All Forum Posts by: Vincent Polisi

Mike, statistically speaking you are correct. Consummation rates of lease option takeouts are horrific with an estimated 80+% not going to takeout but there are mitigating circumstances that cause this.

The number one reason for this is because most investors follow the Claude Diamond approach of lease options and purposefully setup the lease option contract to ensure that the tenant/buyer cannot qualify during the specified term. The purpose here is to constantly churn the option money.

The number two reason is that everything is a priority for a tenant/buyer up until the point in time that they get into the home. After that, it is prop up your feet and watch the big screen time and all thought or efffort for mortgage qualification becomes a distant memory.

This is why we contractually require that tenant/buyers enter into, pay for and maintain credit restoration during the specified term. To discontinue the credit restoration program constitutes a material breach of the contract.

We also go to the added trouble and expense of reporting their payments to Equifax to help generate new positive good credit. All of this is done in an effort to fast track the tenant/buyer for mortgage qualification and ensure the takeout.

The sad reality is that most people have no idea what to do to restore credit or what is necessary in their situation for them to qualify for a mortgage.

This is where investors who want the takeout have to be their partner and coach and contractually guide them in the right direction.

Otherwise, it almost always ends up as you indicated with no one happy with the outcome.

1. Not structuring triple net leases
2. Doing straight rentals versus lease options
3. Competing with other investors in the rental market bloodbath, attracting career renters who want to be babysat and ultimately destroy the property, and accepting rental rates versus charging a premium for triple net deals with people who want to own a home but cannot qualify for a mortgage
4. Not making the tenant responsible for maintenance and repairs (yes, there are legal ways to do this despite what your state's landlord tenant law dictates)
5. Not requiring payments made via bank draft authorization for direct deposit into your account
6. Not having a home warranty in place to defray the expense associated with repairs

ok, that was 6

Josh:

Jon and David both provide excellent solutions. The solution you need depends on the type of transactions you are looking to do.

Educating people to self directed IRAs as a means of generating investment capital is great if you are looking to actually purchase for flip or for long term hold for cash flow. The present market tone is somewhat reminiscent of the way it was back in 2003 when the Baby Boomers were fleeing the stock market in droves looking for investment alternatives. The key with these deals is understanding self directed IRAs to the point that you can present them effectively to an investor as well as preparing a prospectus of the deals you want to fund with rates of return so the investor can see the benefit.

Presently, Jon's solution provides the perfect storm of opportunity for an investor without either cash or credit. Through variants of owner financing you can option, control, lease, buy, sell, etc., properties with absolutely no cash, no credit, no carrying cost, no liability, etc. And, make a great profit.

Mark:

Will is right. I have been involved in thousands of transactions in more than 30 states with virtually every variant you can imagine. I have never once heard of any lender ever calling a note due based on the due on sale clause in the note. Not to say that it couldn't happen, but what are the odds that they are going to call a note on a loan that is peforming?

Slim to none.

It is akin to evicting a tenant who is paying on time. Great! You got the house back (or in this case, the bank got their money back) but you lost profit and now have to go find someone else to do a deal with that may or may not pay on time. A devil you know is better than a devil you don't know.

What you need to do is speak with a good estate planning attorney who can adequately structure the asset protection features you need.

So you understand going forward, loans made to LLCs are called non-recourse loans because the bank has no litigation recourse since you have the veil of protection of the corporate entity. Unless there is fraud on your part, they cannot pierce the corporate veil to come after you personally in the event of a default.

When banks do these loans, they require significantly higher down payments to insure their equity position in the event of a foreclosure. They are not attractive loans for investors.

Don't think that every investment deal you do must be done in the name of the LLC because this simply isn't necessary to accomplish asset protection.

I am sure you can find a good estate planning attorney somewhere on Bigger Pockets, but if not, a good guy to speak with is Roccy DeFrancesco, Esq. of The Wealth Preservation Institute. Don't let his name fool you. He is the "Rainman" of estate planning and asset protection and I believe can show you how to "fund" the LLC with the property through various structures that wouldn't require the transferrance of a recorded title but would provide layer upon layer of asset protection.

Stephen:

Without sounding condescending, you need to get some professional guidance from a hard core experienced investor that you trust prior to proceeding.

In this market, you've got too much cash going in to the deal.

Depending on what you are trying to accomplish with this deal, you may need to walk away from this particular property.

Here's why, given the state of the current market, if you know what you are doing, you can easily get sellers to do variants of owner finance deals with NOTHING other than receipt of the first month's lease or interest payment (depending on whether you are doing a lease option, lease purchase, subject to the existing mortgage or contract for deed transaction).

Yes, you read that correctly. No down payment of any kind.

On any given day, we have between $30 Million and $40 Millon dollars worth of property under option contracts with the seller receiving nothing other than the first month's lease or interest payment upon us exercising the option and renting/selling it to a third party tenant/buyer. We do not absorb or assume any expense associated with the property and have no carry cost while we are matching buyers to the property.

Why would they do this?

They are ecstatic to have someone cover the debt service, carrying cost and maintenance and repairs who will eventually qualify for a mortgage and take them out. Living to fight another day always trumps foreclosure and bankruptcy if you are a seller carrying a vacant property.

We do not option homes in need of regentrification or rehab. These are AAA caliber prime properties in prime locations with option contracts presently in place on properties with values from about $175,000 to $2.5 million.

If you are going to do any variant of an owner finance deal, you need to put a clause in the contract requiring proof that the mortgage is current PRIOR to any money changing hands AND on a monthly basis thereafter with an additional provision enabling you to wrestle control of payment away from the seller in the event they decide to take your money and not pay the mortgage. Or, alternatively, have payments made to a third party real estate attorney who will make the payments directly to the mortgage company on behalf of the seller. People who have been paying their rent on time are getting evicted everyday because the sellers are not paying the mortgage and the properties end up in foreclosure.

In this market, 10% down is entirely too much down on an owner finance deal (unless you are the seller getting the 10% of course).
It simply isn't necessary.

The fastest path to acquiring this property is going to be to negotiate an owner finance deal and eliminate the need for a third party lender. You could have this deal wrapped up this afternoon and be moving in tonight (if this is a primary residence deal) or market it and rent or sell it to someone else tomorrow (if this is for investment purposes).

Before you part with the 10% downstroke that could be used on other deals or for something else, you should definitely consider what your options are other than conventional mortgage financing or hard money private financing.

Hope this helps.

This can really be answered very easily.

For a successful real estate investment career, the two are complimentary and go hand in hand. One without the other is a complete disaster waiting to happen.

At the end of the day, there is no teacher like hands on experience. Experience can be a brutal master because without the proper educational foundation and reference, you end up putting your hand on the stove because you weren't educated to know that it is hot.

Reading is utilized to begin and continue the educational process to initially lay a foundation and then continue building on it once you have gained some real world hands on experience.

The interesting and exciting part about real estate investment is that no two deals are identical. As a result, anything learned from reading simply provides a basis from which to start.

Hands on experience working on individual deals then continues the educational process with the myriad nuances and curve balls of real estate investing.

As an avid reader, I have read books and/or taken courses from real estate experts like Robert Allen, Robert Kyosaki, Donald Trump, Carleton Sheets, Dolf de Roos, Gary Keller, William Bronchick, and hundreds of others. Some were excellent and provided practical real world application and some did not.

As a full time professional real estate investor, you are in a constant state of education learning something new every day, whether by reading or by real world hands on experience.

In reality, the two are really cyclical. You read a strategy that you decide to implement. Because every deal is different, the deal throws an unexpected curve ball that you must deal with for a successful conclusion. So, you go back to square one and read up and continue the educational process to learn how to move over, under, around or through the obstacle.

While books and courses are great, it is impossible for them to cover every possible detail or risk that may come up in a real estate deal, especially given the current market and legislative climates.

So, the guidance here would be to continuously read but do not allow it to create analysis paralysis. Pick a strategy that fits within your experience, income, assets, reserves, credit and risk tolerance and then jump in and start working on some live deals!

Ozperp:

You provide an excellent example about the differences in real estate investing ideology. The same holds true in any boom market in the U.S. What isn't being mentioned in this post is the fact that MANY people made an absolute fortune investing ONLY in appreciation in Florida, California, Nevada (Las Vegas), Arizona and New York over the past 5 years. I know countless people who made hundreds of thousands of dollars from relatively small earnest money deposits on pre-construction properties via a simple assignment during construction (example, they put $60k down on a $300k pre-construction purchase only to assign the sale for $500k prior to completion of construction). This far offsets ANY potential cash flow and required absolutely NO carrying cost other than the "lost" opportunity cost of the money during the time of the investment. The key here is that this strategy relies on timing the market and not time in the market. Conversely, I also know many people who got destroyed utilizing this strategy on the tail end of the boom.
Proponents of the "cash flow" is the only thing that makes a solid investment theory, in my opinion, are what true professional passive real estate investors call, property managers. Typically, these are the people who want to grind it out, be landlords, deal with maintenance and repair problems, and absolutely are relying on cash flow to survive because they have little else in reserves to fall back on. If that is your methodology, God Bless You. The challenge is that it totally discounts most of the benefits of real estate investing. Properly structured, you can 1031 exchange yourself into completely free and tax free multimillion dollar retirement homes that don't cash flow at all but provide incredible housing in later life in resort and/or waterfront areas. They provide reverse cash flow in the sense that they don't cost anything monthly.

I think you have properly illustrated that every deal does not have to cash flow to make sense. They key is the financial holding power and patience to attain the return required to make the deal a solid investment. But after all, aren't patience and holding power the real key to any investment, even ones with cash flow?

I have to be honest with you. I am humbeld everytime I see or hear the name Tayor, Bean & Whitaker. They just happen to be one of the largest lenders in the nation and just happen to be from the small home town where I was born and raised, Ocala, Florida. I know exactly where their office is. I rode by it many times as a high school student on my 12 speed bicycle. You are correct, they have tended to remain on the cutting aggressive edge. I can't personally say what they are or are not doing today. I know they are conservatively aggressive. Or perhaps in this market, aggressively conservative. Unquestionably, a great firm that has weathered the recent storm. Few things would be sweeter than catapulting investments utilizing an Ocala hometown firm. Go TB&W!!! Keep the dream alive!!!

I will inquire as to their understanding of the current Fannie/Freddie directives and see what they are willing to commit to purchasing in writing and post to this forum.

Vincent Polisi
The Wealth Consortium
[LINK REMOVED]

Mike:

You talk about assumptions being unnecessary but "equity" today is an assumption just as "appreciation" or "future value" are also assumptions. The reality is that equity changes daily, weekly, monthly, and yearly based on the local market. Equity can be destroyed by a few foreclosures, RELOs, distressed sales, etc., that can all happen on the day you purchase the property. Equity is a myth and a risk inherent in real estate investing. Cash flow is king and a better gauge on the caliber of the investment/proerpty (depending on the structure) for the current lease term, but how long is that and how long is that sustainable after the current tenant moves out?
When truly investing, despite what anyone on this thread says, there are multiple variables that require due diligence beyond "equity" which can be manipulated and "cash flow" which can also be manipulated and is typically for a limited duration with no guarantee of an exit strategy.

Please send any and all info on any and all Direct and/or Correspondent Lenders who are interpreting Fannie's ruling this way. We have spoken with no less than half a dozen Direct Lenders in the last 36 hours who interpret it that Freddie is following Fannie's directive and won't do more than 4. If Fannie will still do 10, God Bless You, tell me who I can get those loans done through and they will have more business than they can handle.
You are obviously better than me in finding lenders who will put their own funds out for Investor loans based on the current "guidelines".