All Forum Posts by: Leland Barrow

I hope this helps.

Banks will want to know where down payment money came from. Misleading a lender by not disclosing that you are using borrowed money when they inquire about the source of funds can be an issue. 

If you borrow a 100% to buy real estate then you are not the owner the lender(s) are. A lender can invest in real estate and buy properties if that is what they wanted. However, they do not want that, instead they want to be lenders. Hence they require you to have skin in the game so that you assume part of the risk and actually own part of the property. If you mislead lenders into believing that you have skin in the game when you really do not then that in a round about way is mortgage fraud.

When a lender says the buyer needs to have a 25% down payment then the buyer needs to have 25% of the down payment. A buyer that does not have the money could partner with someone that has that 25% and the would satisfy the requirement of the buyer having a 25% down payment.

Lenders prefer big loans because they want a return on their money. A 25K loan at 8% is not worth the time nor the effort. If a lender has 2 million to loan and wants a return of at least 8% it would take a lot of work to process 80 loans at 25K each when they could process 20 loans at 100k each, or 10 loans at 200k each. Asking for less money does not make a loan more attractive it actually makes a loan less attractive.

Much of Central Texas is built on caliche and limestone. This causes homes to settle and shift far more than in other areas. Texas in general has more foundation issues than other states. Texas also has lower prices to repair foundations than most other states. I have never watered foundations and I consider that as an attempt to have control over something that people have no control over. I also think that most foundations are damaged during the warranty period on the new home but go unnoticed. In my opinion the settling happens within the first couple of years. Pier and beam is not a big deal and can be cheap to repair. 

If you are out of state then you should make sure you get a home inspection done or simply calculate foundation repairs into your costs. If I had to make an uneducated and completely contrived guess I would say that 1 in 20 homes has slab foundation issues. 1 in 10 pier and beam have foundation issues. Some areas are worse than others. Hope that helps.

A---I am a speculator

This property is where everyone wants to be. With apartment complexes these would be your large corporate or fund owned properties. They have the best location, amenities, and the highest rents. With houses these are your growing areas that everyone wants to move to. It could be downtown neighborhoods that are within walking distance of night life. They could be a "snob hill" and are defined by being a mixture of upper middle class and wealthy. Most of the time they will be on the west side of any town and are populated with doctors, lawyers, and professionals. Everyone would live here. These areas tend to have high appreciation.

Garden clubs, people jogging, BMWs.

B---I want it all

These can be older and neglected homes in A areas or be homes in B areas. These are the middle class to upper middle class areas. They can be a mixture of blue collar and professionals. The have significant income and good schools. Most people would be ok living here. Investments in these areas have moderate appreciation. Usually they have a good mixture of demand and appreciation. 

Manicured lawns, BBQs, Toyota Camrys

C ----I am a manager

These properties are in low income areas. The areas have more crime and the schools are mediocre. The properties can be generally neglected. Tenant turnover can be high. People live in these areas because they are limited by their income or life circumstance. These areas can have greater cash flow but usually have flat or negative appreciation. These are your 30k-75k homes in cities that have an average home price of around 150k. There is a reason why a $30k home built forty years ago is still worth 30k forty years later. These areas have potential if you have strong management and people skills. Buying an apartment complex known for drugs and crime that is under-performing is an opportunity to decrease the vacancy rate and upgrade the tenant class.

Bars on windows, hanging out on the porch, bus stops

D-----I am a thrill seeker

These are properties located in areas with high crime and violence. The properties are dirt cheap and life is never boring. Your tools and materials will get stolen. Your tenants will struggle to pay. You will stay busy.

Hope that helps. Properties are not so much ABCD as the areas are. Although distressed and under-performing assets in A areas can be considered B properties.

Interesting post. I always assume foundation problems if I am considering buying without seeing it in person because it is Texas. 5-10k is not a profit margin in my opinion. I would not consider risking any of my money for a 5k profit. I see people going with less and less margins and that is how you lose money. The problem that full-time REIs make when it come to flipping is that they are dependent on flipping income and when the market turns they become desperate for deals. That desperation leads to lower margins, and can lead to losses. 

I look at deals and consider the most likely worst case scenario. If I can break even if the worst case scenario happens then I am interested. Since you are operating in Texas I would suggest that you always consider foundation issues as a possibility. What I didn't see in your numbers is a return on your cash. I would imagine you are going in at roughly 95K for the down payment, rehab, and other cash costs. Earning 5-10k on that is not worth the effort. How much effort and personal time would you have to put into that return? You could throw 95K into decent stocks and have far less hassle. At 95K cash I would want to see close to 25-30% return on my cash on a flip, because my time eats away at that return. It is not a true return on cash because I have to actively managed it and the opportunity cost of me managing it is that I can do consulting at $120-$150 per hour. You probably have opportunity costs also and you should consider what they are and how much they are.

I don't know that a house listed at 217k with an ARV of 285K would have made the first cut. Factoring in a rehab cost sight unseen of $20, $25, or $30 a square foot eliminates the margin pretty quickly. As a disclosure I am a cherry picker with a W2 so my opinion may not be the best opinion for you.

The biggest issue is that they didn't do as you asked. Like I said they work for you. Personally I want every penny I can get for the product that I offer. You can do "what ifs" all day long and just spin your wheels. Market rent is market rent. It is my money and my properties so I have the right to make a bad or good decision. If I tell someone to do something with my money or my property then they damn well better do it. I hope it works out for you. Never ever be afraid to tell someone to $&@"? Off. Some of the best relationships I have is with vendors that I told I will never do business with again and would never recommend. Watching people back peddle has its own amusement. Some business owners or "operators" as Ben calls them don't care if they have your business or not. Avoid those people like the plague. They are a sinking ship wether they know it or not.

In industries that involve fleets for a long time everyone preached "preventive maintenance". It is the gospel of managing large fleets of vehicles. Everyone has heard the term and everyone now intuitively knows it saves money. I do consulting and for several years I have been teaching "predictive maintenance". Both preventive and predictive are proactive maintenance with the goal of reducing breakdowns and reducing downtime. The fundamental difference is that predictive maintenance does repairs before a run-to-failure. If you really want to be steering your ship then you should change your mindset to predictive maintenance.

Squeezing an extra year out of an A/C unit has absolutely no benefit. A/C units fail when it is hot. A/C units are at peak prices when it is hot. Tenants are going to be less understanding when it is hot. Everything has a life-cycle. Preventive maintenance is designed to help things live that life-cycle. Predictive maintenance is designed to plan replacement on your terms at the end of that life-cycle.

Replacing an a/c unit during the winter can get you a better price, is easier on the tenants, can be planned etc. 

Trying to squeeze life-cycles is called gambling. Good business owners do not gamble. They instead make sure they have control of everything and are making decisions based on all available data. Everything business tries to do is to remove volatility. Everything manufacturing tries to do is remove variation. 

This is only applicable if you have a large volume of units. If you have multiple properties and are a serious investor then you should keep a spreadsheet that tracks component life-cycles such as roofs and a/c units. You should avoid having multiple life-cycles coming to an end during the same year. Replacing less than one a/c unit per year is better than replacing 3 in one year. You should also have cash saved up to replace those units. If you are on 13 years of a 15 year a/c system then you should have liquid funds that are allocated in the amount of 13/15 of the replacement cost. That is not your cash flow that is allocated cap ex. You have been paying for that a/c unit for 13 out of 15 years. 

Running your business means removing guesses, unpredictability, and chance. You cannot remove all chance but remove what you can. Just my 2 cents.

That is mortgage fraud and you posted it on a publicly searchable forum. No it is illegal and it is easy to follow with insurance. If your property burns down and the insurance company finds out it was all a lie then you will have multiple issues. Fraud is fraud.

Fire them and next time communicate in writing. Never do verbals unless you follow up with an email that summarizes the conversation. They work for you and personally I would have driven to the office and had a "come to Jesus" meeting.

Primary residences are not an asset. There is no return on the down payment or on the extra payments. I see zero benefit to use money you could be saving to pay it off. If you want to live there and eventually rent it out then make sure it cash flows as a rental today. If it would cash flow today then live there and rent it out down the road. Paying it off quicker adds no value. With interest rates today you are far better off with multiple 30 year mortgages than one paid off house. You can always buy houses but you cannot always buy at todays interest rates.

Is there not a survey on file? The owner could have a survey. Personally if time is important then I only worry about surveys if I think something is off from other research. Properties with survey issues seem to have warning signs.