All Forum Posts by: Randall Alan

@Nick M.

We have been through that situation several times.

It depends on your objectives with the property, but my first thought for you is - “are you sure you want them to leave?”

We actually rented the unit back to the existing tenants for as long as they wanted to stay because we didn’t have to do anything to the unit to start generating income.  
Also - presuming you paid more for the property than was owed on the mortgage due to competition on the auction (several presumptions there) - the previous owners are entitled to those excess funds from the court - which gives them a resource to be able to afford our rental rates.  this worked out well in the short term for us.  Or,  it also works out well to give them money to move on if you want them to exit.

As far as the basic question goes though, I just went to them and said,  “Hi, we bought your property in the foreclosure auction and you have a few choices…. You can either rent the unit from us at $X per month, or you can exit within the next 7 days, or we can have you evicted.  We would obviously like to avoid the last scenario if possible for everyone’s sake”. If no one answers the door, you can put that in a letter / notice and post it on their door.  

Worst case you can post a 3 day notice and just begin the eviction process if you can’t make contact with them.  Eviction is really your only legal option if they are not communicating with you.  

All the best!

Randy 

 @Oliver Powell

Hi Oliver,

Welcome to Bigger Pockets!

While multi-family is a perfectly good place to start, I would tell you that it is often more competitive than single family homes… maybe just due to there being less of them in general, and being more desirable by investors.  
When we first started we began there as well because we liked the idea that one side  could pay for the mortgage if there was a vacancy.  But we soon came to realize that we could re-rent a unit in a matter of days as long as we had proper notice from the tenant.  So if we were given 30 days notice we could turn on our marketing, screen applicants and almost always dovetail  the new tenant’s move-in to within a few days of the old tenant exiting.  By being open to single family homes as well it really increases your choices, and for us, reduced the cost per door of acquiring our properties.  In short, the vacancy concern was far less of a concern than we thought. 

Just a thought for you as you begin your journey.

Randy 

@Sara Wylder

Different locations operate their auctions in completely different ways. 

In Florida, most counties use the Real Foreclose website.  You have to deposit cash up front in your bidding account to be able to bid.  You are required to have 5% of your bid deposited into the account.  So if you were bidding $100,000 on a property - you would need $5,000.  If the bid jumped to $101,000, and you only had the $5,000 in the account, you would not be allowed to bid again - you would be out of the auction.

But say you won the auction at $100,000.  You then must submit the remaining $95,000 via certified funds within 24 hours of winning the auction.  If you fail to show up with the $95,000, you forfeit your $5,000 bid and the property would be auctioned off again.

So your bidding money is at risk until you pay the balance.

After you win the bid, there is a 10 day redemption period in Florida where the owner can more or less "claw back" the property by paying all the money that is owed to the lender that is foreclosing.  There is a tactic that I have heard about where (rather unscrupulous - but still legal) investors will contact the owner after the close of an auction and will offer them cash on the side to let them buy the property from them during the redemption period.  The owner gets cash, the investor signs a sales contract with the owner, and then proceeds to redeem the property and takes possession through a regular sales transaction.  So that is more a way you can still lose the house, even though you thought you bought it.

We have had an owner declare bankruptcy on the day of the sale, but the sale went through due to the late filing.  We had to petition the court to get our money back since we had already paid it to the court the next day.  Took 4 weeks to get our money back.  Basically - any legal filings that come into play during that redemption period could cost you the house - but you wouldn't lose your money as long as you didn't default on your obligations to the court / auction.

In Florida there is no inspections of foreclosed properties.  You can drive by them, you can maybe press your nose against a window to look and see what you can see if the property is abandoned... but you don't know what you don't know about the property.

We have bought 4 properties through foreclosure.  3 worked out about as we expected.  One had the owner still living in the property with 5 cats, and 10 litter boxes that had never been changed in years.  The entire house was essentially one big litter box.  Once we had the tenant out, we had to literally wear respirators to enter the house.  We stripped out all the carpet and pad, and the unit still wreaked of cat urine.  We had already done exterior repairs to the house including a roof, and an AC.  We sold the house with no carpet, no appliances, etc to a handyman who wanted to refinish it.  We were set to make about $100,000 on the property.  We chose to walk away and let him take it off our hands for about a $40,000 profit after expenses.  We were concerned about being able to sell it at retail with the defects.  So it wasn't a complete loss.  But as previously mentioned - if you didn't know the roof was rotten, and the inside is completely mold infested because of leaks, you could quickly be in for way more money than you expected and you could lose money if your repair costs exceed the value of the property, for instance.

Liens work on the basis of seniority. So any lien filed prior to the one that is foreclosing will survive. So if it was a Home Owners Association suing for their HOA fees, any primary mortgage would survive. Also tax and municipal liens typically survive foreclosure (so think code enforcement liens for not mowing the lawn). We have seen code enforcement liens upwards of $100,000 on a property where they added on weekly for years. Code enforcement in our area will settle those for 10 cents on the dollar if you bring the unit back into compliance - so it would be a $10,000 instead of $100,000 or what have you.

Hope some of it helps!

Randy

@Derek Morrison

It sounds high… but we don’t know anything about each unit… size in tons, furnace specs, etc.  if they are quoting really high SEER  rated units it’s probably not impossible though. 

I would start off by getting several quotes.

I can tell you that my regular AC guy charges 40% more than the guy I go with.  I installed a 2 1/2 ton straight AC with heat strip unit today for $3,900 out the door.  My local guy wanted $6,900 for the same setup.  So prices definitely vary.  But even with all that - barring some extreme specs required for your systems, it sounds really expensive to me.

See what several quotes tell you. 

All the best!

Randy

@Damien C Hyatt

Hi Damien,

I wish you all the best on your journey.  What follows will probably sound somewhat pessimistic - but I put it out there for your consideration...

Understand that your journey will be a long one, as real estate is usually not a get rich quick game.  A descent cash flow from a typical property in today's market is probably $300/month.  So to reach $2,000 at that rate you need 7 homes; and to reach $10,000 at that rate, you could need 33 homes.  

We have 37 units (25 properties), and have over $1 million in up front cash invested in those - and that was with rentals purchased between 2018-2021 - when both real estate and mortgage rates were cheap relative to today's prices.  It would likely take $2,000,000 in resources in today's markets to achieve your bigger goal.  

Much of what we purchased was done through MLS listings - but we have also purchased multiple homes through foreclosure auctions. Know that while you can find them cheaper at foreclosure - often it is at the expense of the risk you are taking not knowing what is going on inside the home. We had one home that the owner had 5 cats and 10 litter boxes that were never changed. Once we got possession of the house we literally had to wear respirators to be able to enter the house the cat urine smell was so strong. Even after stripping out all the soft surfaces (carpet, etc) it still had a strong smell because it seeps into the walls. Point being - you don't know what you don't know about what you are buying at foreclosures - so you are getting that discount for taking that risk.

I would also point out that at 8% interest - VERY LITTLE cash flows well. You need to run your numbers and do some serious thinking about your return on investment. It's not worth spending $6,000 in closing costs, and paying 8% interest to net $100/month on a rental. When doing your calculations - be sure to include principle, interest, property taxes (what your new ones will be - not what the current ones are - because after 1 year they reset to what you paid on the property), property insurance, and a maintenance reserve (we use $100/door/month on maintenance). There is also Capex expenses that must be considered. We have replaced 7 AC units in the past 2 months in our portfolio - which is really extreme... but it's $35,000 in expenses we had to incur... so it deserves consideration regardless of what scale you are at.

You might think - well I can just refi it when rates come down.  Which is true - but the refi is going to cost you $3,000-$5,000 in closing costs again - which actually moves you backwards by a couple of years to recoup those costs at the $200 more per month you will make once rates get back down to 5.x%.

My bet is that unless you can find some seriously undervalued real estate that your numbers won't look pretty at 8% interest (all in).  Which is probably 'code' for - real estate can be a great investment vehicle -but today may not be the best time to jump in as to returns on investment.  The Fed is expected to start cutting their interest rates in September, which should have a knock-on effect for mortgage rates coming down.  They meet 8 times a year - and if they cut rates 1/4 point a meeting that could mean that by mid next year we could see a 1% drop from todays rates... and maybe 2 points in a year if we were really lucky.  My guess is somewhere between those two.  

As for ourselves, we are always looking, but not buying at the moment as we think our money is better off sitting in a high yield savings account, versus locking in a high rate on a mortgage.

I'm not trying to be a nay-sayer - as real estate is awesome.  It is our full time job and income.  But we bought when cash flow was easy.  I'm just suggesting it might be worth waiting for the rates to come down before you pull the trigger.

All the best!

Randy

 First and foremost - know it it is way harder than in the tv shows!  (lol!). 

Second - there is a big learning curve to doing something like a flip.  Just learning how contractors work (or don't work), and how to manage them is a feat unto itself!  

When you are running your numbers - be sure to factor in things like the fact you have to close twice - once to buy it, and once to sell it.  Depending on the size of the project - that can eat up a descent chunk of money.  Finding a deal with a $20,000 profit margin is a non-starter for us.  Half or more of that money will be eaten up in closings.  So you really need a GREAT spread between your buy and sell price after the rehab.  We personally won't look at a deal where we don't think we won't make at least $50,000 after all expenses and closing... and truthfully we are usually wanting closer to $100,000 or more.  Just understand that one mistake can be very costly.  We decided to replace wooden windows in a 2300sf flip we were doing, instead of rebuild them on a 1908 house.   It ended up costing us $50,000 in additional expenses across 25 windows because once we changed the windows, we had to bring the framing around the windows up to 2023 code - which required removing the already installed windows and reframing each window down to how the studs were strapped with metal straps down at the floor.  It was an expensive lesson - but because we had a $140,000 profit margin it worked out.  

Also know that if you hold your property for less than a year, it's regular income taxes on your profits.  So if you made $100,000 - that's $22,000 or more off the back end you will owe on taxes - depending on your tax rate.  And also know that if you make more than $200-250,000 in combined investment income in a year there is a 3.8% Medicare surcharge on top of that 22% or whatever percentage.

Best advice - start with a very cosmetic flip.  Paint, flooring, landscaping, some new appliances, fixtures, hardware, etc.  Don't get into a long drawn out - knock down & move the walls type of project as a newbie.  You need time to get your feet wet - and doing it on a small scale is WAY safer than getting into a 6 figure renovation.

Flips are for one time cash, and rentals are for long term cash-flow.  Decide on which one you are really after.  As soon as you sell your flip, your real estate investment path starts over.  With rentals - it's cash flow every month for as long as you own it (presuming you find a good rental that cash flows - which isn't the easiest thing in today's market.)

Know that you are coming into a high market - both real estate and money are expensive right now.  Money should start to get cheaper towards the end of this year - but 7-8% interest makes deals tough - especially on a rental purchase.

Know that you don't know what you don't know.  What this translates to is - expect to make mistakes, and for your budget to get mangled the first time or two you do a flip.  You probably don't know about septic systems, foundations, how to look for termite damage, how to know if you need a new roof, how much life is left in the AC, or what it costs (from a contractor) to fix much of anything.  Those can be eye-opening experiences.  I needed a small 10x15 lanai re-screened.  The first quote I got was $1,200 - mind you the materials are about $100 - and it's easy to do - could do it myself but have other projects where I'm focused.  I ended up paying about 1/2 that with another service.   Point being - retail / contract labor can be really expensive - and how do you know when you are being ripped off?  That is part of that learning curve.  

I would suggest factoring in a 20% over-run allowance on your budget.  

Hope some of it helps!

Randy

@Jacob Ross

Two answers for you- more times than not - equal partnerships don’t work out nearly as well as going it alone.  When each of you have equal “power”, disputes can be frustrating.  Inevitably you will have differences of opinions on things.  If you are married to your partner (spouse) it’s a little different, but business partnerships can be more challenging - especially when things aren’t going well.  

Take just deciding on how far you rehab a house…”Do we really need granite counter tops in the rental?” can be a question that can have very opposing opinions depending on the mindset of two investors.. and there are thousands of decisions in flips like that.  One person may take the “it adds perceived value”approach, while the other is cost conscious.  Figuring out his to amicably solve issues can be a challenge if not addressed in advance.   

It’s not that it can’t work out, but first you need someone you can trust… I’ve seen many a person scammed by someone they partnered with.  My vote would be for family or close friends who you know and respect from earlier than your current venture.  

But my second answer is that if you are able to “go it alone” from a directional control perspective you will be much happier, and can operate lean where there is no counter arguments to be had with a partner.  Plus all the profits are your own.  You will come out ahead more times than not in my opinion.  
if it is just the financial side holding you back - let your bank be your partner… or see if you can borrow the money from a family member who knows and trusts you -  without actually partnering with them on the control of the deal itself (pay them interest - or even bring in on the lien to secure their position the first time) - but let them be the finances and you control the project. 

My 2 cents.

Randy 

@Vincent L Sanchez

I would say find someone to partner with - as you don’t seem to have the resources yourself.  This could be a family member or a relative possibly who knows / trusts you.  The deal may literally have to go in their name because of debt to income requirements from any traditional lender.  Present it to them as a return on their money deal - “I’ll pay you 8% on your money while I’m borrowing it”  or whatever, and  pay them out of the cash flow on the deal until you can qualify for a refi into your name when you would pay them off.  You would want a contract spelling out the terms of the deal so everyone is covered. 

The other possibility might be to try and structure a seller finance deal along the same lines…. Use your relative’s money for the down payment. 

The alternative is that we all pass on deals all the time that could have been.  You have to be in the right position to invest - and currently it seems like you aren’t there due to your recent purchase. 

Hope it works out!

Randy 

 @Joshua Flamm

If money is a constraint you borrow against your free and clear property. You should be able to get a 75% loan against your current property. This gives you the financial resources to buy your next property or two. From there you show a commercial portfolio lender your 3 properties that are cash flowing and tell them about the next property you want to buy that also cash flows. By showing a successful track record hopefully they see merit in lending to you. Portfolio lenders use more of a DSCR analysis to lending - meaning they are likely to lend to you as long as the investment can pay its debts - more so than a residential lender.

Hopefully along the way your properties appreciate, you pay down debts  (mortgages) from operating income, and you get market appreciation on what you can rent each unit for - giving you more income each month. 

We are on the long term rental side of things.  We’ve been in real estate for 6 years.  In that time we have seen our properties triple in value!!!  I can’t say I expect that to happen again any time soon… but it has been an amazing ride across 25 single & multi-family properties!!

Along  the way we sold of several properties we liked the least - mostly due to location and used those proceeds to pay down our highest mortgages on other properties.  The crazy thing was that we didn’t lose cash flow by doing this because the mortgage pay down reduced more expenses than we lost in income from selling the properties!

When rates came down we also did a couple of cash out refis on appreciated properties where we also took the proceeds and paid down other notes - again increasing cash flow by paying off higher interest rate properties with lower interest rate refis.

We have also done several flips we renovated, and sold and put proceeds towards other loans as well.  We have gone from 19 mortgages to 7 through these processes (granted - some of the 7 are now larger loans due to the cash-out move) - but just like before - cash flow actually increased!  

With the increase in the mortgage rates and property prices we haven’t done much lately on new projects.  Partially because we are fairly content with where we are at, but also because the market isn’t offering up great deals right now that we want to invest in.  So we are always looking for deals - but for now we are mostly watching for rates to drop to where cash flows fall into a better range.

Hope some of it helps!

Randy 

 @Terra Padgett

So I get what you are saying, but I don’t know if I totally agree with you.  If you want to nit-pick reality, I guess I could get on-board… but the general concept is that you make allowances for the things you are talking about.  I have 37 units.  I have a maintenance reserve account I fund with over $3,000 for repairs a month.  I have an escrow account that I fund with over $5,000/month to cover tax and insurance payments due across the year.    While those escrow accounts are funded from GROSS cash flow - I don’t count those escrows as a part of my income from my business.   They are really pre-paying expenses.

Maintenance issues, taxes, and insurance expenses are all expected things - and frankly they are expected to increase every year to the point I actually over fund my T&I account by about 10% to compensate for those increases.

So if we turn to rent, yes, someone can be late on their rent.  But 9 times out of 10 that is made up for within 30 days by the tenant - so cash flow for the month USUALLY is consistent for the month - but maybe not by the 5th when it is due for us.  

On rare occasions a tenant can’t - or chooses not to recover and they get evicted.  Maybe THEN you see what you hoped wouldn’t happen - that you may be out a month’s rent or so - but that is why we mention a vacancy rate when forecasting rents, right?  To say repairs and price increases imply unpredictable cash flow I think is an over statement if you are running your business right. 

Does a credit card company say their cash flow is unpredictable because of late payments and defaults and charge-offs?  No - they expect them.  They plan for them - in essence they budget for them to the point they are listed in their annual report. 

Just a little counter argument…

Randy