All Forum Posts by: Dory Peters

Although I wouldn't advise against seeking legal counsel, one way to quickly clear up the issue of potential mortgage fraud is to demand to receive a certified copy of the HUD-1 for that transaction. If that note doesn't show up on the HUD-1, then you're dealing with mortgage fraud.

If you've discover during your due diligence that mortgage fraud has occurred in the previous sale, then you might want to have a conversation with a RE attorney, and you'll definitely want to have one with your lender (if you intend to finance) provided you still intend to pursue this deal.

Originally posted by SolidReturns:

Dory,

Thank you for the input.

So...if I'm looking at it correctly...

Down payment of $11,250
Sell land contract note with face value of $213,750 for 80% ($171,000)?

So that would be $182,250 ($32,250 profit before leaks such as fees, etc.)?

I'm assuming that there's a year of seasoning involved here? Without seasoning I'm guessing that I'm going to be looking at offers of 70 cents on the dollar, if not less.

You're forgetting a few things. Assuming that the note goes to full-term (ie 5 years), it should pay out a total of roughly $286,531. 80% of that amount is $229,224.80. Add that amount to the down-payment (11.25K). (I didn't factor in the fees, because I assumed you factored them into your purchase price.) From that sum, deduct the purchase price ($240,474.80 - $150K). Your partner will receive 70% of the result (aka the upside [$63,332.36 - .7{fees}]), and you'll receive the remaining 30% ($27,142.44 - .3{fees}).

Not too shabby, right?

Originally posted by Eddie Ziv:

Those people, who potentially are our clients, are also our competition. They can cause a certain market to go up in price because they "just like the area" and they can make the those prices go down, because "it became so expensive, we decided to move to the suburb..." Whatever the reason is which is not driven by a simple pure business decision.

I don't entirely agree with that. They're only our competition if they're shopping for the same thing we're trying to buy at the same time we're trying to buy it. Just because 100 or so other customers are in Frye's shopping at the same time I am, that doesn't necessarily make all of them my competition. I might have gone there to pick up a computer, and someone else might have come to pick up a DVD. Similarly, I might be in the market for ugly, brick bungalows in Riverside (if there are any :mrgreen:), with an avocado tree in the backyard, that have a cumulative DOM greater then 400 days, and that belongs to no HOA; whereas, someone else might be looking for a new ranch-style home along the beach. Clearly, we're not competitors, because we're not even looking for the same thing.

Besides, my strategy wouldn't change much even if that person were looking for exactly the same thing. I know the numbers that will work best for me, and I'll pass on any and all deals that don't pass the muster. I'm also not worried about competing against other investors, because I assume if s/he knows what s/he is doing, then our numbers will be close.

I'm allergic to multiple competing offers; they make me vomit.

Originally posted by nationwidepi:

Originally posted by Dory:

I agree and suspect Eddie and Will were talking about "longer-term, market type appreciation."

I never stated that, so you are assuming incorrectly. Just as I never stated that appreciation could not include "forced". For me, appreciation can come in several forms and Dory hit the nail in one of her explanations which included time, buying at steep discounts, forced, and the power of leverage. Who every said you cant have more than just one? I sure didn't!

Sorry about that, I tried to err on the safe side by not putting words into your mouth--only err on the wrong side anyway. :eyes: Thanks for the clarification, and I see your an my views also converge.
Actually, I was thinking exactly the same thing.

Actually, I believe I do know of a better way to do this deal. If you two were my partners, then I'd pitch something similar to the following. (Please note that I underlined the proposed changes.)

buy side of transaction:
purchase price: 150K cash (as before)
your partner supplies 70% of the equity, and gets 70% of upside
you supply 30% of the equity (as before)

sell side of transaction:
selling price: 225K (as before)
down payment (5%): 11.25K
land contract for 95% (213.75K) at 7% APR, amortized for 30 years, with a 5-year balloon
escrow the title, and hold it deed in lieu
sell that note for 80% of its value

This way you won't have to wait 20--or even 5--years to pay off your partner, and you both will get paid much sooner. Plus, after your partner runs the numbers, s/he will realize that s/he will earn more (ie a higher IRR) via the upside than the interest over 5 years (due to selling the discounted note immediately).

Thanks, Mike. One of my mentors said the same thing, and another one said that he'd go up to 80% LTV--all-in of course--in a good or hot market.

I'm surprised I can hear the crickets chirping in here.

Although I do both, I've been focusing primarily on wholesaling in NoVA at the moment. I'm saving up for something larger in another market.

Jim, you've hit the nail on the head again.

Originally posted by Eddie Ziv:

I still want to emphasize on the difference between multi-family and SFRs. Multi-family are a pure business. . . .

SFRs on the other hand, are not necessarily seen from the investor point of view. Believe it or not, but people buy them to live in them too. . . .

Eddie, your argument has a few flaws.

First, one of my mentors basically told me once unless I'm doing this to make money, then "all [I'm] doing is playing office." He really ticked me off when he told me that, but after some honest self reflection I had to agree. Whether one invests in multi-families, SFHs, strip malls, medical offices, or gas stations, if s/he isn't doing it to make money, then they're "playing office" too. On the other hand, if they are doing it to make money--whether full- or part-time--they're running a business.

Second, we're investors; we needn't care whether or not other buyers purchase for other reasons. Either the numbers work or they don't.

Third, an income analysis for a SFH is the same as it is for a multi-family property. They both have purchase prices, cap rates, NOIs, operating expenses, debt-service (if financed), and hopefully positive cash-flow. The key difference between the two is due to an economy of scale issue.

Originally posted by MikeOH:

If we're talking about forced appreciation, then my entire opinion is completely different on this entire topic. Obviously, the entire rental property business is based on buying at a discount to market value. In most areas, it is impossible to have positive cash flow if you pay retail for a property. So, to the extent that this is what you're calling appreciation, then I would say this "instant appreciation" is absolutely necessary and in fact required to run a successful rental property business. That's also true of the flipping type businesses you discussed.

However, it was (is) not my understanding that this was the issue presented in this thread. My impression is that both Will and Eddie were talking about the type of appreciation that occurs when the market raises the value of the property over time. If we're talking about buying at a big discount with instant cash flow and instant equity (instant appreciation) vs. buying at or near retail, with negative cash flow and hoping for future appreciation, then I'll take the cash flow and instant equity every time.

To be perfectly clear, even if we are talking about this longer-term, market type appreciation, I agree that it is still a valid business model. It's really no different that any other type of speculation and speculation is certainly valid.

Mike

I agree and suspect Eddie and Will were talking about "longer-term, market type appreciation." Jim expanded the discussion, and I extended the foundation he laid to include other forms of upside and positive leverage. I did that, because I believe every good and reasonable exit strategy needs to account for cash-flow, upside, and positive leverage (in that order).

I'm glad you clarified your position, you confirmed what I initially suspected, and I see Jim's, your, and my views all appear to converge. Additionally, to be perfectly clear, I too won't do negative cash-flow. Why should I (or anyone else)--when there are so many other deals out there where I can get positive cash-flow?

I'm looking for positive or negative feedback on an idea that I'll share in a moment. If you think my line of thinking is off, then please tell me. And if you think otherwise, then please tell me that too.

I wrote that disclaimer, because I'm looking for brutal frankness--and nothing less.

I plan to make an offer on an ugly property--that's in a great neighborhood--I saw roughly a week ago. Although I haven't ordered an inspection yet, I can already tell from what I saw that it will need roughly 100K of work. The ARV is 340K, and the market appears to have been flat--rather than declining--for the past 3-4 months.

If I were going for HM, then I'd want to be all-in around 50%-60% LTV, and I'd even consider being all-in around 70% LTV with conventional financing. Nevertheless, I don't intend to seek HM or conventional financing for this property; instead, I'll only make an offer with with 3 options: 1) using 100% seller financing, 2) using 50% seller financing, or 3) an all-cash offer (which of course will put me all-in at 50% LTV).

I have 2 related questions.

Would you buy this property at 80% LTV provided you could get the following terms: fund the deal with 100% seller financing, abate/defer the payments for the first 3-6 months, get a minimum appraisal threshold (120% of the purchase price [408K]) guarantee, and do the deal with split funding (finance 150K to 200K amortized for 30 years, and pay the remaining 130K to 190K after the appraises for 408K)?

Would you buy this deal wholesale?

I agree the appreciation was forced; nonetheless, it exists--period. One's cash-flow is forced when one buys at deep discounts; nonetheless, that cash-flow exists too--period.

You're preaching to the choir here. I've already stated that I strongly prefer cash-flow, and I've also stated that I strive to optimize "all of my exit strategies to deliver me the most cash-flow, upside, and interest rate spread" (in that order).

We could look at this another way. What has happened to cap rates in multi-family properties in bubble areas since the real estate bubble burst? While rents have stayed the same or even decreased, cap rates have increased because the property value has gone down. That is why we're beginning to see people talk about multi-family property in California that is getting closer to positive cash flow. So you see, there is not necessarily a correlation between rents and value in commercial property. That is just another myth propulgated by the "gurus" and another reason that the whole cap rate topic is nothing more than gibberish.

In addition to the cap rate increasing in some areas which indicates a decrease in value as compared to the income, rents have also been decreasing. This can be a double whammy because that means the value is decreasing both due to an increase in cap rates AND a decrease in rents. Here's an article that discusses the trend of decreasing rents:

http://laist.com/2009/01/08/signs_of_the_apocalypse_part_xxii_l.php

...and here's an article about the increase in cap rates:

http://seekingalpha.com/article/111379-commercial-real-estate-offering-8-9-cap-rates-anyone-interested

The bottom line is that cap rates can go up and rents can go DOWN. We had an unprecedented period of property value appreciation during the bubble. That was probably a once in a lifetime event and anyone that is expecting a return to that type of appreciation is deluding themselves. Historically, real estate appreciation is a very poor investment. Appreciation historically barely keeps up with inflation. I am fine if anyone wants to speculate on appreciation, but buying a property with a negative cash flow (that loses money) in hopes of future appreciation is nothing more than gambling. Personally, I'll take the cash flow NOW and the instant equity (resulting from buying at a huge discount) NOW! Why wait for appreciation when you can have it NOW?

Mike

Sorry, Mike, that's a loaded argument full of contrived suppositions. Whether or not values, cap rates, and rents go up or down (and I agree they do go up and down), it's clear that they they're mathematically related, and it's clear that lenders and appraisers can--and do--express that mathematical relation using standard formulas.

Also, Mike, I don't agree entirely with your argument about appreciation, because you keep repeatedly ignoring/omitting the fact that rehab/flip/assignment is a viable business strategy that relies heavily on upside (or appreciation). It puts food on people's tables, and works today (albeit not in every local market). People are flipping properties in ATL, Cleveland, DC, DFW, and other markets.

Choosing bad implementations of appreciation-based business models doesn't make the model itself bad; rather, that example simply reflects the poor execution of that individual/group. There are plenty of poor implementations of cash-flow-based businesses out there too; similarly, those examples also reflect poor execution.

Again, cash-flow is the obvious play for rentals, and upside is the obvious play for rehabs/flips/assignments. It's a bogus argument to say that appreciation takes time and that cash-flow doesn't. Cash-flow takes time too, because one collects rent periodically (weekly, monthly, etc) over time.

If one wants to compare apples to apples, then be honest and compare good implementations of both models against one another. Otherwise, all one is doing is stacking the deck.

Both business models are viable--period. And one can optimize one's exit strategies to maximize both cash-flow and appreciation for now or later. For me, choosing between the two is like trying to choose between chocolate and strawberry ice cream. I'll let others choose between the two, and I'll choose Neapolitan.