All Forum Posts by: Matt Schelberg

For any wholesalers out there, how are you reducing the number of deals that fall apart at the title company due to liens or defects?  I've been stuck with title search fees a few times this summer, so I am refining how I screen deals before sending them to the title company.

For example, my last seller bought his property without a title examination.  I didn't discover this until the title search.  After that failure, I now ask all sellers if they purchased their house with title insurance. 

I am good with searching for mortgages and municipal liens, but not so good at screening for bankruptcies and judgments.

• If there was a bankruptcy, how are your determining if this will impact a sale?
• If there is a judgment recorded, how are you determining the unpaid balance?
• What other screening methods are you using?

Thanks, @Russell Brazil.  Hopefully I can negotiate a lower price for treating a house that's totally stripped and empty of furniture.

Has anyone else had bed bugs that survived the nuclear winter of a renovation?

Great thread! If you got the loan 2 months ago, you probably have an awesome interest rate. Probably less than 4%...that is some seriously cheap money! I would take a closer look at the opportunity cost of paying down the principal to avoid PMI. If your house is increasing in value 2% each year ($8,000), it might be better to let appreciation do the work rather than making early payments on your mortgage.

I don't know what your exact numbers are, but let's say you reach a point where an $8,000 pre-payment will allow you to ditch PMI a year early. You have 2 options:

Option 1: Make $8,000 prepayment to reach 80% LTV and cancel PMI. You will save $1,200 in the first year on cancelled PMI. It will also save you 4% per year in interest payments on your mortgage (approx $320/year). But you will have $8,000 less to invest in other real estate investments for the foreseeable future.  If you have the opportunity to compound that $8,000 at a high rate of return, your prepayment carries a large opportunity cost.

Option 2: Wait 1 year to let appreciation increase your equity by $8,000. This costs you $1,200 in PMI ($100/month). But you can use that $8,000 to invest in other opportunities for many years to come. If you can achieve annual returns of at least 6%, this is probably the better option.

Bottom line:  A prepayment on your mortgage can be viewed as declining a low-interest loan.  It makes sense for some people, but for most real estate investors it reduces future net worth and is probably not the best decision.  

I closed on a foreclosed rowhouse this week and during the clean-out yesterday, I found cans of aerosol bedbug-killer laying on the ground.  No "smoking gun" that there are bed bugs -- but the spray cans are a pretty strong indicator.  Should I bite the bullet and pay for an exterminator before starting the rehab?  

Additional background:  People were living in the house as recently as 1 month ago.  All carpet and furniture will be removed during the rehab.  I will keep the house as a rental property.

Should I have the property treated before the rehab?  Or will the full rehab kill anything that's there?

Great advice from @Roy N. You can improve simplicity and fairness with other partnership structures. Does your partner want a fixed return secured by an income-producing asset? Or does he want some of the equity upside? Or both?

I have done 50/50 deals with several partners on buy-and-holds, and my favorite structure allows the money partner to act as the bank and also enjoy the equity upside of owning rental property.  Here is a possible structure:

-Property titled to LLC

-50/50 partnership with you as managing member and other member as passive investor

-Passive investor (in his individual capacity) lends money to the LLC for house purchase + rehab cost. The loan is secured by a mortgage and title insurance.

-Managing member does all the work.

-All equity and cash flow split 50/50.

-The operating agreement would define your "rights, powers, and duties" as manager.  It would set limits on your decisionmaking authority and give your partner a say in important decisions.

This would fund your deal and avoid sliding scales of cash flow and equity.  

I have Section 8 rentals in two counties in the Baltimore area and I was surprised to learn that the counties have different standards for what counts as a bedroom. I had assumed that HUD issued the guidelines on basement bedrooms, but apparently it is determined by each municipality. Since bedroom count determines Section 8 rent amounts, the lack of a bedroom is costing me $300+/month in lost rent!

One county requires that basements have 2 egress routes to count as a bedroom. Incredibly, stairs to the first floor do NOT qualify as an egress route.  They require an exterior door in the basement and a window well with escape ladder.

Needless to say, it is quite expensive to cut into the foundation and build a window egress window. 

I have spoken with the county's top inspector for Section 8 and he confirmed the rule regarding egress routes. How would I contest this interpretation of the bedroom rules? Are there any HUD guidelines that would supersede county rules on what qualifies as a bedroom?

@Rich C. Glad to hear it! Sounds like you are in property management?  How often are your student renters late on rent compared to other types of tenants? I hadn't really considered it before your post, but I would think university students are generally good tenants. Would be interested to hear your observations.

@Rich C. Usually I would say yes, but the circumstances of the tax lien and the co-signor's efforts to redeem would guide my decision.  

• What type of property is delinquent on taxes? Is it the owner's primary residence or an investment property?  If primary residence, the delinquency is more concerning.
• What efforts has he made to pay it off?
• How big is the lien?

Unless you think the parents are in severe financial distress and simply don't have the money, I would think that paying their kid's rent while the kid is at university is pretty high up there on the priorities list.

I am imagining how the late rent scenario would play out:  Student calls mom and dad crying, asking "I'm getting evicted right before exams because you guys didn't pay the rent???"   The vast majority of parents are going to use every available dollar to pay.   

I would be more concerned about the parents' willingness to pay repairs when their kid has a party and wrecks the house.

That is solid advice from @Mark Elliott.  If you are just starting out, you can get a higher return on your money in other sectors of RE.  Plus, as Mark said, if you only have a little bit of cash now you don't want it to be tied up in some tax lien for 12-24 months while you wait for the court case to play itself out.

Are tax liens scalable? Absolutely, but you would need a bankroll of several hundred thousand dollars to scratch a living.  And the Baltimore auction has been pretty frothy the past 2 years...so it's possible you could spend months doing prep work for the auction only to find that there aren't many good deals.

People in the tax lien business generally either have excess capital (that they are unable to deploy elsewhere at acceptable rates of return) or they are borrowing to invest in tax liens.  And to borrow money you would need a track record.  It doesn't sound like you fit either of these categories, so I think your best bet is to look elsewhere.

That is good advice from Mark on how to use your time and sweat equity to get deals. You could also offer to assist a landlord or flipper with a rehab project so that you get experience with estimating rehab costs and managing contractors.  That would give you an awesome foundation for building your own business.

Good luck!

Glad it was helpful, @Kenda Bell.  

@Annie Bliss keep in mind that tax lien rules vary by municipality.  While some of the concepts are similar, the rules are different in other parts of the country.