All Forum Posts by: Brad S.

@Patrick Mahoney

Yes, you would own the property, and would then be responsible for the first Trust Deed. The Homeowner would not have a right to the property anymore. But, it is likely the HO is also behind on the 1st, and would owe back payments and penalties, etc. You should put that into your calculations. You may also want to contact the 1st and offer to buy their TD at a discount.

@Jonathan Feliciano

My first choice would be unfurnished, unless the specific market calls for it to be furnished. But, my guess is that long term tenants typically expect an unfurnished unit.

A tenant that moves in with their own furnishings, would feel more vested in the unit, and would likely stay longer then one who can more easily leave at the drop of a hat, with less stuff to coordinate. Now, you can typically get more money for a furnished place, but if many prospective tenants already have their own furnishings, I wonder how much of a turnoff a furnished unit would be to them. What if the don’t like the way it’s furnished or they just feel weird about using furniture that may’ve been used by many people, and/or what do they do with their furnishings, or what do you do with yours. etc.

In this situation, you may want to remove yourself from the equation and get an experienced leasing agent to handle leasing that unit for you. Someone who is very aware of the local laws and regulations, etc. That way they may be able to navigate this person more easily, since they are detached from you, the owner. Of course, you can discuss your approval criteria with the leasing agent and make sure it is legal.

The main thing is to have clear, reasonable, documented, and legal approval criteria and procedures in place, so that you are assessing every applicant equally and don't have any fair housing issues you can be accused of.

But, it doesn't feel right, based on what you described. I think you would be wise to avoid this "future" problem tenant. In CA, we just had a county ban criminal background checks on prospective tenants!

Quote from @Doug Poirier:

Hey all, wanted to share with you my house flipping strategy. I'm confident that this strategy is the future of flipping real estate. Buying houses to flip is costly and time consuming. Why buy when you can flip without owning the property

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This is not really new. I believe there were, and maybe still are, companies and even Brokerages that had this as one of their business models. It's also similar to an Equity Share (ES) arrangement, where the Investor would control the property and pay the expenses (typically through leasing it out), and then take part in some equity sharing arrangement when the house sold, at some point in the future. But, that strategy was usually best for those homes in good condition, where the Sellers had a difficult time selling. But, the Investors didn't need to invest a lot of upfront rehab money. This situation was usually better in a property and market, with good appreciation potential. 

What you are proposing, is more of an immediate "forced equity" situation, where the investor does the rehab, hoping to benefit from an immediate increase in appreciation/equity, as a result of the rehab. In that case, the investor would risk their money, time, experience, etc, with limited control and limited or no ownership benefits. So, if the market changed, or some unexpected rehab issues or costs came up, etc, they would not be free to decide what is best for that deal. Like, if they couldn't sell, they couldn't unilaterally decide to rent it out for a few years and sell in the future. So, basically, they would be risking a lot for a limited return.

And let's look at the #'s:

1) Your way
    Investor invests $100k, profits $75k
     Return = 75%

2) Typical Deal
      Investor invests 
      $50,000 (20% down pmt)
       $5,000 (2% closing cost)
       $12,344 (6 mths holding costs incl- mtg @7%, utilities at $250/mth, taxes @ 1.2% annually of purchase price, insurance @ $720/yr)
        $100,000 (rehab costs)
        So, total monies invested = $167k (rounded) 

         Profit = $500k (SP) - $200k (loan balance) - $117k (rehab + holding costs) = 132k (rounded)
         Return = 79%

So, if I did my #'s correct and didn't miss anything, the returns are actually not much different, but the risk profile is. Your way, you invest quite a bit of money in something you don't fully own or control and in the other way, you invest more money, but have more options, should things go south, and have the potential to make significantly more nominal amount money, without having to split it.

Quote from @Christopher Cole:

Thanks so much for the information one last question is there a Appraisal done when doing a wraparound mortgage and if so does the buyer pay for it

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An Appraisal is not required in a wrap, since there is no traditional Lender involved. But, it may be desired. In a wrap, the Homeowner/Seller is the Lender and they may want an Appraisal for their own satisfaction, but it is not necessary.

And for the Buyer/Investor, no Appraisal is necessary. And, the investor should be experienced enough to know the value to them, regardless of an appraisal.

Hey @Adam Mayberry

So, can municipalities refuse to allow the ADU ordinances to work in conjunction with SB9. In other words, can they restrict you to a total of 2 units while using SB9, and not allow a third (ADU) unit?

Quote from @Ty Rob:

I would have to jump in and disagree here. No offense to the appraisers out there, because it's a very difficult job to do, but I've had appraisals come in all over the place. In fact, it is now part of my normal operating procedure to order an additional appraisal or even two, paying out of my own pocket, because I've found there can be thousands of extra dollars coming my way in doing so. This applies much more on the re-finance side in the case of a BRRRR situation, but helps on all sides and I'll lay out a few real examples:

-I was looking at refinancing a rental and received the bank appraisal at $425,000 and the second appraisal I ordered myself came in at $505,000. What this allows me to do is go back to the bank and say "the appraisal you ordered is off and here is proof." Normally the chances of having an appraisal changed are slim without evidence, but because it's another appraisal it would have to be given some serious credit and would likely increase the cashout amount. I didn't end up moving forward with refinancing on this property, but, hypothetically, let's say I did and that they took the second appraisal into account and settled somewhere around $450,000. Since you would typically be getting 75-80% LTV in a cashout, that would be an extra $18,750-$20,000 coming directly to me because I spent an extra $500 on an appraisal. The worst case is that you're out the cost of an appraisal at $500 or so, but the best cases can be tens of thousands of dollars in upside.

-I recently did a refinance and did my usual and ordered a second appraisal and in this case the appraisal I ordered came in way below ($35,000 less) what the bank appraisal showed, so I didn't need to use it, but again a win-win situation.  

I believe that appraiser's, at least in California, are supposed to be within 5% of each other as a standard...I've found that's rarely the case, but you wouldn't know it unless you got in the habit of spending that extra money on an appraisal of your own. I would highly encourage every real estate investor on here to order a second or even third appraisal for every single purchase, refinance, or sale (in which case if the bank appraisal comes in low and the buyer's might get skiddish because of having to put more cash in themselves for a larger down payment, you can provide the secondary/tertiary opinion and hopefully save them the extra money thus keeping them in the deal). I've found few tricks as simply as this that have as high of an ROI. Hope this is helpful to someone out thee!

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While I appreciate the "friendly" disagreement, I would like to respectfully add some clarity to your comments. I agree, that some appraisals can come in with a wide range of conclusions. As an Appraiser, I have reviewed terrible reports in the past and have had unpleasant experiences with appraisals on my own properties and deals. Typically, that's a function of lack of knowledge, skill level and/or laziness.

Anyway, while you are free to pay for as many additional appraisal reports as you desire, a mortgage Lender is unable to use those reports for their lending decisions (per law). I suppose, that may present some new and different facts to be considered by the original Appraiser, and maybe they will alter their original report based on the new information, but a Lender will not utilize your new appraisal to make their decision. Or, more specifically, they cannot legally do that. 

#2 - there are no "standards" or anything else bounding us (Appraisers) to be within 5% of anything (California or anywhere else). That would circumvent the idea of an Appraiser having an objective opinion. But, yes, appraisers may have differing opinions based on their individual knowledge, skills, and work put in to a particular assignment.

Quote from @Alexandra Sales:

Is it typical for an appraisal to come back almost exactly what you're purchasing the property for? 

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Yes, in a typical, arms-length, open market purchase transaction, the appraisal will most likely come in at the contract price (sales price). This is partly because, the transaction has many elements of the definition of market value inherent within it. Meaning, the purchase is usually between typically motivated buyer and seller, whom are well-informed or advised (represented by Realtors), each acting within their own best interests, the Subject property was exposed to the open market, and the price was not affected by creative financing or associated sales concessions.

Of course, this does not always happen, and I have come in both above and below the contract price on multiple occasions. But, that is not typical in my experience (as an Appraiser) and not preferred, since it requires more explanation, justification, and work, on the appraisers part.

Quote from @Joseph Godio:

When refinancing, do banks typically require their own appraiser performs the appraisal or am I able to hire my own appraiser and use that appraisal to support the refinance loan?  Will investors obtain multiple appraisals and use the highest one, or is that usually not worth the extra cost of multiple appraisals?

Thanks in advance! 

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Per the HVCC law, in 2009, for residential mortgage transactions, no one who directly benefits from the loan is permitted to order the appraisal. In other words, if they stand to make money from the loan (Lenders, Mortgage Brokers/Loan Officers, Realtors, Borrowers, etc) they cannot be involved in ordering the appraisal. This is to prevent any influence on the Appraiser.

This is why many lenders now use AMC's (Appraisal Management Companies), unless a Lender has a separate department set up to specifically handle the appraisals. But, they are detached from the origination of those loans.

So, no, it is not worth the cost to order your own appraisal. You are able to dispute any appraisal though, and point out any factual discrepancies or present new information (i.e. new comparables, etc), but many times that isn't too helpful. You may also try and get the Lender to order a 2nd appraisal, but I assume there would need to be a good reason for them to do so - just because the value isn't high enough, is not a good reason.

Yep, sound good!  ...assuming the rehab estimate is relatively accurate. Even if those are a little low, you should have enough room.

But, it sounds like you are going to hold this as a rental, so what are those #'s?  Rental amount, expenses (piti), etc?