controversy with the IRS, sought the advice of the tax accountant as to the potential outcome of the dispute in tax court. In that case, I agree--that's squarely legal advice.

I don't think UPL statutes were intended to serve as a gag order on citing to legal authority -- published opinions can and often do affect the way the IRS interprets the Code. Their role in keeping the client out of tax trouble seems indispensable.

Originally posted by @Chris Martin:

@Christian Carson

I'm just curious as to why is it that the Ohio legislature would remove that phrase as part of the exemption from the definition of broker? Seems like to eliminate options, marketing of contracts, etc., where the seller does not hold the true deed.

Part two of my question... when a lien holder with ‘an interest in’ in Ohio property (e.g. a Bank) markets via an internet site which appears to not be affiliated with a licensed Ohio brokerage, the lien holder is certainly 'ready, willing, and able' to buy/assign if need be. Does Ohio law distinguish between a Bank and a 'wholesaler'*?

*'wholesaler': assumed to be ready, willing, and unable to buy without a substitute buyer

Good memory. The statute was amended sometime around 2011 from the original exception:

"With reference to real estate situated in this state or any interest in it owned by such person..."

to the new language:

"With reference to real estate situated in this state owned by such person..."

Such activity does indicate legislative intent to stop unlicensed people from selling any real estate they do not own. Ownership of real estate is necessarily a question of title; but since a land contract vendee certainly owns their property but lacks legal title, they are said to hold equitable title.

Lienholders are similar to land contract vendees when their mortgagor defaults. Presumably they have an equitable title interest as soon as they file a foreclosure complaint, because now they will bear the risk of loss and will inevitably obtain legal title. When a mortgagor defaults, many mortgages allow the lienholder to "take possession" of the property, which is permitted by courts as soon as the default occurs and entitles the lienholder to rental income. Traditionally the only rights of possession that a lienholder could exercise was the right to petition a court to appoint a receiver to collect rents and pay them to the lienholder. Since the foreclosure crisis courts have been much more permissive toward direct property preservation activities that certainly look like ownership.

Originally posted by @Account Closed:

The state has decided that residents are particularly at risk of predatory activities when buying and selling real estate, which is why the licensing statutes exist. It's similar to law licensing--people who practice law without a license are subject to punishment. I'm sure we all have given and received legal advice every now and then without law licenses, between friends. Contrast this--if someone who didn't pass the bar hangs a shingle and starts representing people in court (and believe me, it happens!), you bet the state will have a problem with it. It won't matter one bit if s/he makes every last client execute an affidavit swearing that they're aware of the risks of hiring a nonlawyer for legal services -- they crossed the line. There's a similar line when it comes to real estate brokering.

Originally posted by @Brandon Turner:

Yes, if he is legally representing the seller as a real estate agnet and has a fiduciary responsibility to get them the highest price possible, it's totally legit. But as a buyer? I don't see it. As a wholesaler?  I don't think a wholesaler has a fiduciary responsibility to the seller either. Thoughts?

@James Wise

 Well, this circles back to what James said about regulation of the sale. The purpose of the brokering license is to impose fiduciary duties upon people who broker real estate. They must disclose, they cannot steer, and they must act with their principal's best interest in mind as they are agents of the principal. The state has prescribed an enforcement mechanism for punishing wayward agents.

Entering the real estate transaction with the intent to broker a sale to another suggests brokering activity, which requires the observation of heightened fiduciary duties in all states. The facts in this thread are a bit different than a standard wholesaling transaction -- paying taxes on property sets him up for risking loss of investment if the transaction doesn't go through. Certainly the more one acts like a principal in a transaction, the less likely a regulatory authority is to consider it unlicensed brokering.

Originally posted by @Ron Kilbreath:

The wholesaler (and I hate that title) on the other hand has entered into a legal agreement with one other interested party to buy the property according to the wording of the contractual agreement. He/she has a vested interest in the property under the terms stated within. It is a legal and binding contract between TWO people. Not three.

"Vested interest" is a term of art in the law, in contrast to a contingent interest. A purchase agreement produces a contingent interest because the purchaser's title is contingent upon releasing inspection contingencies and paying the seller. Contrast this with the land contract or contract for deed, where the contract gives the buyer the right to possession upon execution and payment of a down payment. That is a vested interest, also known as equitable title.

The most topical Ohio court pronouncement on equitable title, or "equitable conversion" as courts call it, is this:

1. [E]quitable conversion by the purchaser, in a contract to convey real property, does become effective in those cases in which the vendor has fulfilled all conditions and is entitled to enforce specific performance, and the parties, by their contract, intend that title shall pass to the vendee upon the signing of the contract of purchase. Sanford v. Breidenbach, 111 Ohio App. 474 (Ohio App. 9 Dist. 1960) (emphasis added).

A standard assignable purchase contract does not entitle the seller to petition a court to enforce the contract because the wholesaler has a back-door clause to escape enforcement if a buyer could not be found. Therefore, equitable title does not pass until the buyer has removed all contingencies and the seller may demand performance.

As discussed in Sanford, one must examine who bears the risk of loss in order to indicate who holds equitable title to the property, and vice-versa. If the house were destroyed by fire during the pendency of the contract, can the seller compel the buyer to complete the contract anyway?

This, I think, is where the logic of the standard method of wholesaling fails, and why the state has recognized it as unlicensed brokering -- the contract signed doesn't obligate the buyer to do anything at all, and as such, looks more like a nonbinding letter of intent or an option, and vests no title in the buyer nor rights of specific performance in the seller.

@Bill Gulley: the option method is otherwise a clever method of realizing an interest in real estate, but unfortunately the Ohio real estate brokering statute contemplates this activity and includes buying and selling or dealing in options on real estate for another as licensed activities.

There are good attorneys and there are marketers who never turn down a job. Beware of anyone who sells you a boilerplate operating agreement without attempting to understand the nature of your business or asking specific questions. My LLC questionnaire is three pages long, and gathers all the necessary information so that I can choose the correct structure and enabling language.

One particular caveat that keeps coming up is where two active real estate investors come together for a joint venture. The statutory default rule sets out a non-competition requirement, which is quite difficult to waive in Ohio without specialized knowledge of the case law. If your attorney doesn't account for the rule, your partner could end up suing you for a violation of fiduciary duty because you bought real estate outside the joint venture LLC.

Paying a $5,000 tax bill is a little different than our standard joker wholesaler who puts a house under contract with nothing down and comes back 30 days later unable to find a buyer. The question is whether the original poster did enough to qualify as a principal in the transaction.

I've got a 1904 house. It's not too bad. Wood doesn't really ever fail unless it's been compromised by cutting or moisture. You'll want to pay special attention to movement of the foundation and horizontal bowing. Basement walls hold back a tremendous amount of pressure.

Zestimates are always worth a good laugh for me. Zillow thinks a house I bought for $27k is worth $200k even though no house on that street has sold for more than $65k in the last five years! Moreover, the comps it suggests often are phantom sales that never actually occurred.