All Forum Posts by: Oren K.

Parth,

An interesting idea but it has many challanges; not the least of which is getting 32 owners to agree to sell at the same time. Evaluating / apprising each unit will be a challange and every one thinks their unit is worth more. I suspect another issue is going to be the 23 single unit owners. Some of them probably live in the units and may be underwater but can still afford the HOA / Taxes but do not have the resouces to move out / buy somewhere else.

Even if everything lines up, I would challange you with why would you want to de-convert. You can run it as a rental property and keep the condo status. Who knows, one day, it may make sense to sell off individual units and then you would have to do the paperwork all over again.

An alternative approach would be to get control of 30 units (just over 50%), probably less. You now have near or absolute control of the association and can implement rules / regulations that improve the property / community. It may mean passing special assesments which not all owners will be able to pay; note that this is more 'predatory' as some may be 'forced' out.

Oren

First a terminology issue; I think you mean that the seller will not provide info until under contract. I believe Escrow is once you go firm / commit to the property after due diligence (DD). If they actually mean after DD, then yes it becomes a red flag to me.

For me no information until under contract is a yellow flag as most owners who are interested in selling know that they have to / should provide some information. IF they don't, they force you to make conservative assumptions (e.g. expenses, capex, vacancy, etc.) and you end up putting in a lower offer.

Another tactic / strategy is to simply give him his price (with the proper out clauses), get the information and then re-negotiate the price. I don't like doing this but lots do.

Oren

One further note of caution being the JV arrangement. Whose name is the property in; yours, jointly with his, in a company that both of you pay 'rent' to? Each one may have implications regarding taxes. For example, if it is only in your name, I don't think he can claim it a primary residence.

I will emphasis again that getting advice from the non-professionals on BP is good for education but absolutely NOT a basis to make final decisions. You are dealing with hundreds of thousands of $, so spending a few $ on proper advice on issues that you do not have experience with is well spent.

Oren

If I have this right, you invested ~275K (35% of 780K). IF you net out $1.4M on the sale, there is ~ 600K of capital gain which will be taxed 150K (25%) of which you will be responsible for ~50K for a profit of $157K; approaching 60% after tax profit over 6 years.

So, you invested ~$275K and will get out $432K ($275K + $157K); over 50% of your target purchase of $800K. Don't know of a bank that would turn you down on less then 50% LTV on a primary residence. Alternatively, do a 75% LTV (Still a slam dunk) and use the remaining $100K to remodel to your tastes, accelerate retirement savings, do a bit traveling, etc (or any combination).

As always, check with an accountant especially as sounds like your first time dealing with these issues. These are life issues and not stuff you want to make a mistake with.

@Jay Hinrichs - Canada does NOT have an equivalent of a US 1031 exchange (wish we did!). It simply does not exist and you owe taxes in the year that your sell. Hence why Canadians should not do 1031's in the US; Canadian taxes would still have to be paid 'now' and that creates other problems down the road.

Oren

Let me jump in here to say that my experience with my PM (Midwest Realty) in Cleveland has been positive but have to stipulate that they are not for everyone as they only will take on mid and larger size (lets say 10 units or more) portfolio (SFR or MFR) which eliminates the majority of OOS investors.

What OOS investors with only a few doors put up with (service levels & costs!) is beyond ridiculous from the postings. Having said that, I also feel that some non-turnkey investors expectations are not appropriate.

Midwest is not perfect but I have found them to be professional, responsive and helpful. They give honest advise and can deal with voucher tenants / HUD process / problem tenants but they can NOT do magic; a bad property / tenant require resources (read $) and take time to turn around. Also, they are not a Turnkey company and generally do not sell real estate (but they are a brokerage so there are exceptions).

If you have 10 doors (or near that and still buying), I have no hesitation to recommend them - PM me for contact info or to get more details.

Oren

As you are asking the question, I would guess that you know that a leaking oil tank can / will open up world of issues; Phase 1, Phase 2, remediation, retesting and who knows what else.

You could purchase it subject to all remediation done by the seller and certification of cleanup by the fire dept / county / state (who ever has juristriction on this).

Alternativley, you could be willing to invest in the testing / consultants necessary to scope the problem (with no guarrantee that they are 100% correct) and then make offer taking the results into account.

Until you know the scope of the problem, you can not know the cost to fix it  so unless you have done this before and have deep pockets, making any offer is very high risk.

Oren

The simple answer is yes.

In more detail now; I am guessing that your are buying from a flipper / turnkey (i.e. post-rehab) and that 81K is what will show up on the HUD-1 form later this year when you close. So you should expect the school board to take note of the transfer / price and launch an appeal of the valuation to the purchase price.

Hope the even with the higher taxes, property still hit the returns you expect.

Oren

Scott,

There are several items that you need to think about; common area cleaning, common area utilities (electrical at least), laundry room upkeep, fire alarm servicing and possibly monitoring, etc. If you go on loopnet, with a bit of digging around, you should be able to source quite a few offering memorandums which will have relatively detailed breakdowns of expenses. After you review a few, put together a list appropriate for your local.

One area that you need to be more aware of is the degree of turnover. I recently reviewed an offering for a 70 unit building with ~60 occupied units (~85%). When I looked at the rent roll, I noticed that about 30 units had moved in over the past 12 months; a 50% turn-over of the tenant base. Now it could be that this was a re-positioning but I don't think it was. The costs of turnover are the bane of rental ownership.

Also, I don't necessarily agree that you need to start small. My first property was 39 units. It depends on your personality, experience and resources. 

I would NOT recommend starting bigger to a someone just out of school who is going to have minimal to no reserves but someone with other business experience, used to managing projects and people and has the financial reserves if things don't go smoothly (especially at first!), can consider it.

Oren

Nicholas,

There are any number of people that have done this successfully in past years. The counties were more lax about transfers and were just happy to have someone keeping buildings maintained. In the past year or three, counties have become more aware of this tactic and are more vigilant. As well, it may not be the county that comes after you but the school board. They monitor transfers and will appeal the taxes if they suspect some thing; it is only paperwork to start the process.

As well there are certain risks / issues you should be aware of;

- As noted above, you have to take on the sellers original purchase cost which limits future depreciation

- If there are / might be any outstanding liens, they will be yours to deal with

- The tri-annual re-appraisal, is being done this year. The taxes are driven by that valuation unless you appeal and win regardless of your or the sellers costs

- If the deal only works with the lower taxes, eventually the taxes will rise and you will be stuck. It MIGHT give you a window, a year or three, with lower taxes to use towards rehab but should NOT be a long term expectation.

Go in eyes open.

Oren

Quwan,

I, and I assume @Jeremy Roberts, understand that there is no loan registered against the duplex. Our posts crossed so I was not aware that your mother was fine with both options (payoff now or installment payments).

As Jeremy posted, it now mostly becomes a math game regarding what is in your best interest but I would still weigh the value of 'making good' on the original loan from your mother. Being a parent not withstanding, good will is difficult to build and very easy to loose.

I would rather owe the banks and if a jam develops have family back me up then get into  a jam with family. Makes those thanksgiving dinners and other family events very awkward :)\

Oren