*** Official Real Estate Forum *** (1 Viewer)

[RKMoney]

A couple thoughts - Mike's done a very good job answering this question, I'm going to chime in with some financing thoughts as that's what I do.

1. Talk to a local mortgage lender about a rehab loan. The process works something like this: $180k sales price, you put 20% down. You get an appraisal done that is assuming the work on the property is already done, and you get a bid from a licensed contractor. If the work is going to cost $50k, and the property is going to be worth more than $230k when you're finished, the bank is cool with that. You turn all of that into the lender, and they will actually pay the builder for you on set timelines - something that, in your case, I believe would be a very good thing for a couple reasons.

#1 - This gives you a great excuse if the wife starts to add a bunch of stuff and wants to change things - "Honey, we already made this decision, and it's out of our hands now." (Since the guy's your buddy, I'm sure you can work something out if you really need an extra)

#2 - You don't stretch yourself completely thin. Cash is good.

#3 - This requires you to do all of your homework before taking on the project - not only do it, but put it on paper and prove to someone else that it's a project worth taking on - if the bank doesn't want to loan on it, that's good info for you to have right there.

There are two "closings" on a rehab loan, but if you go through a good lender, there is actually only one loan involved. With certain lenders, you don't get to lock in your rate until the project is complete. You don't want that. The first "closing" is when you buy the property and work gets started. You are charged the payment on your original loan monthly, and typically are given the option to either pay interest only on the draws to the contractor as you go, or roll that interest into the final mortgage balance. After the work is done, the loans consolidate into one with a pre-determined interest rate, and you go from there. At that point in time you can decide to put extra money in your property should you choose.

There's so many things going on in here that I've got no idea if I answered any of your questions or not, but feel free to fire away with more.

Wow thanks. You answered a question that's been on my mind for a while that I hadn't gotten around to asking. Good thing I'm reading through this thread start to finish.

Why do this? Leverage is king for me and if I can get 100% financed (80/20) then that leaves 20% in my pocket to use as I see fit. So what if the mortgage amount is a few hundred a month, if I can keep from having to fork out 20%/10% or even 5% I think that's a no brainer.

 

[Jeff Pasquino]

Can you sign your house over to someonelse and let them take over the payments? Would there be closing cost as if you were selling the house?

No, most loans have a "due of sale" clause which means the entire balance has to be paid in full before new ownership can be recorded.

Half true, half false.Yes you can sign over a house - this is called "Subject To the Existing Financing", abbreviated "Subject To" or even "Sub2".

It is also called "getting the deed".

Here is an article that explains this in detail.

Sub2

You basically clean up the issues (back payments, etc.) with the loans, pay the mortgage for a few months while you repair it / fix it up, and then attract a new buyer that buys it and cleans the title once again.

There is a "Due on Sale" clause that can be enacted by the lender, but that rarely (if ever) happens.

That's probably because they don't know about it and a form of loan fraud is occuring.

Due on Sale - Part 1Due on Sale - Part 2

 

[KnowledgeReignsSupreme]

20% is the PMI hurdle. Buy the first property with zero down using an 80% first and 20% HELOC out of the gate. You can then use the cash from your sister as the down payment on the flip.

I'm not understanding this part. How do you get a HELOC on a property you have no equity in?

 

[Sinrman]

I've read some of what's been posted here, and as someone who works for one of the major listing services in Georgia, I can tell you that this is solid advice I see. I don't own any real estate or a home (plan to soon though), but I see it from both sides of the aisle just about every day.

Good stuff, Jeff and Co.

 

[BassNBrew]

Can you sign your house over to someonelse and let them take over the payments? Would there be closing cost as if you were selling the house?

No, most loans have a "due of sale" clause which means the entire balance has to be paid in full before new ownership can be recorded.

Half true, half false.Yes you can sign over a house - this is called "Subject To the Existing Financing", abbreviated "Subject To" or even "Sub2".

It is also called "getting the deed".

Here is an article that explains this in detail.

Sub2

You basically clean up the issues (back payments, etc.) with the loans, pay the mortgage for a few months while you repair it / fix it up, and then attract a new buyer that buys it and cleans the title once again.

There is a "Due on Sale" clause that can be enacted by the lender, but that rarely (if ever) happens.

That's probably because they don't know about it and a form of loan fraud is occuring.

Due on Sale - Part 1Due on Sale - Part 2

Note: This discussion is limited to the legal analysis of "ethics" rather than the moral one, namely whether you think it’s "right or wrong" to try and get around a due on sale without telling the lender. I’ve found that such a discussion is pointless – only you can decide what’s "right" for you.

 

[BassNBrew]

20% is the PMI hurdle. Buy the first property with zero down using an 80% first and 20% HELOC out of the gate. You can then use the cash from your sister as the down payment on the flip.

I'm not understanding this part. How do you get a HELOC on a property you have no equity in?

I'll let proninja explain in more detail, but it's a standard financing option for owner occupied.

 

[Mike Anderson]

I haven't been around much. Sunday is a slower day for me, I'll try and catch up.

 

[Mike Anderson]

For those guys I have commented on about cleaning up a problem. Here are a few stories from just the last couple of days.

Yesterday, middle of the day, running like a chicken with my head cut off. Got a call, sounded OK, didn't really do a prescreen over the phone, I was close to the rental, meet you there in a few minutes kind of call.

I'm standing on the front porch, and an Ice cream truck with the music on pulls up, and two gals hop out. Tons of stupidity here, but to make this short, the one gal tells me that I can't run a background check on her as she won't be on the lease. She's been evicted 4 times in the last two years because she keeps finding herself in abusive Lesbian relationships, and has to move out, but this time will be different because these two gals "Love each other".

I say no way with evictions, and it's like a switch clicks in the minds of these two short fat unattractive lesbians and they start screaming at the top of their lungs every single curse word in existence at me. Screaming, right up in my face. Really, basically shove/corral them out of the house, lock the door, and went to sit in the Van as I wasn't leaving my property until they did. Another 5 minutes of screaming at me while I was sitting there, and they stop, climb back in the Ice cream truck, turn the Ice cream music back on, and sloooooowly drive away.

Stopped by my rental on the same block as the crack house shortly after. as I am standing in the alley, a Crackhead on a bike rides up and asks whose Van is that? Mine. He says I hit his car the other day. Cusses at me some, saying I hit his car at St. Mary's church. We have a TON of churches in this town, beats me if we have a St. Mary's? I just wanted the guy gone, he rides off.

As I am walking around the property to my Van, the people across the street are yelling that the crack head had gotten into the van, and been in it for a bit. I check real quick, and maybe I lost $10.00 of stuff, probably not that much. I lit out after him in the van. I had to juggle some around blocked streets downtown and one ways, but I caught up and got out, just a foot or two away at one point. If I had only reached out and pushed him off that bike. Still kicking myself. At another point, I had to stand on my brakes to keep from running him over. He slid away, and went the wrong way into traffic on one of our busier streets. I had lost him and been searching for 5 minutes before I got a Cop there, even though I was on the phone with the desk the entire time giving updates of his location. That crack head will be back to the crack house, and I am around all the time. I will get him.

Today I am just south of the city doing a ton of eve and sofit repair on a triplex we are turning around. Another crack head (Actually, he was most likely just drunk), stubbles up and starts muttering. The guy might have said 100 words to me, but the only thing I actually made out was "50 cents?" After yesterday, this guy was getting no quarter. I told him to get lost, he tried to shake my hand or some such thing, and I "walked" him to the sidewalk and told him to move along. I walked back to the back yard where we were dropping a tree, and here comes the street urchin again. This time, I pushed him all the way off my property. Every few steps he would try and buck back some, so he was really pushed right to the end of the property.

Then I called the cops, and told him I was doing so. He walks right across the street, and starts talking to the old gal doing yard work at her home. I was over there moving him along as well. I have the cops coming, and I'll be damned if this one is getting away, so I follow at a distance.

He stumbles down an alley, and back out on the street. He goes over to talk to a woman pushing a baby stroller and about falls over into her and the stroller. I move up fast, he stumbles away, and without my asking, she was calling the cops as well.

He stumbles down another half block, and starts to try and walk behind a house to avoid me. HOWEVER, the very house he was trying to get behind was MY rental as well about 2 blocks over from where this started. He was put back into the street, and at this point 3 Cops cars are rolling down the street. I signal them over to him.

I stay close, and honestly after being stolen from yesterday by a street urchin, I was happy to see the scene, they frisked him, the works.

After a long while, the Cop says, "Alright, I'll run you home now", and they drove him off.

RUN YOU HOME?!?!?!? I think my naive thought that he lives at the jail is just wishful thinking......

 

[Mike Anderson]

Can you sign your house over to someonelse and let them take over the payments? Would there be closing cost as if you were selling the house?

No, most loans have a "due of sale" clause which means the entire balance has to be paid in full before new ownership can be recorded.

Half true, half false.Yes you can sign over a house - this is called "Subject To the Existing Financing", abbreviated "Subject To" or even "Sub2".

It is also called "getting the deed".

Here is an article that explains this in detail.

Sub2

You basically clean up the issues (back payments, etc.) with the loans, pay the mortgage for a few months while you repair it / fix it up, and then attract a new buyer that buys it and cleans the title once again.

There is a "Due on Sale" clause that can be enacted by the lender, but that rarely (if ever) happens.

That's probably because they don't know about it and a form of loan fraud is occuring.

Due on Sale - Part 1Due on Sale - Part 2

Note: This discussion is limited to the legal analysis of "ethics" rather than the moral one, namely whether you think it’s "right or wrong" to try and get around a due on sale without telling the lender. I’ve found that such a discussion is pointless – only you can decide what’s "right" for you.

30 years ago, most mortgages were assignable. My father sold a House during the awful interest rates of the Carter admin solely on the fact that he could assign the mortgage, and the buyer had a rate 8-10 points lower than going.It was during this time that lenders put in a Due on sale clause as they were really losing out.

I've had to face it when putting properties that I bought personally into an LLC. When they switch from you to an entirely different entity (Your LLC), they are in the eyes of prevailing law, "Sold", and subject to be called in full.

I was extremely worried about this. Truth be told, people skirt the due on sale clause every single day, and never have any consequences. Never a problem. However, it is out there.

For me, I don't mind understanding the rules, and pushing them, but I have a problem with flat out breaking them. In my case, I was able to get a letter from my lender that they were OK with the switch. Since I was the knucklehead that actually asked, they really wanted me to get out of my low rate 30 year fixed loans, and get commercial loans that are variable, with arms, the works. Something I didn't want.

I stated that if I had to do that, I would pull about 14 loans from them, and take them to a new lender for the conversion. That stopped that.

I have my letter of acceptance, I have some properties in my LLC where the LLC holds the title, and Mike Anderson holds the mortgage. I did have to agree to back the loans personally, as they didn't want a case where Mike Anderson files Bankruptcy, I ditch the mortgages, and keep the properties in the LLC.

All of this is going to be a personal decision on what you can live with.

I did at one time hold a % of equity in a Land Contract property I was buying, but the seller continued to hold the majority of the property until I put a Mortgage on it. There loan was a personal signature loan, and not backed by the property.

 

[Mike Anderson]

Can you sign your house over to someonelse and let them take over the payments? Would there be closing cost as if you were selling the house?

No, most loans have a "due of sale" clause which means the entire balance has to be paid in full before new ownership can be recorded.

I will comes down on the side of Bass here, with the one comment that you can legally do just about anything with FULL disclosure to your lender.

 

[Mike Anderson]

Realistically speaking... assuming that this building is in a good enough area to sustain it... how much would it cost to completely renovate this building with a contractor in a worst case scenario? The company that owns this is paying $1k in taxes just to have an eyesore. Maybe they are getting fined out the ### for it also? My coworker's father works for the city for the inspections & codes department. Maybe he could provide me some useful information?I'm going to drive around that area again when I get a chance to, but my initial impression of that neighborhood is that it isn't a neighborhood. It's basically that and small industrial/commercial businesses in the area. At least it's not in a war zone.They bought it for $60k in 1997, not sure why they think it's worth MORE now. For some reason, I can't get this place off my mind. Scare me away Mike. All I can think of is six units bringing in $400-$500 each...

I did a court records search on our county webpage.They received a notice to demolish or repair on November 23 2005. They had 45 days to demolish or repair the building or be fined. Well... it's been quite a bit longer than 45 days now.The building was found unfit for occupancy and so dilapidated, unsanitary and/or unsafe that it creates a serious hazard to the health and/or safety of the public (I could tell that just by looking at it for 1 minute, I didn't need a hearing. ).According to some city ordinance, since the cost to repair it is more than 50% of the physical value of the building they have to remove or demolish the building... so why haven't they yet?Failure to comply will result in a citation for violations or will cause the structure to be placed on the Council Agenda for demolition...So why are they trying to sell this place again?

They are trying to sell it to make it someone else's problem.The VERY FIRST place you need to go check next is your Neighborhood Code Enforcement/Minimal Housing/Code, whatever they call it there?They should be able to tell you what is going on with it. If you are even contemplating this (And I doubt you should be), you need to know that they will support you. How would you like to buy it, and Code tears it down the next day, billing YOU the owner? Go play really nice with the receptionist over there.Some of my VERY best deals started out while I was flirting with the receptionist at Neighborhood Code Enforcement.It could very well be that the "Tear down houses" fund is tapped out until they write more tickets.

 

[Mike Anderson]

Rents are $250 per month and each is rented. I think $275-$300 is a fair price.

I am in a lower Market as well.Now, please understand that my Wife built this website, it is not from a Professional. That said, it looks pretty good now, where it used to be terrible.

Here is a list of my Available properties, you can see that I deal with Lower rents than much of the country. I do hold out for excellent candidates, and expect my units to stay in great shape.

A 900 sq ft one bedroom here would be $375-$425.

My Available Properties

I went and looked at this property on Thursday. All I can say is that the next time I feel like life isn't going my way, I'll visit this place and count my blessings. 2 of the 3 units were in bad condition and one unit was packed with 6 people...3 being kids. Laundry piled 3 ft deep in the closets, food laying everywhere, and a 6 month old lab leaving fragrance throughout.Really too much liability for my tastes. Potential great return, but who knows about the roof, electrical system, heating system, etc. No feasible way to remodel short of spending big bucks and this neighborhood will never appreciate. 2 bedroom waterfront condos can be rented as low as $750. With two people sharing, that's $375 a month for a modern place in a nice area on the lake. That's the reason for the low market cap on 1 bdrm rents. I don't think I'm ready to jump into the market of high risk tenants at this time.

Mike...great website!

Bass, Given what you said, as long as the property will pass basic inspection: roof, etc, this is exactly the type of place I want to STEAL with money at close.The seller is in trouble. You know it, I know it, everyone in the market knows it.

This guy is in over his head. Would an offer of $50K be worth his while? It just might be. $60K with $10K in allowances. You won't know unless you come to the table. If this is something you want, an off the record conversation is most likely in order.

Figure out what it takes to rehab, fix/clear the "Stacking" problem, Holding costs until you find good College GIRLS, the whole nine yards.

This kind of worthless property owner is exactly the guy I would hit for 10K in my pocket at closing and just STEAL the place from him. He has lost control, and needs out in the worst way.

Check the local records, and if he owns it outright, it is prime for a takeover. If he owes the $82K, run screaming.

Can you explain what you mean by "hit for 10K in my pocket at closing"?

Check your PMs

 

[Mike Anderson]

Actually, I make a limited punch list before I buy the place as I first walk through it. Later, when you are at home with your thoughts, I want to go over the list, and see what I can handle, and what I can't. Also, it helps you get things in logical order. You certainly want to replace the Houses Main water cutoff before you ever have the water turned on just as a matter of precaution (I've been burned on that too many times). Knowing that, you know to put anything that needs water off for a few days.

Why is that?

Odds are the house is empty, and you have to get the water fired up. It hasn't been under pressure for a while.In your basement is going to be the main cut off for the house. The only cut off before that one is the street. After waiting around for hours, the water guy shows up, turns on the water, the main cut off leaks, he cuts the water off, and leaves. You have to repair it, call them back out, and wait around for hours again.

There is no other cut off for you to close and be able to fix this.

Or, you could just upgrade it with a brass baring cut off right out of the gate, and never worry about it until you die. The fitting will outlive you if it is the barring type without washers to fail.

20 minutes up front, or 8 hours of waiting around.

 

[Mike Anderson]

A couple thoughts - Mike's done a very good job answering this question, I'm going to chime in with some financing thoughts as that's what I do.

1. Talk to a local mortgage lender about a rehab loan. The process works something like this: $180k sales price, you put 20% down. You get an appraisal done that is assuming the work on the property is already done, and you get a bid from a licensed contractor. If the work is going to cost $50k, and the property is going to be worth more than $230k when you're finished, the bank is cool with that. You turn all of that into the lender, and they will actually pay the builder for you on set timelines - something that, in your case, I believe would be a very good thing for a couple reasons.

#1 - This gives you a great excuse if the wife starts to add a bunch of stuff and wants to change things - "Honey, we already made this decision, and it's out of our hands now." (Since the guy's your buddy, I'm sure you can work something out if you really need an extra)

#2 - You don't stretch yourself completely thin. Cash is good.

#3 - This requires you to do all of your homework before taking on the project - not only do it, but put it on paper and prove to someone else that it's a project worth taking on - if the bank doesn't want to loan on it, that's good info for you to have right there.

There are two "closings" on a rehab loan, but if you go through a good lender, there is actually only one loan involved. With certain lenders, you don't get to lock in your rate until the project is complete. You don't want that. The first "closing" is when you buy the property and work gets started. You are charged the payment on your original loan monthly, and typically are given the option to either pay interest only on the draws to the contractor as you go, or roll that interest into the final mortgage balance. After the work is done, the loans consolidate into one with a pre-determined interest rate, and you go from there. At that point in time you can decide to put extra money in your property should you choose.

There's so many things going on in here that I've got no idea if I answered any of your questions or not, but feel free to fire away with more.

Wow thanks. You answered a question that's been on my mind for a while that I hadn't gotten around to asking. Good thing I'm reading through this thread start to finish.

Why do this? Leverage is king for me and if I can get 100% financed (80/20) then that leaves 20% in my pocket to use as I see fit. So what if the mortgage amount is a few hundred a month, if I can keep from having to fork out 20%/10% or even 5% I think that's a no brainer.

In this case it is to avoid the unjust PMI tax. The program I use is 10% down with no PMI. Add up a bunch of PMI payments that you will never see back and give you no benefit, and see what it does to your cash flow over time.

 

[Mike Anderson]

20% is the PMI hurdle. Buy the first property with zero down using an 80% first and 20% HELOC out of the gate. You can then use the cash from your sister as the down payment on the flip.

I'm not understanding this part. How do you get a HELOC on a property you have no equity in?

I'll let proninja explain in more detail, but it's a standard financing option for owner occupied.

Someone with much more finance background can take this for you, but it's a standard program. Happens every day.

 

[Mike Anderson]

How did you finance your first investment property? Please give all details.

I have been a loan officer in Seattle for about 5 years. Are you already a home owner? If not you can buy a duplex, tri or even a 4-plex as an owner occupied principal residence, while using rental income to qualify as your income. Not the only way but a great way tot get started.

That is basically how I started. Duplex, Owner Oc, FHA, seller escrowed funds to get past FHA requirements (Paint, brick work, etc). The other side paid the PITI at the time.

 

[KnowledgeReignsSupreme]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

 

[KnowledgeReignsSupreme]

Remind me again, the wife is all over me, and if I can get her to bed, I will post this, if not, top it again later. I have a very good Hard wood deal that is easy.

That explains the baby on the way.

 

[KnowledgeReignsSupreme]

Okay 35 pages of information. I started reading this way back when it was created, but I slacked off.

Finally caught up in this thread. Whew. We need a :wornout: smiley.

 

[KnowledgeReignsSupreme]

Realistically speaking... assuming that this building is in a good enough area to sustain it... how much would it cost to completely renovate this building with a contractor in a worst case scenario? The company that owns this is paying $1k in taxes just to have an eyesore. Maybe they are getting fined out the ### for it also? My coworker's father works for the city for the inspections & codes department. Maybe he could provide me some useful information?

I'm going to drive around that area again when I get a chance to, but my initial impression of that neighborhood is that it isn't a neighborhood. It's basically that and small industrial/commercial businesses in the area. At least it's not in a war zone.

They bought it for $60k in 1997, not sure why they think it's worth MORE now. For some reason, I can't get this place off my mind. Scare me away Mike. All I can think of is six units bringing in $400-$500 each...

Okay drove by the place again just to really get an idea of the neighborhood. It's all businesses. It's next to the railroad tracks, which do get busy near downtown. In one direction, about two blocks down is a huge car dealership. I forget what kind of dealership offhand. About two blocks the other way is the hospital and everything you'd expect to see near a hospital. There is nothing residential within blocks of this place, except for directly across the street, there is a row of like 2-3 shotgun homes that are pretty run down. Not sure if anyone even lives there. Everything else is basically small businesses.

One street over is Veterans Parkway which is basically the carotid artery of the city. It connects the NE part of the city to downtown and ends at the Civic Center.

Of course, the only possible way this would work financially is if:

a) We got the property for a song

b) Got the city behind us so they don't show up and tear the place down

c) Were able to get a good ARV appraisal to use for a construction loan

d) Get tenants in there

Even if it cost upwards of $80,000 total for repair and purchase, 6 units renting out should be able to cover the bills. If the loan can be deferred 3-6 months, it would be a slam dunk on actual out of pocket cost.

I really should stop thinking about this though. Why hasn't someone else done it, right?

 

[Random]

Jeff is going to kick my ### (because I paid cash for my current flip).

On the way to work at the investment property I take a small detour to go through the towns "nice" area. I see a house that looks like it might be vacant, for sale sign in the yard and check it out when I get home. Knowing this is probably a 300k house I'm not too excited but look it up anyway.

Its listed at $224K. So I call. Says I could probably get it for $205K. Realtor says it needs new paint, new carpet and a bathroom redone (says the family raised 12 kids there and the bathroom is pretty beat up. I'm sure thats not all but I'm really thinking about ways to approach this.

We're about 3 weeks from completing our current flip if we really kick ### on it.

Should I:

A) Forget about it, get the first one sold, deals are always out there.

or

B) Mortgage the other house we're working on, take the cash to put down on this one.

eta: I guess I could take out a HELOC on the flip house we're currently working on, no?

 

[KnowledgeReignsSupreme]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

 

[Random]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

Great post. ARV?

 

[KnowledgeReignsSupreme]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

Great post. ARV?

After repair value.

 

[Random]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

Great post. ARV?

After repair value.

I shoulda known that one.

 

[Jeff Pasquino]

I've read some of what's been posted here, and as someone who works for one of the major listing services in Georgia, I can tell you that this is solid advice I see. I don't own any real estate or a home (plan to soon though), but I see it from both sides of the aisle just about every day.Good stuff, Jeff and Co.

Thanks Sinrman.How's the market in GA these days?

 

[Jeff Pasquino]

Can you sign your house over to someonelse and let them take over the payments? Would there be closing cost as if you were selling the house?

No, most loans have a "due of sale" clause which means the entire balance has to be paid in full before new ownership can be recorded.

I will comes down on the side of Bass here, with the one comment that you can legally do just about anything with FULL disclosure to your lender.

For the record, I've never done "Sub2" but it is done all the time.There is also a loophole you can drive a mack truck through, but it isn't exactly straightforward. It involves trusts and assigning the beneficiary of that trust. As I understand it, you move a house to a living trust and then reassign the trust to the new owner.

As someone who hasn't done it, I cannot (nor should I) comment on it. There's plenty of other "gurus" selling their wares to do this.

If you want to attempt this, contact your local real estate club and tell them you need Sub2 help. Someone will help you.

 

[Jeff Pasquino]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

I'm so not an accountant - but mine told me this was the way to go.Something about taxes. .

 

[Jeff Pasquino]

Realistically speaking... assuming that this building is in a good enough area to sustain it... how much would it cost to completely renovate this building with a contractor in a worst case scenario? The company that owns this is paying $1k in taxes just to have an eyesore. Maybe they are getting fined out the ### for it also? My coworker's father works for the city for the inspections & codes department. Maybe he could provide me some useful information?

I'm going to drive around that area again when I get a chance to, but my initial impression of that neighborhood is that it isn't a neighborhood. It's basically that and small industrial/commercial businesses in the area. At least it's not in a war zone.

They bought it for $60k in 1997, not sure why they think it's worth MORE now. For some reason, I can't get this place off my mind. Scare me away Mike. All I can think of is six units bringing in $400-$500 each...

Okay drove by the place again just to really get an idea of the neighborhood. It's all businesses. It's next to the railroad tracks, which do get busy near downtown. In one direction, about two blocks down is a huge car dealership. I forget what kind of dealership offhand. About two blocks the other way is the hospital and everything you'd expect to see near a hospital. There is nothing residential within blocks of this place, except for directly across the street, there is a row of like 2-3 shotgun homes that are pretty run down. Not sure if anyone even lives there. Everything else is basically small businesses.

One street over is Veterans Parkway which is basically the carotid artery of the city. It connects the NE part of the city to downtown and ends at the Civic Center.

Of course, the only possible way this would work financially is if:

a) We got the property for a song

b) Got the city behind us so they don't show up and tear the place down

c) Were able to get a good ARV appraisal to use for a construction loan

d) Get tenants in there

Even if it cost upwards of $80,000 total for repair and purchase, 6 units renting out should be able to cover the bills. If the loan can be deferred 3-6 months, it would be a slam dunk on actual out of pocket cost.

I really should stop thinking about this though. Why hasn't someone else done it, right?

Ok, Time to do what I do - think out of the box.

Check the zoning of the property and see what COULD be there rather than what IS.

Is there a better use of the property?

Seems like there's no good reason to keep this an apt. building if there's another usage.

Step 1 - Call the county / city and ask what the current zoning is on the property.

Step 2 - Ask for the applicable zoning code to see what is permitted for usage in that zoning.

Step 3 - Post here. .

 

[Jeff Pasquino]

Jeff is going to kick my ### (because I paid cash for my current flip).

On the way to work at the investment property I take a small detour to go through the towns "nice" area. I see a house that looks like it might be vacant, for sale sign in the yard and check it out when I get home. Knowing this is probably a 300k house I'm not too excited but look it up anyway.

Its listed at $224K. So I call. Says I could probably get it for $205K. Realtor says it needs new paint, new carpet and a bathroom redone (says the family raised 12 kids there and the bathroom is pretty beat up. I'm sure thats not all but I'm really thinking about ways to approach this.

We're about 3 weeks from completing our current flip if we really kick ### on it.

Should I:

A) Forget about it, get the first one sold, deals are always out there.

or

B) Mortgage the other house we're working on, take the cash to put down on this one.

eta: I guess I could take out a HELOC on the flip house we're currently working on, no?

Not worth the headache IMHO.Even if you got it for $205K, you now have to do about $20K in repairs at a minimum. $225K for $300K sounds good, but if you throw in the obligatory 10% cost of sales on the back end (realtor, closing) and now you're at $225K for a $270K.

This might get tight quickly.

If you can get a look at it and decid that it COULD be worth it, you really REALLY need to do the math on it.

I try not to stray from the 70% of ARV (after repair value) minus costs of ownership until sold. That puts me at buying at about 50-60 cents on the dollar.

 

[Jeff Pasquino]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

Good stuff here. Haven't done the D&B thing - not sure what the benefit is, but maybe someone can tell me.

My main company is over two years old, but haven't pushed the major credit avenues yet. Good thought though.

I'm more on this one.

 

[KnowledgeReignsSupreme]

Good stuff here. Haven't done the D&B thing - not sure what the benefit is, but maybe someone can tell me. My main company is over two years old, but haven't pushed the major credit avenues yet. Good thought though.I'm more on this one.

D&B is to businesses what Equifax/TransUnion/Experian are to consumers. Lots of the businesses you guys deal with, Home Depot or Lowes for example, report b2b credit transactions to D&B. If you get a business credit line with Home Depot, it will be reported to your D&B file. Instead of FICO, it's called your PAYDEX score on a scale of 1-100. With no late pays, it's an 80.

 

[marshall88]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

I'm so not an accountant - but mine told me this was the way to go.Something about taxes. .

LLCs are best for holding property. I would even use LLCs for flips. LLCs offer the same liability protection as S and C corps, but are better because they do not require the corporate formalities (such as annual meetings and filing annual reports). Those formalities may seem trivial, but the failure to do them could result in personal liability to you (which is called "piercing the corporate veil").LLCs and S-Corps are similar with respect to taxes. Both are considered "pass-through entities" by the IRS, meaning that the income from the entity is simply passed through the entity level to the owners and taxed as gross income of the owner. In fact, when forming an S-corp now, you have an election on the formation documents to be taxed as a partnership, instead of a corporation. A C-corp is not a good idea for tax reasons. A C-corp will subject you to a double layer of taxes, since any money paid to shareholders is taxed as a dividend.The one tax advantage an S-Corp has over an LLC is with respect to employer taxes. I'm not sure of all of the details, but I believe that the taxes paid for employing persons under an S-Corp may be less than that of an LLC -- these laws have been changing quickly, however, and I wouldn't be surprised if they have now changed to eliminate this advantage. Ask an accountant.IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.I have been a transactional real estate attorney for 14 years -- mostly commercial retail development. I'm glad I found this thread. I don't usually have much to offer re fantasy football -- so it's nice to have something to contribute.

 

[Random]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

I'm so not an accountant - but mine told me this was the way to go.Something about taxes. .

LLCs are best for holding property. I would even use LLCs for flips. LLCs offer the same liability protection as S and C corps, but are better because they do not require the corporate formalities (such as annual meetings and filing annual reports). Those formalities may seem trivial, but the failure to do them could result in personal liability to you (which is called "piercing the corporate veil").LLCs and S-Corps are similar with respect to taxes. Both are considered "pass-through entities" by the IRS, meaning that the income from the entity is simply passed through the entity level to the owners and taxed as gross income of the owner. In fact, when forming an S-corp now, you have an election on the formation documents to be taxed as a partnership, instead of a corporation. A C-corp is not a good idea for tax reasons. A C-corp will subject you to a double layer of taxes, since any money paid to shareholders is taxed as a dividend.The one tax advantage an S-Corp has over an LLC is with respect to employer taxes. I'm not sure of all of the details, but I believe that the taxes paid for employing persons under an S-Corp may be less than that of an LLC -- these laws have been changing quickly, however, and I wouldn't be surprised if they have now changed to eliminate this advantage. Ask an accountant.IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.I have been a transactional real estate attorney for 14 years -- mostly commercial retail development. I'm glad I found this thread. I don't usually have much to offer re fantasy football -- so it's nice to have something to contribute.

Welcome

 

[Joe T]

Please explain getting pre-approved for a loan to me like I'm an idiot.

Do they run my credit during this pre-approval process?

Also, how many lenders should I check with on current rates, and associated fees before I select a lender. Do I need to be pre-approved by the lender I choose or can I get pre-approved anywhere then switch based on who has the lowest cost?

Will hang up and listen...

 

[KnowledgeReignsSupreme]

Please explain getting pre-approved for a loan to me like I'm an idiot.Do they run my credit during this pre-approval process?

Preapproval isn't a traditional credit pull. They get a sneak peek from the reporting agencies that does not effect your credit in any way and is not seen by your creditors.It's used as a pre-screening to narrow their focus for direct mailing. They see you meet some minimal requirement, then they ask you to apply for their products. Being pre-approved is in no way a guarantee of actual approval.Pre = before, prior toI'll leave the 2nd part to proninja.

 

[KnowledgeReignsSupreme]

IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.

Can you explain this a bit more?

 

[marshall88]

IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.

Can you explain this a bit more?

You first form GLOBAL LLC, which is your holding company. If it is only your business, this is a single-member LLC -- thus no need for an Operating Agreement. If GLOBAL LLC will have more than one member, you will need an Operating Agreement (which is similar to by-laws of a corporation). Operating Agreements set forth the relationship between the members of an LLC -- how they will split profits and losses, who will be in charge of tax matters, how are day-to-day decisions made for the company, how are major decisions made, what are major decisions, how are deadlocks handled, etc.Then, for each property you acquire, you form another LLC - such as 10th & Madison LLC, or whatever name you want. The sole member of 10th & Madison LLC is GLOBAL LLC. As you acquire properties, each one will be owned by a separate LLC, but all of those LLCs will be owned by GLOBAL LLC (which is owned by you).

This structure allows you to easily apply for loans and re-financing, since each of your assets is in a single-purpose entity (meaning the sole purpose of 10th & Madison LLC is to own the property located at 10th & Madison). Lenders now routinely require this single purpose entity status to avoid bankruptcy issues associated with multiple properties being owned by the same entity. This structure also allows you to easily peel off each asset in a sale, since you can either sell the asset (and be left with an LLC which owns nothing), or you could sell all of your membership interest in the LLC to another entity (instead of selling the real property). The latter method will sometimes enable you to work around due-on-sale clauses (but not many of them, since most of them now include change of ownership as an unpermitted transfer).

This structure insulates each of your properties from liabilities arising on another property. If a someone is injured at 10th & Madison, and a court finds that the owner is negligent, the recovery would be limited to the assets owned by 10th & Madison LLC -- which is the owner of that property. Since the only thing 10th & Madison owns is the property at 10th & Madison, then you don't subject all of the other properties you own. If you instead owned each of your properties under LLC, then all of your properties would be subject to the judgment imposed because of damages incurred at one property.

There are several other advantages to this structure, besides financing and exit strategies. This structure also allows you to more easily tinker with the ownership structure of particular properties (e.g. if you want to cut your kid into 10% of a property), or if you want to enter into different management or service agreements with different properties.

The goal, of course, is to NEVER have your personal name on anything to do with your properties. That goal is rarely possible since most lenders will require a personal guaranty -- but other than the personal guaranty (and possibly, an environmental indemnification which most lenders now require on commercial properties), you should not personally sign anything. Everything is signed either by the LLC which owns the property, or by GLOBAL LLC. And you should avoid signing things in the name of GLOBAL LLC, since that entity will own many assets (and you don't want to subject all of those assets to liability resulting from a breach of contract).

 

[Mike Anderson]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

I'm so not an accountant - but mine told me this was the way to go.Something about taxes. .

An LLC can be set up (and should be) as a Pass through. The LLC turns in a return at zero everything, and every bit of anything just passes straight to you whatever it is. Can save a lot of money at tax time. Idealy, a Sole member pass through LLC is what you want.

 

[Mike Anderson]

Realistically speaking... assuming that this building is in a good enough area to sustain it... how much would it cost to completely renovate this building with a contractor in a worst case scenario? The company that owns this is paying $1k in taxes just to have an eyesore. Maybe they are getting fined out the ### for it also? My coworker's father works for the city for the inspections & codes department. Maybe he could provide me some useful information?

I'm going to drive around that area again when I get a chance to, but my initial impression of that neighborhood is that it isn't a neighborhood. It's basically that and small industrial/commercial businesses in the area. At least it's not in a war zone.

They bought it for $60k in 1997, not sure why they think it's worth MORE now. For some reason, I can't get this place off my mind. Scare me away Mike. All I can think of is six units bringing in $400-$500 each...

Okay drove by the place again just to really get an idea of the neighborhood. It's all businesses. It's next to the railroad tracks, which do get busy near downtown. In one direction, about two blocks down is a huge car dealership. I forget what kind of dealership offhand. About two blocks the other way is the hospital and everything you'd expect to see near a hospital. There is nothing residential within blocks of this place, except for directly across the street, there is a row of like 2-3 shotgun homes that are pretty run down. Not sure if anyone even lives there. Everything else is basically small businesses.

One street over is Veterans Parkway which is basically the carotid artery of the city. It connects the NE part of the city to downtown and ends at the Civic Center.

Of course, the only possible way this would work financially is if:

a) We got the property for a song

b) Got the city behind us so they don't show up and tear the place down

c) Were able to get a good ARV appraisal to use for a construction loan

d) Get tenants in there

Even if it cost upwards of $80,000 total for repair and purchase, 6 units renting out should be able to cover the bills. If the loan can be deferred 3-6 months, it would be a slam dunk on actual out of pocket cost.

I really should stop thinking about this though. Why hasn't someone else done it, right?

Ok, Time to do what I do - think out of the box.

Check the zoning of the property and see what COULD be there rather than what IS.

Is there a better use of the property?

Seems like there's no good reason to keep this an apt. building if there's another usage.

Step 1 - Call the county / city and ask what the current zoning is on the property.

Step 2 - Ask for the applicable zoning code to see what is permitted for usage in that zoning.

Step 3 - Post here. .

My mind goes to the same place. Is there a good commercial application? It will be tough to get good tenants in a brown out area.

 

[Mike Anderson]

Jeff is going to kick my ### (because I paid cash for my current flip).

On the way to work at the investment property I take a small detour to go through the towns "nice" area. I see a house that looks like it might be vacant, for sale sign in the yard and check it out when I get home. Knowing this is probably a 300k house I'm not too excited but look it up anyway.

Its listed at $224K. So I call. Says I could probably get it for $205K. Realtor says it needs new paint, new carpet and a bathroom redone (says the family raised 12 kids there and the bathroom is pretty beat up. I'm sure thats not all but I'm really thinking about ways to approach this.

We're about 3 weeks from completing our current flip if we really kick ### on it.

Should I:

A) Forget about it, get the first one sold, deals are always out there.

or

B) Mortgage the other house we're working on, take the cash to put down on this one.

eta: I guess I could take out a HELOC on the flip house we're currently working on, no?

Not worth the headache IMHO.Even if you got it for $205K, you now have to do about $20K in repairs at a minimum. $225K for $300K sounds good, but if you throw in the obligatory 10% cost of sales on the back end (realtor, closing) and now you're at $225K for a $270K.

This might get tight quickly.

If you can get a look at it and decid that it COULD be worth it, you really REALLY need to do the math on it.

I try not to stray from the 70% of ARV (after repair value) minus costs of ownership until sold. That puts me at buying at about 50-60 cents on the dollar.

From a rental possition, your break even point is going to be give or take $2K on any loan that is not interest only or something like that. How much can you rent it for?Not my area, but it seems tight as a flip if you have holding costs.

 

[Mike Anderson]

Just going to throw some random thoughts down for what I've gotten out of this thread. I've learned a LOT of terminology and abbreviations, and that's great in and of itself.

Three types of business models:

A) Buy and hold. You are a landlord.

C-corp as the "main" seasoned company and LLCs for one or groups of rental properties OR

One LLC or multi LLCs (depending on costs) for one or groups of rental properties OR

Buy in your own name with a big umbrella policy. Mold/lead insurance is extra.
1% ruleQuestions:

What about doing a || b combined with c? The goal is to get a company that is approved for it's own credit without a personal guarantee. The benefits are if the business fails, you aren't on the hook personally for lots of money and a FUBAR FICO score. Drawbacks would be increased costs.

Are any of you guys setting up your biz to have a duns and bradstreet credit file?

Would buying a shelf corporation take care of the seasoning issue?

B) Buy and re-sell quickly (flipper or rehabber)

C or S-Corp (why?)
Total costs are 70% of ARV.

15% profit, 10% closing costs, 5% #### hits the fan cushion.
Find a portfolio lender who understands investment property.


C) Short term holder

Setup initially as a landlord as an LLC.
Sell the entire LLC after 1 or 2 years.

Questions:

How do due on sale clauses effect people who are into B) or C)?

I'll add more as I think of it.

Good stuff here. Haven't done the D&B thing - not sure what the benefit is, but maybe someone can tell me.

My main company is over two years old, but haven't pushed the major credit avenues yet. Good thought though.

I'm more on this one.

Your D&B score is actually easy to build a good score, but tougher to get a large amount lended to it. Any of the big box stores will give you a small amount (a few grand or so) of credit on a fresh never tested score, getting those limits up is the tougher part. I found that Banks wait for the 3 year mark, and then will start lending to you.

 

[Jeff Pasquino]

LLCs are usually best for holding property.S- and C-corps for renovations / quicker turns (I hate the term "flip" - still negative connotation to it).

Can you give me a general rundown on why?Standard "I am not a tax accountant/lawyer" disclaimer applies.

I'm so not an accountant - but mine told me this was the way to go.Something about taxes. .

LLCs are best for holding property. I would even use LLCs for flips. LLCs offer the same liability protection as S and C corps, but are better because they do not require the corporate formalities (such as annual meetings and filing annual reports). Those formalities may seem trivial, but the failure to do them could result in personal liability to you (which is called "piercing the corporate veil").LLCs and S-Corps are similar with respect to taxes. Both are considered "pass-through entities" by the IRS, meaning that the income from the entity is simply passed through the entity level to the owners and taxed as gross income of the owner. In fact, when forming an S-corp now, you have an election on the formation documents to be taxed as a partnership, instead of a corporation. A C-corp is not a good idea for tax reasons. A C-corp will subject you to a double layer of taxes, since any money paid to shareholders is taxed as a dividend.The one tax advantage an S-Corp has over an LLC is with respect to employer taxes. I'm not sure of all of the details, but I believe that the taxes paid for employing persons under an S-Corp may be less than that of an LLC -- these laws have been changing quickly, however, and I wouldn't be surprised if they have now changed to eliminate this advantage. Ask an accountant.IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.I have been a transactional real estate attorney for 14 years -- mostly commercial retail development. I'm glad I found this thread. I don't usually have much to offer re fantasy football -- so it's nice to have something to contribute.

Fantastic - welcome aboard.What part of the country are you from?

 

[marshall88]

What part of the country are you from?

Phoenix.

 

[KnowledgeReignsSupreme]

IMO, the best structure to hold real property is to have each property in a separate LLC, with the sole member of each such LLC to be a single holding company LLC, of which you (and any partners you have) are members. That way, you limit liabilty related to each property and also create an owning entity which enables the easy sale of the property.

Can you explain this a bit more?

You first form GLOBAL LLC, which is your holding company. If it is only your business, this is a single-member LLC -- thus no need for an Operating Agreement. If GLOBAL LLC will have more than one member, you will need an Operating Agreement (which is similar to by-laws of a corporation). Operating Agreements set forth the relationship between the members of an LLC -- how they will split profits and losses, who will be in charge of tax matters, how are day-to-day decisions made for the company, how are major decisions made, what are major decisions, how are deadlocks handled, etc.Then, for each property you acquire, you form another LLC - such as 10th & Madison LLC, or whatever name you want. The sole member of 10th & Madison LLC is GLOBAL LLC. As you acquire properties, each one will be owned by a separate LLC, but all of those LLCs will be owned by GLOBAL LLC (which is owned by you).

This structure allows you to easily apply for loans and re-financing, since each of your assets is in a single-purpose entity (meaning the sole purpose of 10th & Madison LLC is to own the property located at 10th & Madison). Lenders now routinely require this single purpose entity status to avoid bankruptcy issues associated with multiple properties being owned by the same entity. This structure also allows you to easily peel off each asset in a sale, since you can either sell the asset (and be left with an LLC which owns nothing), or you could sell all of your membership interest in the LLC to another entity (instead of selling the real property). The latter method will sometimes enable you to work around due-on-sale clauses (but not many of them, since most of them now include change of ownership as an unpermitted transfer).

This structure insulates each of your properties from liabilities arising on another property. If a someone is injured at 10th & Madison, and a court finds that the owner is negligent, the recovery would be limited to the assets owned by 10th & Madison LLC -- which is the owner of that property. Since the only thing 10th & Madison owns is the property at 10th & Madison, then you don't subject all of the other properties you own. If you instead owned each of your properties under LLC, then all of your properties would be subject to the judgment imposed because of damages incurred at one property.

There are several other advantages to this structure, besides financing and exit strategies. This structure also allows you to more easily tinker with the ownership structure of particular properties (e.g. if you want to cut your kid into 10% of a property), or if you want to enter into different management or service agreements with different properties.

The goal, of course, is to NEVER have your personal name on anything to do with your properties. That goal is rarely possible since most lenders will require a personal guaranty -- but other than the personal guaranty (and possibly, an environmental indemnification which most lenders now require on commercial properties), you should not personally sign anything. Everything is signed either by the LLC which owns the property, or by GLOBAL LLC. And you should avoid signing things in the name of GLOBAL LLC, since that entity will own many assets (and you don't want to subject all of those assets to liability resulting from a breach of contract).

They should be teaching this stuff in HS.

So you literally sign a contract or check as "10th & Madison LLC"?

 

[marshall88]

So you literally sign a contract or check as "10th & Madison LLC"?

Yes. Your actual signature block would be:10th & Madison LLCBy: GLOBAL LLCIts: MemberBy: your name, its MemberIf you form an entity to hold title to your property (or if you have an entity for your business) you MUST follow that rule on every document you sign -- even if you have to hand write it in on a preprinted form. If you don't do that, you run the risk of someone using that fact against you if they ever try and sue you personally for the liabilities of the company (i.e. piercing the corporate veil - which applies equally to LLCs).Briefly, piercing the corporate veil is the term used in law to attach personal liability to the shareholders of a corporation (or members of an LLC) for the liabilities of the corporation (or LLC). The argument by the plaintiff is that they were really dealing directly with the shareholder as an individual, and not dealing with the corporation. They support the argument in many ways -- one of which is showing that the shareholder never signed documents in the name of the corporation, but instead just signed documents with their own name (i.e. not as President of the corporation). While that alone may not be enough to pierce the corporate veil, when combined with other factors (such as whether the entity had enough funding for its anticipated business venture, whether corporate formalities were followed, etc.) it could lead to a shareholder becoming personally liable when they thought they had the liability protection of a corporation -- and that really sucks for them.

 

[cosjobs]

Realistically speaking... assuming that this building is in a good enough area to sustain it... how much would it cost to completely renovate this building with a contractor in a worst case scenario? The company that owns this is paying $1k in taxes just to have an eyesore. Maybe they are getting fined out the ### for it also? My coworker's father works for the city for the inspections & codes department. Maybe he could provide me some useful information?

I'm going to drive around that area again when I get a chance to, but my initial impression of that neighborhood is that it isn't a neighborhood. It's basically that and small industrial/commercial businesses in the area. At least it's not in a war zone.

They bought it for $60k in 1997, not sure why they think it's worth MORE now. For some reason, I can't get this place off my mind. Scare me away Mike. All I can think of is six units bringing in $400-$500 each...

Okay drove by the place again just to really get an idea of the neighborhood. It's all businesses. It's next to the railroad tracks, which do get busy near downtown. In one direction, about two blocks down is a huge car dealership. I forget what kind of dealership offhand. About two blocks the other way is the hospital and everything you'd expect to see near a hospital. There is nothing residential within blocks of this place, except for directly across the street, there is a row of like 2-3 shotgun homes that are pretty run down. Not sure if anyone even lives there. Everything else is basically small businesses.

One street over is Veterans Parkway which is basically the carotid artery of the city. It connects the NE part of the city to downtown and ends at the Civic Center.

Of course, the only possible way this would work financially is if:

a) We got the property for a song

b) Got the city behind us so they don't show up and tear the place down

c) Were able to get a good ARV appraisal to use for a construction loan

d) Get tenants in there

Even if it cost upwards of $80,000 total for repair and purchase, 6 units renting out should be able to cover the bills. If the loan can be deferred 3-6 months, it would be a slam dunk on actual out of pocket cost.

I really should stop thinking about this though. Why hasn't someone else done it, right?

Ok, Time to do what I do - think out of the box.

Check the zoning of the property and see what COULD be there rather than what IS.

Is there a better use of the property?

Seems like there's no good reason to keep this an apt. building if there's another usage.

Step 1 - Call the county / city and ask what the current zoning is on the property.

Step 2 - Ask for the applicable zoning code to see what is permitted for usage in that zoning.

Step 3 - Post here. .

My mind goes to the same place. Is there a good commercial application? It will be tough to get good tenants in a brown out area.

If you are a short walk to the hospital, I'd sure consider re-doing the apartments and either gear them mid-upper end for the professional staff at the hospital or mid-lower for the hourly staff. You have built-in residents with little/no area competition...

 

[KnowledgeReignsSupreme]

We drove by a few houses that were for sale today. Just getting in the habit of paying attention, even if it's not a "go" yet.

There's this one house that we always drive by that my GF said she always liked and wanted to live in. It was sold last year for $89.5k and it's a corner lot. Overall I'd say the neighborhood is pretty nice. Definitely more nicer areas than bad, and the neighborhood is probably on it's way up. Anyway, right across the street at the other corner lot, a house is for sale. Looks like it hasn't been lived in for a while. Tall grass, and could probably use some new paint and windows. That type of deal. I checked the property tax records and it's owned by the mortgage company. I'd assume that got foreclosed on at some point?

 

[rpreswood]

Jeff, Mike, and anyone else that wants to chime in,

What are your experiences in buying foreclosures at courthouse auction? I know there can be alot of risk doing this so I wanted to hear what your opinion is.

How difficult can it be to obtain a clear title on the property?

Can any other liens be placed on the property after auction and prior to close?

Is the winning bid amount all that you have to pay for the property? What other costs are there?

Do you guys prefer this method or letting the bank deal with the title issues then try to aquire the property from them?

Thanks for all the advice so far.

 

[Jeff Pasquino]

So you literally sign a contract or check as "10th & Madison LLC"?

Yes. Your actual signature block would be:10th & Madison LLCBy: GLOBAL LLCIts: MemberBy: your name, its MemberIf you form an entity to hold title to your property (or if you have an entity for your business) you MUST follow that rule on every document you sign -- even if you have to hand write it in on a preprinted form. If you don't do that, you run the risk of someone using that fact against you if they ever try and sue you personally for the liabilities of the company (i.e. piercing the corporate veil - which applies equally to LLCs).Briefly, piercing the corporate veil is the term used in law to attach personal liability to the shareholders of a corporation (or members of an LLC) for the liabilities of the corporation (or LLC). The argument by the plaintiff is that they were really dealing directly with the shareholder as an individual, and not dealing with the corporation. They support the argument in many ways -- one of which is showing that the shareholder never signed documents in the name of the corporation, but instead just signed documents with their own name (i.e. not as President of the corporation). While that alone may not be enough to pierce the corporate veil, when combined with other factors (such as whether the entity had enough funding for its anticipated business venture, whether corporate formalities were followed, etc.) it could lead to a shareholder becoming personally liable when they thought they had the liability protection of a corporation -- and that really sucks for them.

Insert childish "member" joke here.