All Forum Posts by: Jeff S.

Consider yourself lucky, @Cristina Rodriguez. These guys found a “live one,” couldn’t get the job done, and seemingly showed their true colors. Sorry for my cynicism, but the fact that they asked you to sign a PA without informing you that it was binding shows they either didn’t know, or they were being deceptive. Either way, shame on them. Your requests were completely reasonable though still shortsighted, in my view. Unfortunately, you also presented many red flags.

First, it does not appear that you have any criteria your partners must personally meet or any criteria their deals must meet before they bring them to you. Without these, you're subject to doing business with anyone good at selling themselves and/or investing in properties using their purchase criteria, which might not be well-thought-out or in your interest. I suggest you establish written criteria that you can provide to potential partners. We don't JV but provide similar criteria to all potential borrowers. Nothing is perfect, but this forces you to think about what you want. It also helps keep you focused and filters out the bad actors and the bad deals.

If you're going to invest in flips, make sure they are a good deal. You wrote that you were buying from a company with a binding PA (and I'll guess a non-refundable $10k earnest money deposit???). 😫 AARGH. These companies, such as New Western or Fair Trade (I'm guessing again, sorry), rarely offer properties with enough meat on the bones. Surely, with 30 years of experience, your partners have the skills and resources to find better, safer deals? If not, why not?

Plus, you weren't clear on the terms of your deal. How could you without the JVA? Nonetheless, you said there would be another lender, and you're using your credit. Does this mean you are the borrower and also putting the remaining money up? If so, as the 100% financier, you should own the property 100% in your name only. Your JVA should allow you to fire your partners if they don't get the job done.

It’s typical that when someone puts up 100% of the money and someone else does the rehab, they split the profits 50/50. Your 66% share appears to be in your favor - maybe. It’s important your partners make money. If not, with no money in the deal, and a minimal profit potential, they could walk.

Last, points at 2% + 11% simple interest are reasonable in Southern CA now for flips. Unless these were closing costs, i.e. escrow and title etc., a $10k fee to the lender on top of that is crazy and completely uncustomary in S. CA now. Please don't tell me this loan was from one of the lenders associated with your wholesaling company. You can do better.

Good luck to you, Cristina.

Keep it simple, @Carlton B. Either your family members are your lenders with recourse to the property, or they are your partners with an equity interest.

Also, keep it fair. If they are going to lend you money, they should be protected like any other lender. That means a set of professionally prepared loan documents from a lending lawyer. These would include a note, a recorded mortgage or deed of trust, a personal guarantee from you and your LLC members, and the many, many, other documents associated with a business-purpose loan. Your LLC would own the property with you the manager. Your family members would be the lenders to this LLC (in first position only, but that's another topic).

Your family members should also meet with this lawyer, so they know what they are getting into. You should be part of that conversation.

A professionally prepared loan will enable your family members to foreclose and even enforce a personal guarantee, if necessary. Deals go bad, and behaviors change, even though that would never happen to you. Plus, what if they wanted to, or had to, sell their loan? Professionally prepared and originated loans are more valuable than something arranged haphazardly. You have an obligation to the people who trust you.

Alternatively, you could partner or JV. Again, a lawyer, not your accountant, should prepare the agreements. In this case, you could pay your family members a percentage of the profits or any other creative sky's-the-limit arrangement you could think of. Of course, as members of the LLC, your family members would be exposed to all legal issues associated with property ownership that a lender would not be exposed to. Plus, do you really want them as partners? An LP could prevent some of this, but do you really want to get into that?

Once you start mixing loans and LLCs, as you wrote, your family members will likely get the worst of all worlds.

Until recently, my settings were configured so I received one consolidated email in the morning with all my keyword alerts. Quite manageable. Either this feature has gone away, or it’s been reset and I don’t know where to find it. Now, instead of one daily email, I’m getting at least 20 separate emails throughout the day. I’m sorry, but this is now spam. It’s terribly disrespectful and annoying.

I know how to turn the various notifications off under my account settings. Fewer alerts will translate to fewer views and less participation. Is this what BP wants? What do your advertisers think?

As much as I like this site, I don’t need this much email and I’m happy to eliminate it on my own if I have to. I can adjust my settings, but I recall the perfectly functional system we had before.

@Noah Bacon, any comment?

Your parents likely need a revocable living trust, @Jerry Poon. In fact, everyone with any assets should have one.

Our trust includes a Pour-Over Will, Abstract of Trust, Asset transfer letters, Durable Power of Attorney, Advanced Health Care Directives, and several other features including specification of the beneficiaries and trustees.

We got our trust through our CPA, but he used AmeriEstate.com. They are a large company that specializes in these. Check out their website.

The cost, in our case, was around $2000 and it included discussions with the AmeriEstate attorney and many questions for our CPA, who specializes in these. Part of the service was to create the grant deed transferring our home into the trust, and then recording it. There was no reassessment and no taxes due.

Don’t even think of doing this yourself even though you can find websites that suggest you can. The peace of mind that it was done right is worth the nominal extra cost.  Our plan documents total over 200 pages and are not something I’d even think about attempting myself.

“Could I draft my own note and have each party notarize the new terms of the loan?”

I hope you didn’t draft your loan documents in the first place, @James Palassis. Notes are only signed. Recorded documents, such as the associated mortgage/deed of trust get notarized.

In this case, you would use a lending attorney to draw up a loan modification agreement. This would explain the existing terms, verify current amounts owed, correct any lingering errors, etc.,  and define the new loan terms. The loan modification would be signed by you and your borrower and filed away with the original note.

Loan mods that affect the mortgage/deed of trust or your title insurance, among many other reasons, should be recorded. Examples might be a change to the maturity date or additional funds loaned. Title and any subordinate lenders should also be notified. In this case, a separate Memorandum of Modification (or whatever it’s called in your state), which broadly tells the world that the loan has been modified but with no specific details, would be notarized and recorded.

Your lending attorney could tell you whether anything should be recorded and how to deal with any existing subordinate lenders. Since it’s always better to be safe than sorry, we always record.

Your question is a bit vague, @Mary Eubanks. There are many rates of return, such as ROE, ROI, ROA, etc. I assume you mean Return on Investment, like this:

ROI = Net Profit or Loss/Amount Invested

I don't believe this is an appropriate way to evaluate a flip.

Getting money after you have a number of flips under your belt can be fairly easy and all the higher volume and/or higher dollar flippers we know eventually run out of cash. It's pretty common to obtain 100% financing for both the purchase and rehab funds after you've been doing this for a while.

Borrowing, of course, is a two-edged sword because your interest payments, especially for a hard money loan, can eat 1/4 to 1/3 of your profit. Nonetheless, most of the experienced flippers we know will borrow as much as possible to do as many deals as they can and keep the pipeline full.

Obviously, the more you borrow the less your Amount Invested is in the formula above and the higher will be your ROI. If you borrow 100% of the purchase and rehab costs your ROI will be infinite and it doesn't matter if your profit is $100 or $100k. Nor does the cost of the property enter into the calculation. That is, would you buy a million-dollar property to make $100 even if that represented an infinite return on investment?

Similarly, merely stating you expect to earn a fixed minimum of $50k on any flip doesn't make sense either since that could be against a $350k property or a million-dollar deal.

Instead, we use Return on ARV to determine if a flip is a good deal or not. In our case, we define 10 to 12% of the ARV in profit as a good deal. Here:

Return on ARV = Net Profit or Loss/Expect Sale Price of the Completed Property (ARV)

For example, if a property with a $500k ARV looks like it will result in a $50k to $60k profit, we consider that fair. A $1M ARV would have to produce a minimum $100k to $120k. We won't make a loan if it does not look like the rehabber can earn a profit of at least 10 to 12% of the ARV, converted to dollars, of course.

This approach takes both your profit, in dollars, into account as well as the value of the property. It also takes some risk into account because it predicts you make more on the higher-value properties, where price swings and rehab budgets can be greater.

We also use the rule-of-thumb formula above, for our evaluations, and it works. Except, for properties with an ARV greater than about $350k, I can show that the rehabber will earn a profit between about 12% to 15% of the ARV using 75% instead of 70%. Fixed costs take a greater bite for lower dollar properties so you should use 70% for ARVs less than about $350k to earn 12 to 15% of the ARV. It's easy to create a spreadsheet to show this. Or, ask your local friendly hard money lender for the one they use.

Good luck to you, Mary.

That’s an excellent observation, @Jeff Stevenson. The industry has certainly changed. We’ve been lending our own money locally for 14 years, working with local house flippers with whom we developed close relationships. When a borrower has an issue, and they always seem to have issues, it’s us they call since we hold the note and we’re almost always able to work something out with them.

A close working relationship is still our model, and I know we represented the majority of private/hard money lenders until about 2015. That’s when Wall Street, the pension funds, and many insurance companies entered the field, providing wholesale money to most of the mega-giant P/HMLs you might have spoken to. They borrow their money at one rate and lend it to you at a slightly higher rate, thereby earning the spread and working on volume. Of course, they must follow the (generally unyielding) rules set by their lender. Direct, aka balance sheet lenders, i.e. those who lend their own money like us, have no such obligations and can be a bit more nimble.

In the case of the larger lenders, 99.99% of the reps you meet will be salespeople of some sort. There’s nothing wrong with this. My stepdad was a sales rep in an unrelated industry. Just understand that you can form the closest relationship you want with any of these individuals but rest assured that your loan will end up packaged among many others and end up on a trading desk of some sort, managed by someone who doesn’t know or care about you. That is, the close relationship you formed with your “lender” will be one of sales rep/client or broker/client. Not of anyone who has a vested interest in your success any more than your next loan. (One very thin exception would be in states where the broker is your fiduciary, such as CA. There are not many states like this, unfortunately.)

Some, who likely haven’t experienced the alternative, don’t care. If you do, my strong advice is to find your money locally. Real estate clubs are a good place to start since that’s where many investors hang out. It’s also safer than searching the web because you can ask the club owner for reliable references of those who frequent the club and meet lenders face-to-face.

Locally, an experienced lender will know your area and might even have flipping experience. He or she could be able to physically look at your deal and have a real-world sense of whether your rehab estimate is viable. They will (must, in my view) have a spreadsheet to estimate your profit. The “box” that some lenders want you to fit in might minimize their risk, but it won’t necessarily maximize your profit.

Watch out and good luck to you, Jeff.

Brokers like to think they “own” you and will often try to lock you into future business. As a borrower, I wouldn’t even think of agreeing to anything like that.  What reason do you have to believe that years from now, you will be dealing with the same individuals at this brokerage?  What if they move firms?  What assurance do you have that their service will be the same? If this lender wants to promise five years or fifty years worth of commissions to the broker for bringing you in, that’s between the two of them. They can agree to whatever they wish. You are beholden to no one.

All deals stand on their own and business must be continuously earned. If in the future you choose to work with the same broker, brokerage, and/or lender, then that’s a choice you can make at the time when they again earn your business.

Until then, it is not in your interest to lock yourself in. Of course, they could tell you to take a hike, but so long as they believe they can always provide the same excellent service that brings you back, they won’t.

“Attorney Opinion Letters are being floated as an alternative to title insurance as title insurance is one of the largest costs to transferring title.”

This is beyond crazy and the ultimate in being penny-wise and pound-foolish. Title insurance might be a high percentage of the closing costs, but it's typically chump change compared to the cost of the property. If this is what stands between a buyer being able to afford a property or not, I’d suggest they can't afford the property in the first place.

“The promise of technology has largely been lost in the mortgage industry and little has been done to reduce costs for consumers,” said Jim Albertelli, CEO of Voxtur.”

I’m not sure what technology Voxtur Analytics Corp. is selling, and I also wonder if Jim Albertelli reads the news. Technology is not the panacea for all woes lending. Ask anyone who invested in PeerStreet, or any of the other bankrupt Fintech lenders – and counting, how it worked out for them.

“Our Voxtur AOL program immediately and directly reduces those costs, maybe opening the door to homeownership a little wider for more Americans.”

The goal is not to widen doors but to make sensible loans on homes to those who can afford them. Didn’t we learn this lesson in 2008? This guy appears clueless.

We’ve had innocuous title issues that just held up closing as well as a monster $600k fraud issue as lenders on a stolen house. I’d love to hear how these AOLs or Voxtur Analytics technology would have prevented that. I bet only those who haven’t been bitten by a significant title issue are those who favor this nonsense. After all, who doesn’t want to save two grand on their multi-hundred-thousand-dollar purchase?

The safest and most reliable partners are local partners, @Rickey Brunson. Start attending as many local real estate clubs as you can and introduce yourself to everyone. Most importantly, get to know the club organizers since they tend to know the honest players as well as those who consistently attend their clubs. Finding partners online is a dangerous crapshoot and not something anyone can do reliably. There’s a skill involved in this that you will have to learn.

While I appreciate your candor, I think you are selling yourself short and giving away the farm. A common newbie mistake is to think it’s okay to make a tiny amount, break even, or even lose money on your first flip for the “education.” It’s not. There is nothing worse than beating your brains out to find a suitable property, working 6 or 8 months with contractors, suppliers, and the city, and not earning anything close to what you should. You will become completely demoralized.

With no/little (?) available capital all you have is time and hopefully a little knowledge. Thus, you are not looking for a lender, as you wrote -- you need a partner.

Traditionally, when someone puts up 100% of the funds on a flip you found and you do all the work, you would split the profit 50-50 with your partner. They would buy the property in their name, and you would have a partnership agreement with them. When the project is complete, by contract, you will receive 50% of the profit. If you could not get the job done, they could “fire” you and perhaps pay you a small finder’s fee or nothing since you’d be leaving them with a busted flip.

The benefit here is that you’ll be working with those who know the area and also know how to value a local flip. With luck, they might mentor you -- though don’t expect that. Accountability is easier when you are dealing with others you can meet face-to-face.

Good luck to you, Rickey.

@Rickey Brunson