All Forum Posts by: Nathan Gesner

There are plenty of threads and blogs about this. Go to the search bar and look for "application screening" or "tenant screening" and you'll get enough to make your head spin.

Generally, you want them to have a recent Landlord reference, make 3x the rent, and have a decent credit score. But it all depends on your market, quality of the rentals, your level of desparation, etc.

Risk is with the funding. He's not only putting the money at risk, he's putting his trust in you to complete the renovation professionally, on time, and on budget.

You'll be reimbursed for everything you put into it (materials, labor) whereas the investor won't get paid a dime until it sells. That means you have no risk and all the reward. I don't mean to insult you but it sounds like this investor could hire a different general contractor to do the job and keep 100% of the profit. 

I assume the value is that you brought the deal, but even that is not worth 50% of the profit. If the investor is willing to accept it, good on you. If I were the investor, I would probably consider something in line with a 75:25 split.

@Joe Yobaccio I'm not a big fan of Nevada. Too much corruption, massive population dependent on an industry that attracts crime, water shortages, etc. Arizona is a better option but both of them are volatile, as we saw in the last crash. Can you imagine how quickly those states would dry up if hit with a drought or the electrical grid had problems and people couldn't run their A/C?

Investing out of state brings additional risk but the rewards are also much better. Instead of spending $100,000 on the downpayment of a single-family home in a very tenant-friendly state, you could put $50,000 down on a four-plex in the mid-west, get a better return, have fewer problems with problematic tenants, and you could set money aside for your plane ticket if there were an emergency.

Stop saying you can't and look for ways that you can! Read "Long Distance Investing" by @David Greene. He's in California and explains exactly how he's knocking it out of the park by investing in other states. I believe he's also a top agent at Keller Williams at the same time. So it's obviously possible.

@Joe Yobaccio I've heard of people that are making good money in California but I suspect they are probably established and experienced. For a new(er) investor, I wouldn't touch that state with a 39 1/2 foot pole.

I haven't even marketed to find my deals. These are owners that came to me looking for property management or sales and I uncovered the deal after talking to them.

Do you have an actual instance to confirm this or is that just your feeling?

I manage over 300 rentals and I have never had to take a tenant to court to recover damages due to negligence that would have been covered by renter insurance.

A "subject to" sale does not require no equity. The Seller could have 10% or 99% equity. The only requirement is that they have an existing mortgage. The buyer offers to take over the mortgage payments and the seller transfers ownership to the Buyer. For example:

Dave owns a house worth $200,000 but owes $150,000. Due to failing health, he can no longer afford the payments. Bob offers to purchase the home as a "subject to". Dave transfers the deed to Bob and Bob takes over the existing mortgage. Dave gets to walk away and Bob gets a house with no down-payment, no REALTOR, no bank, etc.

The downsides? Dave is transferring the deed so that Bob legally owns the property but the mortgage is still in Dave's name. If Bob misses a payment, it can impact Dave's credit rating. If Bob defaults and the property is foreclosed, that foreclosure goes on Dave's record. The downside for Bob is that the bank may learn of the transfer and decide to enforce their "due on sale" clause. This would force Bob to seek traditional financing and pay the original mortgage off. The hope is that he would buy it at a low enough price that this wouldn't be a problem in an emergency.

Again, I hope that helps.

Dillon, a wrap-around mortgage is a little different. The Seller keeps his original mortgage in place and creates a separate mortgage with the Buyer that "wraps" around the Seller mortgage. For example:

Dave owns a duplex valued at $200,000 but he's getting old and can't keep up with it anymore. He still owes $100,000 on the current mortgage with a monthly payment of approximately $600. Bob hears about it and offers to purchase the property using a wrap-around mortgage. They agree to a purchase price of $180,000 at 5% interest for 30 years. Bob offered this lower price because Dave will essentially walk away with about the same amount as if he had sold the property through a REALTOR (commissions, closing costs, sitting on the market, etc.). They use an attorney to create a wrap-around mortgage. Bob makes monthly payments of $912 to Dave and Dave continues paying his mortgage of $600. Dave gets the benefit of walking away while still making a profit. Bob gets the benefit of instant equity and ownership of two more units without going through a bank. Bob is responsible for taxes, insurance, and maintenance of the property as if he owned it. In a few years, Bob should have enough equity in the property that he can finance it with a traditional lender and pay Dave off completely.

There are some dangers to watch out for. The Seller could fail to make his mortgage payments and his lender could foreclose, causing the Buyer to lose everything. The Seller runs the risk of a Buyer that runs the property into the dirt and then defaults on the wrap-around, forcing the Seller to take back the property and deal with the mess. A good legal contract - and working with honest people - can reduce the risk dramatically.

I hope that's helpful.

 For example, the last property I bought was a six-unit. The owner came to me asking to sell it and thought it was worth $325,000. His jaw dropped when I told him it was actually worth $460,000. Long story short, I gave him market value and the different options available for selling it. He appreciated my honesty and offered to sell it to me for 15% below market AND owner finance it because he was already making far more than he had anticipated.

I'm closing on a sale tomorrow where the seller is 92. She owned the property for nearly 30 years but her health is failing and the medical bills are piling up. We're picking it up for about 20% below market. Not because we're taking advantage of her but because she is desperate to sell fast and we were able to provide that.

@Account Closed in my experience, the PM involves the Landlord because they don't want to take responsibility when something goes wrong. If the tenant skips out on rent and trashes the place, the PM can say, "You approved them!" By the way, involving the Landlord does nothing to relieve the PM of his liability.

In my humble, humble opinion, it's a position of weakness. The PM should know how to screen applicants and choose the one qualified for the home. Involving the Landlord - in most cases an amateur - makes no sense.

@Dillon Kenniston what you're describing is similar to a second mortgage. 10 - 15 years ago, mortgage loans were easy to come by. Lenders were giving Loan A for 80 - 90% of the purchase price and then a second loan for the remainder, which means they were bending the rules to provide the Buyer with 100% financing.

Your scenario is similar. Seller has 70% equity. You get a loan for 70% of the purchase price and Seller gives you a loan for the other 30%. You're essentially borrowing 100% of the purchase price which is nice from a leverage standpoint but it's also much riskier.