All Forum Posts by: Anthony Thompson

Hector, if I understand you correctly the deal is

• You take over loan with ~186K remaining balance (235K after 10 years of payment)
• You also pay a total of 25K down
• So the total you're buying it for is ~211K.

Is that consistent with what you think you're paying?

I do have a few questions.

Do you have some kind of proof that all payments have been made on time (so the remaining balance is actually 186K) or what the current payoff amount is?

(It's often on the monthly statement and you could also call the bank with the seller who'd probably need key in the loan #, birth date, last four of SSN, etc.)

Also you'll want to read the fine print (i.e., all pages) of the mortgage and promissory note. (The mortgage is recorded but the note usually isn't.) Specifically what you're looking for is any balloon payment (the whole amount being due at a certain date before the 30 years - uncommon for a regular mortgage but possible) and especially and adjustable rate language (usually covered in something like an "adjustable rate rider" toward the end).

If the mortgage includes escrows for taxes and insurance, I'm not sure the #s add up - I'd expect the payment to be a lot higher. A 235K 30 year mortgage at 4.2% would have a base (principal & interest) payment of 1150/month and I'd expect taxes and insurance to add at least several hundred more.

So I'd recommend looking closely at the last monthly mortgage statement, and last year's end-of-year mortgage payment summary where it would list all the 2015 escrows and payments.

Another point is that what you're proposing doesn't sound like "assuming" the mortgage - which is a separate process requiring lender approval, checking your credit, qualifying you for the loan, etc. - but buying the property "subject to" the existing mortgage without telling the lender. (Most mortgages these days aren't assumable anyway, so unless you know for a fact this one is, it probably isn't.)

Re: the "due on sale" clause, various real estate gurus have, over the years, proposed a variety of schemes to try to conceal the fact that the property has changed ownership from the lender, such as putting the property in a trust (which technically does violate the due on sale/transfer clause though it makes it harder for the lender to know).

Honestly, I'm not a big fan of those concealment strategies, and I don't think they're likely to work too well in today's digitized world.

One way a lender could easily tell if a property had transferred would be that usually the insurance policy changes, and mortgagees (lenders) get notified whenever an insurance policy changes. So unless you like paying double insurance (the seller's old policy which does not cover you, and your own policy that does) that's a tip-off right there.

Another is simply that when property ownership changes hands, trust me, it shows up in a thousand databases within a month of it happening.

If you buy something subject to, you're basically playing roulette hoping the lender will never call the loan due. Which they may not, for a long time. But I honestly think that if interest rates rise, lenders will start doing so in an effort to force homeowners to refinance at higher rates. That's not the end of the world if you can afford the higher payments, but it's also a tough pill to swallow - it's a big difference between deciding to refi on your terms, and being told you have 30-60 days to refi or you'll lose the property to foreclosure.

Also, you and/or the seller may not realize, s/he probably won't be able to buy another property as long as this mortgage (and its payments) are still on her/his credit report. So that could be an issue down the road.

I don't think a wrap mortgage is what's going on in this situation - that would be more if you in turn sold the property to someone else with seller financing and "wrapped" the underlying loan with a bigger loan, and then paid the underlying loan from the payments you received.

However with the various consumer protection laws that happened after the last real estate crash, you probably don't want to be selling a property with seller financing unless you know you're selling it to a non-owner-occupant.

I guess the most important question is, what makes this house/property a deal?

There's a lot of complexity in buying subject-to, and some not-insignificant risks. I wouldn't recommend it to a beginner at all. And with any complex/risky situation, the question is, what are you getting in return for taking on that risk? What's great about this particular house/deal that would make you want to do this rather than just saving up your own down payment over the next year and getting a regular mortgage and avoiding all this risk/complexity?

Kerwin, I would recommend attending one of the Black Diamond REI meetings as they recently had a presentation on investing in Florida since one of their board members moved down there and started investing there.

I'm sure they could put you in touch with him and maybe he could give you some tips, references, maybe send you his presentation slides, etc.

That's funny, because the Bigger Pockets Best and Worst Markets for Residential Real Estate Investors, 2016 recently listed Providence in the "The 10 Worst Markets for Real Estate Investors".

Between the two, I think I agree with the Bigger Pockets assessment over the Realtor(R) research, at least for the evaluation of Providence/RI.

@Joanne Chang great tip! (Though doing so for Providence usually produces shock at how high the taxes are, especially compared to other cities/towns.)

The Realtors used to have a good tax rates page with all the tax rates but then they reorganized their site and I think eliminated the page.

So now I use RIPropInfo.com for the assessor links and tax rates - there's a link at the bottom under "See Also" for "Property Tax Rates" that goes to the state Division of Municipal Revenue page listing the rates.

That's also a good page because it's a reminder that some cities and towns also have "fire district" taxes in addition to regular property taxes (and sometimes special water district taxes full under the fire district taxes rubric, e.g., Portsmouth Water & Fire).

@Eric Smith Absolutely, let me know when you'll be in the area (send me a PM here on BP) and we'll figure something out; and thanks for the compliment, you too @Brett Read :)

Maxwell, if you can afford it the East Side is definitely a good place to invest. You can be sure that if managed reasonably well, the property will keep its value, rents are good, and tenants are generally easier to deal with.

The only down sides are the initial acquisition cost is higher and, well, Providence - by which I mean Providence taxes (which are higher for landlords than owner-occupants; see the Providence Apartment Association website for more info on that).

One other thing is to make sure you're actually looking at "East Side" properties. Like many other good areas (e.g., "near PC"), real estate agents & sellers are sometimes "liberal" with applying those neighborhood terms when most reasonable people familiar with the area would say, "Eh, I don't really think that's in that area." (Technically this might fall under puffing.)

With the East Side the classic rule is "above Camp Street" but that's just one boundary. The general rule with house buying and neighborhoods is, visit during the day, visit during the night, visit during the week, and visit on the weekend (Friday or Saturday night is a good one), to get a sense of the area during all times.

Also talk to the neighbors, especially the older ones sitting on their porches or walking dogs, who look like they've been in the neighborhood a lot. They'll tell you whether it's really "East Side" or "Elmhurst" or whatever.

Hope this helps, and good luck!

Eric, I'm not too familiar with Westerly/South County so maybe some folks down that way will have some thoughts.

Generally when I think of Finance jobs I'd think she'd be looking in Providence, Cranston, or Smithfield - or maybe going up to Mass somewhere along 128 or 495.

Also for you, if you're looking for 3-4 units you're going to find a lot more of those in the Providence-Pawtucket area than Westerly/South County.

(and when Rhode Islanders say "south county" they really mean "Washington County" - see all of the RI counties)

So I guess it's good if you guys are going to rent before you figure out where you want to put down roots - after you settle in and start to adopt the Rhode Island mentality (20 minutes away = TOO FAR), you might find Westerly starts to seem like a haul depending on where she gets work and you find properties.

Anyway, welcome to Rhode Island.

Oh and if it's cold and the sky is in any way cloudy, immediately go to the supermarket and stock up on bread and milk. You'll thank me someday :)

Peter, welcome to Bigger Pockets! You've already discovered the podcasts, which are one of the things I typically recommend to newer people.

I also often recommend people seek out and attend a local real estate investment group such as Black Diamond REI (blackdiamondrei.com) or RI Real Estate Investors Group (rireig.com). I believe Black Diamond has some meetings in Waltham, and RIREIG meets in Warwick, so maybe both groups will be convenient for you.

As for your question, tips for someone with investing and business knowledge, I'd say real estate isn't as different from other businesses as it might seem at first.

If you're doing buy and hold, each property is a business and the tenants are your customers. Just like any business, you have to find ways to increase income, reduce expenses, keep your customers happy, but not let any specific bad customers ruin things for your business and other (good) customers.

If you're going to be wholesaling it's the same thing except your cash buyers (like me) are your customers and you still need to increase income (get better at doing comps and repairs and negotiating) and reduce expenses (find better marketing lists/methods).

And of course if you have specific questions you can post them here on BP and we'll be happy to help.

@Stephen Torti 1pm might work but I won't have a lot of time, a little earlier would be better. We can PM about it.

I would wait until you can afford the full down payment for three reasons.

First, in the application process of most residential mortgages they are going to scrutinize your finances, paying particular attention to where you get the money for the down payment.

They will be looking for exactly the situation you're describing, where you're getting a loan from someone else because you can't pay the down payment yourself, and unless the source of funds is willing to give you a "gift letter" saying it's not a loan (and you sign something saying the same thing), they will turn you down for the loan.

And as I wrote in another BP thread today, if there are Federal funds involved (almost always the case with mortgages as I understand it), I believe it's a felony to lie on those forms. Serious stuff, mortgage fraud - people can and have gone to jail for it, even in RI.

Second, I almost always recommend against a new investor buying a condo for their first investment property, unless s/he already has an existing relationship to that particular condominium association/complex (owning another unit in there, being on the board, etc.).

There are just too many issues that seem to come up with other condo units, the condo association rules, ratio of owners to renters, condo association board politics, special assessments coming down the road, how professionally (or unprofessionally) the condo board manages the building and its finances, and - importantly - the fact that you have no control over the HOA fees but are required to pay them.

New investors are almost by definition unable to grasp the complexities of the condo association they would be joining and unable to understand that they are tying their financial fate to a group of people who may or may not be managing the property and its finances well. Also if a number of other condos stop paying their fees (as happened 6-8 years ago), it will be up to the remaining condo owners to make up the difference.

In many ways condos have all the burdens of owning a house but all the limitations of an apartment. Except for certain limited circumstances I usually recommend against them, at least for long term buy and hold. (Non-beginner investors can do OK with condos on a short-term basis at the right point in the market cycle but care must be taken not to be without a chair when the music stops.)

Third, in this particular case the #s are not only tight, by my calculations they'd actually put you into slightly negative cash flow.

Using the same format as the original, my numbers are:

Property:

• Purchase price: $95,000
• Down payment: $19,000
• Private $ down payment loan: $14,000
• Real down payment: $5,000
• Monthly income: $1,100
• Yearly income: $13,200
• Operating expenses using the "50% rule": ($6,600)
• this would include taxes, insurance and HOA fee
• Yearly mortgage pmts (main mortgage): ($4,896)
• (76,000 loan for 30 years at 5%)
• Yearly private loan pmts: ($1,782)
• (14,000 loan for 10 years at 5%)
• Yearly free cash flow: ($78)

For all the reasons above, I would recommend you continue saving until you have the entire down payment. Then I would look for a 2F located within 15 minutes of where you work, buy that (possibly living in one side if you need to), learn some property management from that, then after some digestion time move on to your next deal.