Buying Notes with David Greene
There is only one man on the podcast today that has a beard, and no, it’s not the hermes replica purses
guitar playing, surfing, 7 foot tall one. David Greene is “seeing Greene” in this episode and gives new and experienced investors advice and answers on their questions. We go through a range of subjects from real estate notes, quitting a W2, scaling, and whether or not to start a property management business.
With David’s experience as a W2 police officer, agent, broker, investor, and lender, he can give all kinds of great answers related to real estate. So whether you’re a newbie trying to get your first deal done or an experienced landlord closing on a new house every week, there is probably some question David answers that can help you out!
All of these questions have been asked by BiggerPockets listeners either via video or from Facebook. If you weren’t able to get a question answered by David this time, you can submit a question at this link.
What going on everybody? I will be your host of today show, David Green. You guys have asked questions, and I got answers. Normally, you guys are used to seeing me sitting next to a seven foot bearded giant. But today, the beard is away and I here to play. We going to be doing this show solo with just me and you and your questions regarding real estate.
You listening to BiggerPockets Radio, simplifying real estate for investors, large and small. If you here looking to learn about real estate investing, without all the hype, you in the right place.
All right. Have you wondered more about how you going to succeed in today market? Maybe you have questions about strategies that you can use in specific scenarios that don always apply to the podcast. We are going to be seeing green where I get my perspective and give my advice on just what people should do in different scenarios when it comes to building wealth through real estate. Before we get to today episode, let hear from me on today quick tip.
As long as it about real estate and wealth building, we want to hear from you. Without further ado, let get to the show. We going to be hearing from BiggerPockets members asking their questions, and I going to do my best to answer them. Let go to the Facebook forums and see what questions we got first. Today first question comes from [Ret M. 00:01:35] Ret asks, an assignment from a wholesaler, what do I need to know? They have their own attorneys and title company doing all the work. Should I have an attorney look over the contract on my side?
All right, this is a good question because more and more people are actually buying deals from wholesalers right now. You should expect to see more of this the hotter the market gets. When there plenty of deals on the MLS, obviously people would rather go to the MLS in order to find properties. They get to use an agent, they don have to worry about as much of the due diligence being done on their own without guidance. But as wholesaling is becoming more and more popular, these type of questions come up a lot more. There two ways that I seen wholesale deals go bad, and those are the two things that you want to focus on.
The first one is that you don have a fiduciary representing you in this transaction because there no realtor involved, which means the due diligence is all on you. I bought a wholesale deal before where I was told it was 1,400 square feet. The property ended up being 1,100 square feet. I took the wholesalers word for it and I didn do my own due diligence. Now, the problem is it appraised for exactly the price per square foot that I thought. My BRRRR would have went perfect, but because there was 300 square feet, I actually didn have any equity in the deal, and I ended up paying market value for that 1,100 square foot house thinking it was 1,400 square feet.
What am I getting at? Make sure that you doing the due diligence and you getting a home inspection on a property that coming from a wholesaler. Now, a lot of wholesalers want you to pay cash for a property. You can pay cash and still get an inspection contingency. You need to talk to the wholesaler and see, has inspections been done on this property, and what is my timeline to back out after I doing inspections? Now, they probably won call it an inspection contingency because you not getting the same type of a purchase agreement that you get with a realtor.
The question you need to ask the wholesaler is, A, if I have to put a deposit down, how long do I have to get that deposit back? Or B, If I move forward with this house, can I just not put a deposit down so I can get some inspections done, and if it doesn look good, I get out? Now this is why we don recommend people buying properties from wholesalers that are not experienced real estate investors because most wholesalers are going to tell you, the property is as is. Your problem is you don know what as is is, you don know what kind of condition it in. A good wholesaler will have already got an inspection on their property.
If I was wholesaling, that what I would do it. I would have inspections already done and give them to you. You would then call the home inspector and go over that with them. You ask the questions you have, and then you could talk to a contractor and figure out, well, exactly how much is it going to cost to get these repairs made? The other side of the question here was that they have their own attorneys and title company doing the work. Should I have my attorney look over the contract on my side? Well, I can give you legal advice, and it probably never a bad idea to have an attorney look over the contract. But it really depends on how complicated the contract is.
The wholesale deals that I bought were one page. There was not really anything for attorney to review. It was pretty cut and dry. In those circumstances, if you understand what at stake there, you don have to have an attorney look over the deal. But I also bought these properties without a deposit. There was an understanding that we would have a 30 day escrow and I would pay cash for the property at the end of the day. In situations like that, it pretty cut and dry. Now, the second way that I see people getting into trouble with wholesaling is when the property doesn appraise for what they thought it would.
When you normally have an appraisal contingency in your deal, if you paid way too much for that property, your appraisal is going to come in low and you going to be able to back out of the deal and get your deposit back. This is when you buying houses traditionally off of the MLS. When you buying from a wholesaler, you sort of flying blind here. It your own gut and maybe an appraiser or an agent that you talk to. The problem is appraisals themselves are more of an art than a science. You never can really nail down exactly what a property is going to appraise for, and that is a big risk that you take when you buy from a wholesaler.
I would say be very, very careful that you feel very confident that this property is going to appraise for what you believe it will after you buy it. Now, many times this is a value add play. That often the case, is you buying a property that is in bad shape, needs to be repaired. You looking at an after repair value, not just the appraised value of what it worth in its current condition. In fact, sometimes you can pay what it is worth in its current condition, but the value add is so big that the deal makes sense to you because you adding more value than what your rehab cost actually was.
My final piece of advice that I leave you with is if this is your first property, I would probably caution you against going with a wholesaler in the first place. I didn buy anything from a wholesaler until I had bought several deals from an agent. I do buy properties from wholesalers now, but I still prefer going the MLS route. If you feel really experienced, if you have plenty of money in reserves, if you make a bad decision and you can weather that storm and come back again, then sure, go after it. But this is your first property or you don have a lot of wiggle room, I would probably have second thoughts about buying directly from a wholesaler.
All right, Ret. Thank you for that question. I love that one. Okay, next question comes from Mantis R., and they ask, do I place properties under newly acquired LLC? LLC stands for a limited liability corporation. In a sense, when you place a property under an LLC, you not holding title in your own name. You are holding title in the name of the business entity. In terms of how the law would understand this, the business owns the property, not you yourself. Now, if you own the business, that how you control the property, and this is really the reason that most people purchase properties in the name of an LLC. When you own the property yourself, if for some reason you get sued, common understanding would be they can come after you and they can take your personal assets.
If the judgment is $500,000 against you, and the property is only worth 200,000, well, they could go after you for the other 300,000 of this hypothetical judgment. People have the understanding that if it an LLC, well, they can only go after what in the LLC. Now again, I not a lawyer, but I will tell you, I seen cases where judges did what is called pierce the veil of an LLC. The judge looked at the circumstances and found the property owner to be negligent, found in favor of the person who is making the complaint, and they said, not just going to take what in the LLC. We going to go after the landlord personal property.
Now, this doesn happen all the time, and I don want to scare anybody because in most cases, if you don do anything grossly negligent, you not going to be found guilty of a lawsuit like this. In fact, I know hardly any landlords that have ever actually successfully been sued. But what I want to say is don assume that just because you put your property in the name of an LLC that that means you covered. It is by far not It is far from a foolproof way of holding title to avoid the lawsuit. That the first thing I want to share. The next thing I want to share is that sometimes when you hold property in the name of an LLC, getting financing is very difficult.
You see, the lender wants to lend money to you as a person because if you don pay, they can get money back from you. You on the hook for that. It called a recourse loan. They don want to make a loan to a company that only has one asset in its entire sheet, which is this exact property. It also much easier to do things like use bankruptcy to avoid having to pay back your debts when you borrow from a bank in the name of an LLC. They don like that, and a lot of the best loans that we look for these Fannie Mae Freddie Mac programs won lend to an LLC at all. When you talking about how do I place properties in my LLC, that relatively straightforward.
You just have the title company take property in the name of the LLC. Here the money that in the company name that you putting into escrow. At the end of the year, you declare in your taxes that this company, this LLC, is one that actually owns this property. Putting properties in LLC is not difficult at all. A title company can do that for you very easily. What makes it tricky is when there a loan on the property itself, okay?
My advice to you, just personally speaking, is that you don put properties in the LLC unless there a compelling reason to do so because you going to make it much more difficult for yourself to be able to get financing for it. This is speaking to mostly new people. When you buy it in your own name, that doesn mean you don have protection. Your homeowners insurance policy will almost always have a certain amount to protect you in case you sued by a tenant for something and you settle, or if the judgment is found against you for a certain number. What I recommend is that you look over your homeowner insurance policy and see how much you covered for, and if you really worried about this, pump up your coverage on your insurance as opposed to thinking that the LLC will protect you.
Your insurance can protect you, and you still get the better financing that most people don want to let go of. Now, I do own property in my own name, and Ia own property in the name of LLC. It all depends on the type of loan I got. When I getting commercial loans, I put the name of the property in an LLC, because commercial lenders really just care about the cash flow of the property in almost every single case. As long as the business that owns the property is cash flowing and making money, which it will be if the property that in the LLC is cash flowing, I can get commercial loans in the name of an LLC, and I fine. When I buying residential property, it usually better to put it in my own name.
When you putting it in your own name, the lender going to look at your personal credit score, your personal debt to income ratio, and that what they going to make their lending decision based on what is David ability to repay, as opposed to what is this LLC that David owns ability to repay? Just to sum that up, when they want to look at what David can repay, they going to look at my taxes, and they going to say, how much did David make? How much debt does David have? How much money does he have leftover at the end of the month to be able to make this payment? What other properties is David on the hook for that he has to pay for?
When there a commercial lender looking at me, they going to say, is the property or what is the company that owns the property cashflow? What is that business making, and are we going to lend to that? They not even going to ask about my personal credit score or my personal debt to income ratio. All right. I hope that answers your question there, Mantis R. That is asked by a lot of people, and I appreciate you bringing that one up. Next question comes from Michael N. contingencies do you often elect when placing an offer for land purchases? I submitting my first offer to purchase land and trying to learn the key differences between property and land contracts.
Okay, Michael. Disclaimer, I don actually purchase raw land. I always purchased things that were already improved, meaning that they already had property on it. But I have represented clients that wanted to purchase land, and I know other people that do purchase land. A few things that you didn ask that I think the listeners need to know that we going to cover first. First off, when you buying land, usually you can get a loan, and you definitely aren going to get a 30 year fixed rate loan like you do when you buy a property. A lot of people assume I can go buy raw land with a 30 year fixed rate loan.
The land only 100 grand, my mortgage payment would be really small, let go buy the land and then I build a house on it. Not the case. You almost always have to pay cash for land, or you have to get a very special loan from a bank where there a commitment to improve that land, and here the reason why. If a bank gives you a loan on land that has an improvement like a property on it, if you default on that loan, they can go sell that parcel with a house on it fairly easily. Now, they may not get all their money back, but they can still unload that asset and recover their capital, and it really reduces their risk and how much time they have to spend to do it.
If you default on land, what are they going to do with it? How do they know how to go sell land? Now the bank is in the responsibility of having to find a person that wants to buy raw land, which there not a lot of people looking to do that, develop that land and sell it to a home builder, or develop that land, build a home on it theirself and then finally sell it. Now, banks are not in the interest of doing that. They not in the business of doing that kind of work. They don really want to give loans on raw land, nearly as much as they want to give it on land that has been improved.