All Forum Posts by: Christopher Telles

Trust

Envolves

Authentication

Measures

When working with a trusted team you've done business with before there is always some level of ambiguity with estimating ARV and or sales comps. However, if you've never done deals with a person you bring on as a part of your team, particularly when it comes to such sensitive issues such as costing repairs, and the resulting affects on exit values its purely on the investor to make such assessments and determinations to insure the project is/will perform as prescribed.

How would one prove fraud in this case? You would have to prove the agent mislead you by producing evidence the comps or other on market availabilities (for extrapolation purposes) where not fact. That s/he grossly mislead you or lied to you about a fact or facts to induce you into closing.

As others have also stated, ARV is a subjective opinion and as such it may be impossible to prove a fraudulent behavior.

The question has not been asked, but is a worthy question, did you improve the property with the appropriate level of improvements to command the price YOU approved to be the ARV?

It really does suck you're facing a loss. After revisiting this situation would some additional improvements to the property get you closer to or more than the original ARV? Instead of taking a loss, is it practical to turn this into a rental?

 "Rarely is commercial fully amortized" yeah which is why I asked. I wasn't sure if the commercial loan be ing applied to residential somehow changed the call dates on the loans since you didn't mention calls dates originally. Thanks for clarifying.

 Just curious, in the commercial loans your taking out on residential property are the loans fully amortized? Or do the loans have a call date e.g. 7, 10, 15 years into the loan?

 You would be hard pressed to find a lender to loan you the other 12% of the downpayment if it needed to sit behind the sellers 1st owner financing.

How motivated is the seller? Would he perhaps carry owner financing behind a lenders 1st trust deed for the 12%? Its unlikely a seller would agree to this unless they are really motivated to sell. In addition, you would really need to search for a lender that would be willing to lend in this scenario, but there maybe some lenders that will, including some hard money lenders.

You didn't provide your purpose for the acquisition, long term investment, value add improvement to flip or refinance later.

As in real estate acquisitions and ownership, details matter too in being able to providing useful guidance. With little details, little guidance can be provided.

As @Jesse Waterspoints out you really do need to know a lot about the marketplace dynamics in advance. Getting to know the local multifamily market is something you'll have to spend time doing if you want to be able to uncover hidden value.

Now as for a seller not wanting to part with their information. Unlike a listed property where an agent has gone in and provided an estimate of value that is agreeable to the seller and then after signing an exclusive listing agreement provides all of the financial data for the broker to assemble into a report format, you instead are a stranger.

You're not a broker, but instead are a potential buyer. Many owners feel the more information they provide to you the less leverage they'll have to negotiate against you. When dealing directly with sellers, as the investor, the best approach is to get bits and pieces of information prior to the meeting, and then once they've seen and met you and you've verbally expressed interest then say something to the affect of "I'm seriously interested in buying your property, but before I can make you an offer I need to review x, y & z.

The process of working the seller in this way takes a little more time, but you'll find the information tends to flow more freely after a) they've met you and b) you've expressed interest in making an offer.

Well given you're talking about a line of credit and not cash, I'd say that buy and hold using the line would not be the best use of borrowed capital (debt from the line) and would substantially increase the risk in any investment(s).

Now, using the line temporarily for the acquisition of property that is either a turn-key or value add investment, and then after seasoning or the completion of work/turn around refinancing the property to extract at least the line of credit funds put into the deal to pay down the line may be an acceptable approach. This too will depend on your tolerance for risk. 

My rule of thumb is that equity buys equity, debt supports equity, but never supports itself. In other words I will use equity through saved rental revenue, a refinance, or 1031 exchange to buy more property. In a purchase I will take on debt that is combined with equity to find a comfortable ratio between debt and equity. But never would I use debt to buy property that will also take on debt to buy the deal. The exception to this is using debt on debt temporarily to buy a deal I hadn't planned on but have run across and needs a quick closing. Access to a line of credit for this purpose is then sometimes helpful, but it can also be a curse if you're risk adverse. 

In my opinion using debt to buy property when either combined with more debt or using 100% debt isn't a preferred method of ownership. Doing so adds so much risk to the initial purchase, and at a higher more important level increases personal overall leverage. Personally, when overall personal leverage exceeds a point of comfort and is to high it makes me nervous, I have a hard time sleeping, and it makes me moody, So I try not to go there. Easy money makes for easy spending. Disciplined investing never allows for easy spending.

 As has been mentioned, time on the market can have an impact on a sellers motivation, but I might add also be a telling take as to how unmotivated a seller is to sell their property.

I would agree that SFR owner occupied sellers have many more reasons, including emotions, that guide their motivation.

When it comes to short sales and foreclosure it really all depends on the bank. Some banks will allow a home to sit on the market until they get their number. While other banks, including the big banks, will sell properties at substantial discounts to current market prices particularly if the property needs work.

The only way to find out is to submit an offer to the bank. Discounts ranging from 20-40% are not unheard of in REO sales. When making and offer be prepared to show your ability to close the transaction at the offering price by either submitting a proof of funds or a preapproval letter from a lender that has already pre approved you for financing up to the purchase price.

 A lot of this can potentially be done online or on the phone.

Utilities. Call the utility companies that serve the property and ask them if the services are active. If not ask if they were turned off by request, none payment, or for deficiencies in the utility services on the property. If by request ask if they offer a clean and show temporary service, you don't need to go into details as to why. If for none payment get the outstanding balance because it will likely need to be paid before services can be restored. If for deficiencies you will know you need to have a closer look at the utility service(s) during due diligence.

Zoning. Look up the current zoning. Then go to the city or county website the property is located and look up their use zoning codes. Most use zoning codes that are available online will tell you what types of uses are allowed in a certain zoning. If the zoning on the property is single family residence (typically R1) you'll then know the multiple units don't conform to the zoning uses allowable for that zone. If the zoning is R2, R3, R4 or a "C" commercial zoning then there will be a description of the allowable uses. One of these descriptions will be something like "multiple residential units of up to x number of units. If not available online then call the planning department and ask to "confirm" the zoning, and ask if the number of units is an allowable use for that property. 

Theres a fair chance the planning department won't take phone calls and you'll need to do this in person. 

Note: no matter what the zoning says on a property profile or in a listing brochure you will want to verify the zoning for the property by checking with the appropriate governmental agencies having jurisdiction over the use of the property. Many times cities and counties have zoning changes that change the allowable uses for properties in that zone. Many have provisions that grandfather in existing uses, but when the use changes, as it would in a new use for a vacant building, the grandfathering expires. Just make sure you verify the zoning that exists and make sure to mention the building units are vacant. Ask if this would initiate any new or old ordinances that would have an impact on a new occupancy of the units.

You would not want to have to go through the process of getting a conditional use permit, and having it denied after having closed on the property. Or if it did require a conditional use permit, or worse an upgrade to meet new building code e.g. parking requirements, IBC codes, etc., you can build in protections for such when you're negotiating your purchase.

To begin, all three strategies are fine. The biggest challenge is determining which is right for you in your current circumstances, desired investment asset, financially, and experience wise.

On that last note, operating a run down building in a more desirable area, if one can be found that actually offers a better value, won't require to many different skills than operating a "turn-key" building. What it will require is that you have the skills, or are prepared to learn as you go, to contract for the improvements to turn the project into something that adds value.

I'm not of the mindset of delaying entry into value add buying simply because there is a lack of experience. If you want to buy good investment properties that actually increase in value beyond raising rents over time then at some point you're going to need to buy assets that aren't in the best of condition on day one. So my question is why wait? Wait for what? Until you get experience operating a building? Experience that has nothing to due with improving an asset...

Which leads me to financing. I would advise you carefully research how you can finance a project now, before you spend time looking for and finding potential projects. How you finance a deal is equally important to finding the deal. One can't exist without the other, but nothing can happen without the financing unless you're paying all cash.

Pretty properties are nice to look at on profiles and websites, but often unless you bought them ugly and made then pretty, they can be pretty ugly for the balance sheet. I like ugly. Buy ugly, improve ugly. Enjoy pretty.

Hire a broker. What do you want to contact them for? To sell them property? Or are you wanting to contact them with brokerage services? 

Your question isn't peppered with enough detail to properly provide guidance.