All Forum Posts by: Jason Krick

So, please critique this scenario. I'm a new investor. My access to funds is limited. I find an REO property in terrible shape. It is listed at $39,900. I negotiate with the bank and get it under contract for $17,500. I take a loan from my 401(k) for $25,000. I buy the house for cash. Repairs to the property and conversion to a 2 unit are $67,000. Add in holding costs, insurance, permits, etc. and I am all-in for $90,000. I find a commercial lender at a local credit union who loves the deal, and sets me up with a construction loan, which will be refinanced into a mortgage at 75% LTV. They will lend me 75% of the appraised renovated value. No seasoning required. It appraises at $50,000 currently and $135,000 after rehab. So, I take a $25,000 loan for approximately 3-5 months, and then my mortgage pays off the construction loan, pays off the 401(k) loan, and puts another $11,000 into my business reserves. I'm now into the property for $0, increased my net worth $45,000 in the property, and another $11,000 in cash. I jump on this deal, which I couldn't normally do, because I am not in a position to put $25,000 down on a deal. Is this situation still a horrible reason to take a loan from my 401(k)?

Robert M. For what it's worth, I'm using a commercial lender for my first purchase, which is a conversion of a single-family into a duplex. They are funding the renovations, and refinancing into a mortgage. It is a very small deal. Smaller than most commercial lenders do. However he wants to help scale my business into the larger, preferred deals. I had no underwriting or success fees. Anyway, it is coming from a local credit union and he is walking me through the process. I'd also recommend checking out the small banks and credit unions. My experience has been great

Should I form an LLC, or is an umbrella policy sufficient?

Ken Wicks Could it make sense to take a loan out short-term? It would be cheaper than HML. For example, with my employer, I could take out a loan of $50,000 or 50% (whichever is less) and amortize it over 5 years at 4.25% with no prepayment penalty. What if I was able to use those funds to purchase or put a down payment on a distressed property, renovate in 3-6 months (via construction loan), and refinance into a mortgage after? In a cash-out refi, I pay off the construction loan and pay off the 401(k) loan in 3-6 months.

Adam Bartomeo J Scott Since I'm a newbie (just closed on my first property, which will be a rental), I will tell you why I think flipping is a big draw to the new folks. It is simply this--quick money. Many people want to start now, and don't have the time, patience, or ability to save up the money required for a down payment, renovation costs, and reserves to purchase a rental. The belief is that, with a good enough deal, they can find an HML or private lender to fund the majority of a flip. They rehab, sell, and suddenly have $20,000-50,000 cash that they didn't before. This cash can then find another flip, or the purchase of a B&H property. I don't think risk tolerance comes into play initially. The dominant, driving forces, are how to quickly establish capital to continue investing. This is also why wholesaling is appealing. It is viewed as a way to inexpensively enter the business. While I don't subscribe to the beliefs above, I think that these reasons are what drives many new investors. Keep in mind that they(we) don't have the experiences as you seasoned investors. Therefore, the view on things like long-range outlook, risk-tolerance, etc. are skewed.

Here's a blog post on the decision. All Things FinReg Kane v. Think Finance and the Possible Impacts on Marketplace Lending By Melissa Hall, Susan F. DiCicco, Steve Levitan and Matthew P. Joseph // February 3, 2016 A recent decision from the US District Court for the Eastern District of Pennsylvania, Kane v. Think Finance, Inc., Civ. No. 14-cv-7139, 2016 WL 183289 (E.D. Pa. 2016), has received a good deal of attention. Although it arises in the context of a payday lender, some market participants have questioned whether the decision is applicable to marketplace lending and other similar financial structures. Marketplace lending involves online platform operators, usually nonbank entities, that partner with a state or national bank, which in turn originates the loans to consumers. After a short holding period, the loans are then sold by the bank to the platform operator, which will subsequently sell the loans to third-party purchasers while retaining servicing responsibilities. Under these facts, the consensus is that such loans should be considered exempt from usury laws in states other than the state where the originating bank is organized due to principles of federal preemption that apply to state usury limits. The Think Finance case stems from a number of actions filed against Think Finance, Inc. (Think Finance), a payday lender, by the Pennsylvania Office of the Attorney General (OAG). The OAG alleges that Think Finance was the de facto lender for a series of loans made through 2012 in a partnership with the now dissolved First Bank of Delaware and that the loans had interest rates (in the 200% to 300% range) that were usurious under Pennsylvania law. The OAG calls the arrangement with First Bank of Delaware a “scheme to avoid state usury laws” and an impermissible “rent-a-charter” arrangement. In ruling on a motion to dismiss filed by Think Finance, the district court held that federal preemption did not apply to the causes of action against Think Finance arising out of its lending activity because there were no claims against a bank. Therefore, the court allowed the claims against Think Finance regarding whether the loans were usurious under Pennsylvania law to proceed. There are a few important issues to keep in mind about the Think Finance case: The district court was ruling on a motion to dismiss, so it had to assume as true any well-pled facts by the OAG. Think Finance asserted that the OAG’s allegations were conclusory and not well-pled, but the court did not accept that argument. Importantly, the district court did not make any finding that Think Finance was the de facto lender, but rather accepted as true that it was the de facto lender and that First Bank of Delaware was only a “nominal” lender. Think Finance is factually distinguishable from cases such as Madden v. Midland in the US Court of Appeals for the Second Circuit. In Madden, there was never an issue about whether a bank was the originator of the credit card debt. The issue in Madden was whether a nonbank assignee could enforce an interest rate that was potentially usurious under state law but could be validly enforced by a bank, had the bank retained ownership. The OAG also alleged violations of Pennsylvania’s Racketeer Influenced and Corrupt Organizations Act (RICO) law, because Pennsylvania law defines “racketeering activity” as including “[t]he collection of any money . . . in full or partial satisfaction of a debt which arose as the result of the lending of money or other property at a rate of interest exceeding 25% per annum . . . where not otherwise authorized by law.” We are not aware of RICO claims having been raised in prior “true lender” or “rent-a-charter” cases. On their motion to dismiss, the Think Finance defendants urged dismissal of the Pennsylvania RICO claims on several grounds, including that the loans were “authorized by law.” The court declined to dismiss the claims, concluding that the allegations that Think Finance was the de facto lender and did not qualify as a “foreign financial institution” under Pennsylvania law were sufficient to suggest that the loans may not be authorized by law. Although the Think Finance case is in its early stages, the decision on the motion to dismiss requires participants in the marketplace lending space to consider the case’s potential future effect on loans with borrowers in Pennsylvania. In the meantime, this case is certainly one to watch as it proceeds.

Here's one article on the case of Kane v Think Finance, et al. From what I gather, they are/were a payday loan company: Federal judge's ruling a victory for AG Kane in a 'preliminary skirmish' Emma Gallimore Feb. 10, 2016, 1:03pm 0 0 0 New Kane PHILADELPHIA - A federal judge has rejected a motion to dismiss a racketeering case brought by Pennsylvania Attorney General Kathleen Kane and a private law firm involving high-interest rate, short-term loans made to Pennsylvania citizens over the Internet. In Commonwealth of Pennsylvania v. Think Finance, Inc., et al., Kane alleged that several companies - including Think Finance, TC Loan Services, Tailwind Marketing, TC Decision Sciences and Financial U - violated Pennsylvania and federal laws governing lending practices. “I wouldn’t say that (the defendants) were trying to get around the Pennslyvania laws,” said Jeremy T. Rosenblum, an attorney at Ballard Spahr in Philadelphia. “They were trying to utilize lending authority that is provided by federal law.” Under federal law, out-of-state banks have the right to lend at the interest rate permitted by the law of the state in which the bank is located. In this case, the defendants are contending that they were entitled to take advantage of this law because a Delaware state bank served as the lending partner when making loans to Pennsylvania customers. Kane and the firm Langer Grogan & Diver called this a “rent-a-bank scheme” and countered that it goes against state law, which does not allow for interest rates as high as those charged by the defendants. Kane also alleged that the defendants engaged in a rent-a-tribe scheme, in which they also partnered with Native American tribes to offer loans at rates permitted by tribal law. “The real question is whether federal law applies here or whether Pennsylvania law applies; and if federal law applies, it trumps state law to the extent that there’s any inconsistency,” Rosenblum said. The case was filed on Nov 13, 2014, in the Court of Common Pleas of Philadelphia County. In December of the same year, the defendants removed the case to federal court. In July, Kane filed an amended complaint alleging violations of the Racketeer Influenced and Corrupt Organizations Act, the Fair Credit Extension Uniformity Act, the Unfair Trade Practices and Consumer Protection Law and the Dodd-Frank Act. On Jan 14, Judge J. Curtis Joiner denied the defendants' motions to dismiss the case. “That doesn’t mean the court has decided that the claims have merit,” Rosenblum said. “But that at least the allegations are sufficient to go to the next step, which is discovery”. However, the court did grant dismissal of one claim – that the Dodd-Frank Act cannot be applied against the defendants in this case. The Dodd-Frank Act governs the oversight and supervision of financial institutions. It is more expansive than the Federal Tort Claims Act, which the court ruled should apply in this case. “It’s certainly a win for the AG on a preliminary skirmish. It’s a very early decision and there’s a lot of litigation left in this case.”

@Harry Metzinger

You would be right in this case.  It was on the market for over a year.  I have some theories as to why it sat so long, which aren't due to the house conditions.  I will shoot you a colleague request and PM you the numbers.  I don't want to hijack the thread. 

And my plan is to write a detailed post recapping the process, as I believe my strategy to get into my first property is different than some others.  That will happen once I get everything squared away and the renovations started.

Harry Metzinger I literally just closed on my first deal today, so take my experience with a grain of salt. It was a cash deal for an REO. During the negotiations, we were $20k apart. I came up $2500 and said it was best and final. My EMD in the offer was $500. They countered by dropping another $10k and upping the EMD to $2,500. Now, we are $7,500 apart. I was going to bump my offer up, but I paused, and asked my agent if the reason for the increased deposit was to make sure I wouldn't walk from the deal. She said, "Yes, that's exactly right." Bingo. That told me they were more interested in off-loading it than the price they would be selling it for. Instead of bumping my ("best and final") offer up, I told my agent to keep the purchase price where it was, but increase the EMD from $500 to $2,500. They accepted it. So, in my case, the larger EMD let the seller (bank) know that I was serious about closing. It appears closing and getting it off their books was more important to them than the price. Had I not paused and thought about it, I would have spent another $2,500-5000 on this property.

Thank you everyone for the suggestions! I closed at 3:00pm today. So, what I did was I came up with what I thought was fair compensation. When I got the final HUD, I saw that the seller increased the original amount of $300. It was still less than I thought appropriate. So I asked the title company to add a some more on my end. That was no issue at all, since I paid cash.

My agent was extremely grateful.  Not for the amount (which wasn't that much), but for the gesture.  On my way home from closing, she told me that the next text she sends me will be for a property that I must come look at before everybody else gets a chance.

I believe I did the right thing morally, and it looks like it will help my future business.