All Forum Posts by: Leland Barrow

My wife and I are having a debate about an issue at a rental property, so I was hoping to get some advice.

Problem: Soft water tank started leaking at the bypass valve. I called out a company to replace an o-ring at the bypass valve. The company called me to tell me that the tank has a crack and needs to be replaced. The crack mysteriously appeared during the o-ring replacement process.

My solution: To leave the system in bypass and forget that the system is even there.

Her solution: To replace the soft water system because it is 20 years old and that the current renters are "good renters".

I don't see any benefit to investing in repairing, upgrading, or replacing a soft water system. When these renters leave I would just remove the system. The current lease is up in 3 months. 

Thoughts? 

How much of a discount did you get? It would have to be huge to take over in the middle of an eviction. I am not an expert but I imagine that you will have to start the process over. You cannot evict someone based on a time period that you did not own the property. Depending on the lease that is on file you may not have any legal grounds to collect rents. Having the tenant agree to a new lease with you should have been a requirement of the purchase. In this situation I don't see that you are entitled to rent, back rent, security deposits, damages or anything. 

I think you are better off offering cash for keys and getting it resolved outside of eviction.

Home warranties cover everything except what is broke. If you like the feeling of beating your head against a wall then home warranties are a great service to look into. It sound like you need to review the agreement with the PM company.

How old is the unit?

Your problem is not having a home warranty it is not having anyone you trust on location to handle issues. A home warranty is not going to fix that problem. 

@Thomas S. You may be right. Part of running a business is also knowing when something is not worth the time and effort. You are not really a savvy business owner if you spend dozens of hours worrying about hundreds of dollars. What is your hourly rate? When you factor in that you can write the bad debts off, then your ROI for pursuing small sums of money may not add up.

If I knew I could get the $3,700 it may be worth the time. 

Here is a silly formula...

(Opportunity Cost X Hours Involved) + Transaction Cost  < $3700 X Expected Chance of Success (True)

Opportunity cost: In my case I am a consultant part time that charges $120-150 and hour. For this example I will just use consulting fees.

Opportunity cost (consulting fee): $120 hr

Hours involved @ approx: 27

Transaction cost (Court Costs): $275

Expected Chance of success: 60%

(120 X 27) + 275 < 3700 X .60

3515 < 2220 FALSE

This doesn't account for tax advantages with write-offs. People chase these things because they feel they have been wronged. You can quantify this decision in any number of ways. 

Your time has a value whether it is spending it with family, working on a business, or pursuing other ways to build wealth. 

Wholesalers and real estate agents are usually optimistic. Experienced real estate investors are realistic. I think a realistic ARV would be closer to 550k. I think if you want to move it faster I would consider 525K. I dont see anything that justifies a 600k+ ARV.

Did the realtor put comps in your hand? Most realtors are terrible at comping homes. You dont need a realtor to give you an ARV you need a realtor to pull comps and put them into your hand. Never listen to anyone with an agenda about what they think an ARV is. Base it on cold hard data or the experience of other investors in that area. If your realtor has sold twenty homes for you and been on the money every-time then I would trust their opinion.

Just for fun tell your realtor that if the home does not sell for over 600K that they will have to waive their commission. Do it with a straight face and see how confident they are at that point. I will make an assumption that their confidence will crumble. Nothing like getting a 6% commission and your customer who holds all of the risk losing money.

Personally I think your buyer pool is to limited, the cash required is to high, and the ARV is to questionable. Just my opinion, hope it helps.

You mean the "Real Estate Guys"? Their show has turned into long commercials.

A bubble is something that is artificially forced. In 2006 lending was ridiculously easy to get. That caused a bubble where the availability of risky financing put pressure on prices. Student loans can be a bubble for the same reason. Getting 120k in debt to graduate with an anthropology degree is an example of a bubble. What are the artificial pressures in 2016? You may argue that it is overseas investors or maybe it is hedge funds and REITS. In my opinion there is not enough artificial pressure to justify a bubble. In my opinion housing is simply expensive. There is a lot of demand for a combination of reasons and no single reason is strong enough to argue for a bubble. Interest rates, quantitative easing, struggling foreign markets, millenials starting families, boomers relocating, job markets transitioning, populations migrating, are all examples of just a market with a combination of real estate friendly causes. The risk is that people will except a lower ROI on investments. That lower ROI increases their risk unlike what we see in traditional investments. Less NOI on a buy and hold is more risky, a lower cap rate on multi-family is less risky, a lower gross profit margin on flips is more risky. Returns should be compared to the risk free rate, stock market risk, and other investment options to make sure that real estate is still a good option. Unfortunately the "quit your job" and invest in real estate attitude took over in 2010 and a lot of people did just that. That is the bubble, that is the greatest risk. You now depend solely on real estate as an income. To continue making an income you have to accept lower ROIs and increase your risk. No bubble just a lot of people that will struggle with adjusting to a changing market. Rule of thumb: When everyone is running to an investment run away. When everyone is running from an investment run to it. In other words buy low, sell high. This is not advice, I am not a professional. It is opinion only and should be treated as such.

@Bill Gulley I disagree with you, and calling names, or belittling people hardly justifies a point. I reread what you wrote a few times to make sure I understand what you are saying so that I do not put words in your mouth like you did me, I never said 30%. If I understand you correctly you are saying that it is a predatory practice to submit low offers and that it creates a bad reputation. Your rule of +/- 10% plus accounting for a property being distressed, on market, or whatever is a superior business model.

I don't use either business model. I am a cherry picker that does opportunistic investing. I like my W2 and will do some version of it until I am no longer physically able to. The 4 hour work week sounds French to me. I prefer buy and holds and am very careful about what I purchase and who I ultimately do business with. I also see nothing wrong with a business model that makes low offers and plays a numbers game to get properties below market value, below market price, or below whatever semantics or refined definitions that you want to use. 

Just because you failed at a business model does not mean everyone will fail at it. Your granny comment makes me think that you are confusing wholesaling versus offers based on the MLS? You seem to be addressing me, but I never discussed wholesaling. On that topic like most topics I am sure we would agree my youthful ego, arrogance, ignorance, stupidity and whatever other word you would like to attach included. I am an expert on having an opinion, if you ever need one let me know. However, you hardly seem to be in short supply with 1.2 million posts.

Don't get the impression I am mad, you actually made my morning. I had the mental image of an old man spraying me with a hose and yelling at me to get off of his grass. I look forward to playing in your grass again.

I hate to be negative but I will because sometimes it is what people should hear. I would give your plan a zero percent chance of working. A partnership is very difficult. A six headed partnership would be a monstrosity. The reason that people syndicate is because they can purchase better properties with less personal risk. Usually a syndication is one person that does the work and others that would prefer to be less involved. They are not really a partnership. What you have planned sounds cool but it is not a business. If you like your friends then do not do business with them.

I think that there is some bad advice on here. Coming in with an offer at 80% of asking price is not a low ball offer. Most homes are priced at or above market value. Realtors can vouch for how many times a seller wants to reach for the sky with their price. These are homes that are not distressed. Distressed homes have less value and they are still usually priced at or above market value when you factor in a reduced value due to being distressed. They may appear cheaper but are they really? There is value to an actual cash offer and a quick close. Many people are not into "peopling" and the idea of having to deal with selling a house is terrifying. Offers are the beginning of a negotiation and anyone that understand leverage and negotiations understands the concept of an "anchoring heuristic". A mls price has already anchored the seller. A low offer is designed to shock that seller and hopefully derail that heuristic. People get mad and bring emotion into it because they do not realize that they are anchored. Any business person that gets mad over an offer to buy their property is not a good business person or they are extremely ignorant of their own psychology. There is nothing wrong with offers at 80%, there is nothing wrong with putting in a 1000 offers at 80% of MLS price. Business is a numbers game. Money is made at the purchase and not at the sell of the property. I agree it should be a case by case basis. To believe that because people accept a low offer that they are being taken advantage of is ridiculous. That is a reflection of a very arrogant and egotistical mind. People make decisions for their reasons and you can go about trying to figure out their reasons all you want. Personally I have better things to do. When you factor in that most MLS deals involve brokers then there is far less ammunition to accuse people of taking advantage of other people. Is that not what a broker system is designed to prevent?