All Forum Posts by: Christian Carson

@Jacqueline Mims : Thanks for the insight. I believe the POS inspection is a regional practice specific to certain municipalities in Northeast Ohio, so it'll be hard to get specific insight about this issue.

I hope the realtors will be flexible about this one, but I have had poor experiences with this brokerage in the past. It seems like a major rookie mistake to list the house before the POS inspection is done--if it comes back requiring the buyer to put up any more than a nominal amount, it has a very high likelihood of killing the deal, as the POS escrow can't be financed.

Thanks for the reply. I have to decide how much of a risk I'll be taking by making a blind offer like this. Standard inspection period is 10 days here -- but like I said, the POS inspection report is probably going to show up after that, and I'm sure that we're looking at at least a $10-30,000 extra cost.

Is there any other backdoor way to get the earnest money back after the inspection period has expired? Like a mortgagee refusing to lend?

I was just advised of a multiple offer situation and was asked for my highest and best offer from Freddie Mac.

I've read several accounts of how Freddie Mac allegedly operates (including one statement that they don't ask for highest best) and they all seem to conflict.

I am fairly certain that my bid will be the highest on this one, but there are certain things that Freddie is doing that is causing me hangups. I'm hoping that someone experienced with Freddie's operations can shed some light on what the best move is here.

The city in which the subject property is located performs a point-of-sale ("POS") inspection on all properties to be sold. The POS requires that certain violations be fixed, and that the buyer put a certain amount of money into escrow to fix them. Freddie, for some reason, probably a nefarious one, put the house up for sale before this inspection was conducted. It's expected to be in hand by sometime in February.

This escrow number can be anywhere from $1000 - $50,000 depending on what they want you to do. I've seen them require new driveways, garages, concrete pads, etc., which can add up to be really big bucks that we investors wouldn't normally ever spend (who cares about driveways? Let them go to gravel!)

To keep my peace of mind I want to put a contingency in the contract, or at least a longer inspection period that encompasses the time the inspection results are supposed to arrive.

Question: Is asking for any of these going to blow my "highest & best" status with Freddie? Will they throw my offer out because it has a 20-day inspection period, a 45-day close, or a contingency based on review of the POS inspection?

I think there are at least two other buyers with offers in. I'm going to wager at least one of them doesn't know about the POS inspection or will neglect to plan for it. I don't want to lose this property (it's a tremendous deal) but I don't want to commit to losing my EMD if the POS comes back at some sky-high number!

It turns out that I'll be in China for the scheduled closing date of one of my acquisitions (the trip came after the scheduling--just bad timing!)

I have a choice: pay the US consulate $50 *per notarial seal* or take a $100 per diem fine to delay closing 8 days to when I will return home.

Since this property will have a mortgage, I'm trying to recall how many notarial seals I will need. Is it simply the actual mortgage or is there more to it?

@Reuben Stewart : My partners and I purchase properties in transitional and gentrifying neighborhoods in the Cleveland area. Feel free to reach out.

I have a few things to point out with the numbers.

1. Do you have backup for that insurance cost? I've never been able to obtain an insurance policy for less than $600/year on properties in this price range.

2. What about property management? PMs in my area generally charge a minimum of $79/mo per unit when dealing with under four units.

3. Who takes care of landscaping and is that built into your cost?

4. What about water/sewer or other utilities?

Actually, you never have to create an LLC if you don't want to. After 4 loans, it's harder to get a standard conforming loan for your acquisitions, which makes commercial lending a more attractive option. Though the terms are usually worse (higher rate, 5/1 ARM usually), the bank will allow you to acquire and title the property in the LLC's name. At that point there's no reason not to get an LLC, unless you live in a state with very high registration fees (I'm looking at you, California).

From a liability standpoint, LLCs provide more back-end protection in case things go horribly wrong and someone tries to sue you. Insurance can function the same way, but then you run the risk of the insurer denying you coverage.

One note: it becomes harder, if not impossible, to refinance your property with a conforming loan if you deed it to the LLC. Banks usually want to see title in your name for at least 6 months (called a seasoning period) before they will lend on a property.

@Katy Bedjeti: The difference in valuation between building types is very market-specific. The market for apartments is primarily driven by investors looking for a return, while the market for duplexes is driven by owner-occupants looking for a nice place to live. There are lots of markets in the Cleveland area where duplexes are just flat-out bad deals while the 10-unit next door is a screaming deal, and there are neighborhoods where the opposite is true.

The important lesson is that every deal is different. If you are considering buying a second property, just look at what's on the market today and try to determine what the best investment is. Then plan your first purchase accordingly. As a miser, I'm always interested in living cheaply, so buying a 4,000 square foot duplex might not appeal to me as much as the family with three kids.

The first step is to calculate the first property's return on investment (assuming you'll pay yourself market rent). BP has a great investment calculator under the "Analyze" tab at the top of this page. Then take a hypothetical second property and do the same thing.

You want to invest as much as your money as you can at the highest ROI you can get, so whichever number you get will tell you what path you need to take. If your owner-occupy house has a lower ROI than the second property, you should downsize your first purchase and plan for a second.

I've found that smaller properties like duplexes and triplexes produce MUCH higher returns than fourplexes and above in my market. I was originally going to buy a fourplex to live in for $200k, but I realized that I could buy three duplexes for the same cost that would return nearly three times as much cashflow (and living in the fourplex meant I'd be breaking even). As the podcast covered today, the market for larger apartment buildings is a bit saturated right now.

As for the type of mortgage you should get, this wholly depends on your income and how much of it you'll be using to pay the first payment. A 15-year mortgage will require a higher payment. Generally you want to keep your total debt service to income under 39%, so keep this in mind.

You're going to get some wildly inconsistent answers on this board. People who invest in the south/southwestern part of the country often are dealing with a very young housing stock, so they can afford to make a statement like "Anything built before 1978 is a deal breaker." Lead paint was outlawed in 1978, and that's important to some people; however in the Cleveland market it is almost uniformly regarded as a non-issue. Style might also be more important in some markets, and age will affect marketability more in those places.

The Buffalo housing stock is similar in character and age to the Cleveland housing stock (maybe a bit older), so most of what you'll be able to find (much less afford) is going to be pre-1978.

I don't see a problem with old houses. In my book, a 1950s house is as good as new, but an investor from Phoenix is going to strongly disagree with me. I figure that if a house has stood for 100 years without developing major foundation and structural problems, it will probably stand for another 100 as long as it is maintained properly.