All Forum Posts by: Whitney Hill

Confirming what @Avi Garg said, after a conversation with both the Business Entity dept under the CA Secretary of State and the CA Franchise Tax Board (FTB). Here's what I was told:
1) Parent and its child LLCs would ALL need to be registered in state of CA - that's the $800 fee, form to file is the LLC-5. So that's 3x$800 in my case
2) However, only the parent LLC needs to file a CA return. The income from the child LLCs can be reported on the return for the parent LLC on a Schedule-7, no need to file individual business returns for the child LLCs

For context, my specific situation is the following (and what I described to the agent to get the above answer): I am a CA resident, so I'm doing business in state by virtue of living here and then being in control of / making decisions pertaining to businesses registered in other states. I have one parent LLC in NJ. I then have two child LLCs - one of those child LLCs is in NJ - it's owned by my parent LLC and someone else's LLC as a partnership. The other child LLC is in OH, a single member disregarded entity since owned fully by my parent LLC.

Another option.... the money partner puts up 100% of the capital requirement. And then you are on the hook if the deal goes over that budget. Money partner is paid a preferred return on their capital (I use 8%), then you are reimbursed for anything extra you had to put out there (hopefully nothing if you ran the project as planned), and then 50/50 profit split. One more thought... if you guys will need hard money financing, it may help to hold the property in an LLC together. That way you can use both partner's experience / balance sheets to get the best possible hard money terms & rates.

Good call on talking to your attorney. A few questions/thoughts that may be relevant your decision:

-Do you need his experience to help get a better loan? Not sure if you are getting hard money or how big this purchase vs rehab cost is. I use an LLC with my partner, who is also a GC like in your scenario, bc we look better on paper as a team vs either one of us applying alone for financing.
-On the payout waterfall you mention, lenders are paid first (yes), then his costs, then splitting profits... where are you repaid on the $ you put up for the purchase plus holding costs? Also, you may want to consider agreeing a boundary on his costs that are recouped ahead of the profit split. Hopefully you trust the guy 100% and this will never come into play, but there can be an incentive for the GC to pad costs, since that part is his ahead of the profit split. In my deals, we agree that I will contribute X capital to the deal, and if costs run over and more capital is needed, my partner is responsible for that. Then, my capital is returned, I'm paid a preferred return on the capital, then his overruns are reimbursed, and then finally the profit split.
-Whether you do the joint LLC or just set up a JV agreement to handle these things on the side.... make sure you also spell out what happens if there is a shortfall. Hopefully that won't happen, but better to prepare now for a situation where the market falls off a cliff and the deal loses money. Ex: lenders get repaid and then you only have $100K left over.... his rehab bill is $120K...do you end up having to pay him $20K out of your pocket? Again, also need to figure out where you get repaid on the down pmt and holding costs.

Would be great to hear what you decide on this after chats with your attorney etc. Good luck!

These are some of my favorite tools for northern NJ as you are researching properties...
Tax record lookup: http://tax1.co.monmouth.nj.us/cgi-bin/prc6.cgi?&ms...
Quick way to see flood zone status + whether owner has multiple properties: http://njparcels.com/property/
Pics for sold listings (when doing comps): Movoto seems to almost always have the listing photos up, even when Zillow/Realtor.com doesn't

Other NJ-specific advice.... there is something called "admin" MLS access that realtors can grant to an assistant (no licensing requirement, just training on the NJMLS system). If you have any realtor friends, find out if they may be willing to add you (it is a single form they fill out, cost to you is like $80/yr). The real gold on the MLS (vs Redfin or Zillow) is way better access to historic data - great for getting your ARVs, but also great for making mailing lists. Not sure what you are thinking on how to source leads? The MLS add-on tool Realist allows you to highlight all the properties that meet a certain criteria and immediately download their mailing info. You can also run stats on how much inventory is out there by city and price point etc

Best general advice... nothing new here, but what I've found to be most true:

1) get extremely comfortable with working deal numbers so you can confidently take action when right one comes up. And figure out what criteria matter most to you (I have two: net deal profit at least 10% of ARV; annualized cash on cash return of my invested capital >40%... shorter timelines help!).
2) make yourself take some sort of action so you will run across people who will become your future partners. You will also help fill in gaps in your understanding way faster than reading about it - e.g. you'll be forced to find financing and insurance for a vacant property and suddenly you'll know 3X more than you would have by reading about it (also read about it, but it's easier to read once you have the frame of reference)
3) pick your deal source (wholesalers, direct mail, web leads via Fbook/google ads, auctions, MLS older listings of ppl who are getting desperate as we head into fall) and get really good at working that one flow. Once that one is nailed down, add another. But pick one to start or you won't get good enough to see results

Thanks for thoughts!  

@Doug W. my partner is a well-insured licensed contractor & we have liability on the house, great call-out you make to have that covered. Also a good caution to try and limit the time spent with buyer - agreement would likely be they can pick from a pre-selected set of options (or worst case, my partner the builder is fine with managing the coddling part)

@Bryan Devitt agree, I've seen it done a lot around here as well. So I'm looking for ideas on best ways to execute, e.g. FSBO vs listing on MLS

What has been your experience pre-selling flips by listing them before reno is complete? Listing would include high quality exterior & interior renderings, floor plans, description of finishes, plus something like "still time to choose your own counter tops, vanities, colors etc... home under construction and finished Sept." Have you had success doing this as FSBO on Zillow, just putting on MLS for fee, or listing with an agent?

ARV is $900K on this house (Summit NJ, train access NYC) and reno timeline is 3.5-4 months (we're dormering an unfinished 2nd floor to add master suite + 2BR + BA, gutting first floor, finishing basement). Plans are submitted to city, will start on "in-place" type reno next week for existing bath.

Goal would be to find a buyer early so that we can either sell as soon as it is complete, or even sell it now - bonus for buyer would be they can customize a bit if desired (e.g. here are your two choices we include in this price range. or pay more to get whatever custom version you want). Also the commission savings are substantial if we only pay a buyer's agent vs both. Would appreciate any insight from folks who have pre-marketed successfully!

Any updates from @Mark Spidell or @Garfield Duncan regarding Zillow's FSBO listing process? Were you able to get the properties listed?

"Best and easiest way to structure" brings up several points in my mind: deal structure + legal structure + tax implications (listed in the order in which I feel more versed, not necessarily their importance). Here's my opinion:

I'd start with getting a deal structure on paper:
1) Agree upfront how much value you assign to his land, and agree that your shared LLC/trust (or whatever you set up) will owe him that amount when you ultimately sell. That value could be zero if you think that your project management time/expertise is just as valuable as the land... that will all depend on whether his undeveloped land is worth $5K or $50K or $500K!

2) Agree who will be putting up the capital required (your partner?) and exactly how much is needed - even if 100% construction financing, there will be interest & closing costs, insurance, plus often fronting the construction costs before the draws are disbursed, drawings/plans/permits that may not be covered by lender's loan...  

3) Agree who will pay for any budget overages. Possibly you, since you will be on the hook for running the project? I find it aligns incentives best if the project manager-type partner is on the hook for any shortfall...  you could also agree to each contribute 50/50 or whatever split if you need more capital in the project.

4) When structuring the profit split, consider paying the capital partner a preferred interest rate on the invested capital, something like 8%. Up to you if you also want to pay any interest on the agreed value of the land over the deal holding period. And if you end up putting any additional capital in to cover budget overages, that capital would also have interest paid back on it.

What this all looks like when you sell the property: calculate your net deal profits after all your expenses like usual. Then pay back his land value (plus interest if you agreed that), then pay back his capital contribution plus an 8% annualized return on that capital, as well as reimburse yourself for any capital you had to add to the pot + interest. Finally, split the remaining profits equally. This structure first compensates either partner for skin in the game (kind of like you would otherwise need to pay for private money), then splits rest.

On the legal structure, sounds like you'll want to set up an LLC, along with an operating agreement that specifies the different duties you each have, all the stuff you agreed on deal structure above. Since he already has the property (presumably in his name?), you'll also want to iron out if he transfers the property at a zero/low value to your joint entity vs holding in his own name. Lender may make you transfer it to an LLC anyway in order to get the construction loan. All of this will have legal/tax implications and so I will stop there and suggest you find someone to take that piece on for you after you have the basics of your deal agreement on paper.

@Tim G. No closed deals from that pilot yet (yet = someone calls me monthly to check in but they are waiting on some condos to be finished in their desired town). I'm 10X-ing the mail though - so I will plan to report back on the final part of the funnel, e.g. # of mails to close a deal with these kind of targets!

Hi Nate! I've mailed in Northern NJ in high income areas -- houses with assessed values from $400K all the way up to $800K+ (with market values typically 20-30% higher than those assessed values). I believe these pricier homes receive less mail than lower valued homes, since high value aren't the 'typical' target of investors. Here are some response rates I can share from my pilot of 371 recipients, which I mailed up to 4 times over a 3-9 month period. This was just a pilot so sample size isn't huge, but hope it gives you some ideas.

Types of targets...55 of the leads were houses we wanted to live in (looking for a new primary residence at the time, we've since moved to CA) - those received a slightly different letter than the rest, stating that we were looking to move to their town and wondered if they were interested in selling (it did also say I was an investor, which was why I was looking for a house in an unconventional way!). 316 leads were "normal" leads and received a typical "we're buying houses in your area and yours caught my eye" sort of letter.

Sources of leads... I used driving for dollars, "data for dollars", and some tax liens+foreclosures. Data for dollars = properties where the improvement value is a low % of the overall tax assessment (meaning the house is probably old/unrenovated), low assessed value in area with lots of knock downs, recently transferred into name of a trustee...

Overall response rate for the whole 371 was 6.7% (response = anyone who called sometime in the mail campaign). 64% of those responses were to the 1st mailing, 28% to the second mail, 4% to the 3rd, 4% to the 4th.  Appointment rate was 3.5% of the 371 (I made offers on 80% of those appointments). Offer rate was 3% (this includes the offers made on appts plus a few phone estimates) - of those 11 offers, I have one tentatively accepted (seller keeps calling back to update me on their timing, I give it a 50% chance of closing). Put another way... my first mailings had a 4.3% response rate, 2nd mailings 2.4%, 3rd mailing 0.5%, and 4th mailing 0.8%. So a different experience than some who say the magic happens after hitting them 5+ times).

By type of target...for the 55 recipients who received a letter that I wanted to buy the house as a primary residence, I had a whopping 16% overall response rate. For the remaining 316, overall response rate was 5%. I will use those 316 targets for the rest of the numbers that follow, since the primary residence targets were clearly responding to the type of letter and results are not 'typical' (though good to know, in case you could legitimately say you are also looking for your next primary residence!). 

By lead source... driving for dollars targets had a 7% response rate, data for dollars 4%, foreclosures+tax liens just under 5%. 

By assessed value... to address your question about whether mailings work for high income or high value areas. I broke the targets into three ranges - those with an assessed value <$400K, $450-550K, and $550K+ (arrived at those numbers to get roughly 100 in each group). <$400K = 3.9% overall response rate, $450-550K = 5.6%, and $550K+ = 5.7%. So the higher valued houses had an even better response rate than the lower values (offer rate was about equal across groups). If we throw in those primary residence targets, the response rate for the $550K+ group goes up to 10%!

What type of mailers to send... I sent a different letter each time. First one is a basic intro (we buy houses, want to buy 2 in your town this spring, selling direct is great for X reasons, let me know if you want an offer), second one highlights what type of sellers typically like to sell to investors (own timeline, no hassle, house needs repairs etc), third mailing is a simple postcard that has similar message on it, fourth mailing is a letter saying I've reached out before and thought you might find these FAQs useful (and I include a 4 pg FAQ distilled from my website)-- I expected that letter to have more response (you'll see above the 4th mailing had a <1% response rate) and it may be that ppl are waiting til after Easter to call, as I get more calls after holidays when ppl have had time to talk to their family.

How to track all of this... you can guess by now that I'm super data oriented. So I use a combo of CallRail for incoming calls (it can record them) + Podio as my CRM + excel to transfer data for creating mailings (though I think Podio can do this directly, I'm just more comfortable in excel). Podio is free, CallRail is $30/mo for 10 phone numbers (I use a different one on different targets so I already know what type of person is calling before I answer, e.g. is it someone with a tax lien, someone I told I want to live in their house etc). You can read all about Podio on the forums, but in a nutshell you can set it up to automatically incorporate data from CallRail so that you can "link" those calls to the entry you have for that address. Then all your data is available in one place, even on your phone (so helpful if you get a call on the road, you can quickly figure out who you are talking to even if they don't give you much info). Also useful for scaling, as you can invite users to access Podio (e.g. someone who works your leads). 

Many people don't track leads at this level (and I'm sure most are doing more deals than I am now!). But my intent was to set up a good structure to manage leads as I scale up so I can measure what works and what doesn't. I'm going to outsource direct mail and start hitting many more targets now that I have the infrastructure set up. Good luck with your mailings!