Facts and Opinions relating to real estate investing and rehab. for beginning real estate investors.
By Philip Elmes
Urban Rehabber Program
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Download: 39 Dirty Little Secrets for Investors.pdf
1. Brokers don’t mention that proceeds or profits from “flipping” real estate are subject to ordinary income tax (not capital gains).
2. About Contractors: They are not out to skin you; more likely they simply don’t understand their own pricing strategies.
3. When you buy a vacant property, often you are not told to secure the property (or you risk a Fast Track citation).
4. In the event you are written up or “cited” for Fast Track demolition for a property recently purchased, you are not likely to receive “timely notice” (because you are not yet of record as the new owner...). [Chicago]
5. If your building is taken down (demolished) by the City, or any government body, you still owe the Mortgage. There is no insurance to cover you in the event your loss is the result of a lawful court action.
6. When buying “on contract”, you have very limited rights in the event of default.
7. Falling out with your contractor? The validity of their claim is almost irrelevant compared with the nuisance consequences to you when selling or refinancing; absent a waiver, he/she will have a claim that stands ahead of you and/or your lender until resolved.
8. Regardless of what an electrician may tell you-- Unless you’re doing a “gut rehab” there is no obligation to “bring your property to Code”. (He’s referring to the ‘new construction’ code which in most cases does not apply to rehab.)
9. Regardless what realtors tell you, there’s no legal obligation to pay a 6% commission. The commission can be any amount, according to negotiation (3% - 10% - whatever is agreed).
10. In the event of an offer to buy, absent a written Listing Agreement, the broker is protected by the language of the form contract ( the “commission clause” ); i.e., there is no need or legal obligation for you to sign a listing agreement with that broker as a condition of accepting an offer, even when tendered by them. Inexperienced real estate agents are often unaware of this.
11. Existing or outstanding code violations or taxes do not have to be satisfied or paid in order to sell/buy. (It’s the Lender and the Title Company that care...). Subject to specific instructions by buyer, seller and lender, title companies will simply “exclude” such items from their insurance coverage.
12. Incorporation will not protect you from liability. There are many situations where courts will allow the “piercing” of the “corporate shield”, passing liability through to owners of the corporation.
13. When contractors claim they are “fully insured” more likely they are talking about Liability insurance only, not workman’s comp. (where you are really at risk!).
14. It’s not true you always need a licensed contractor – esp. a General Contractor– when working on a house where you reside. ( Exceptions include: electrical and certain plumbing work where you may still need a permit.)
15. When buying for investment/rehab, the claim that “everybody” identifies themselves as First Time Home Buyers (or “owner-occupants”) when borrowing in order to purchase one or multiple properties is, in fact, bank fraud.
16. When selling, and told the buyer/investor insists on cash back outside closing (to achieve no $ down), you are being asked to participate in bank fraud.
17. Buying directly at auction is not the easy way to buy cheap/discounted properties: The auction is highly competitive and, more often than not, you have not seen interiors and other critical building elements...
18. It is not easy to buy real estate by “buying the taxes”. It may an opportunity to acquire the properties in time, should the owner fail to pay, but success is dependent on satisfying tight, technical obligations...
19. The claim is made that the best way to buy real estate with “no $$ down” is Seller Financing and that is true, but this is not a viable business model in its own right. (Takes lots of legwork, persuasion, and generally too hard to find.)
20. It now is required that those who routinely buy/fix/sell secure a General Contractor’s license. (Chicago)
21. When it comes to property security, house sitters or dogs may not be the best alternatives. (While not perfect, the best solution is likely steel cladding, e.g., VPS.)
22. Most contractors expect–or try to insist on–1/3 $ down. Doesn’t mean you should give it... There are many reasons this is not a good idea.
23. “Wet areas are always protected by ‘green board’.” NOT TRUE! Green gypsum board is a poor choice in truly vulnerable wet areas. Use cement-based “concrete” board products, which are truly impervious to water.
24. Don’t fall for claims that no special permits are required for porch repairs. [Chicago]
25. All contractors expect to be paid in cash. In fact this may be a dangerous practice... There are better, safer alternatives.
26. In spite of their claims, few contractors you encounter will in fact be qualified General Contractors (G.C.); they’re just reaching, and don’t understand the true obligations and function of the qualified G.C.
27. Some say hiring a GC is the easiest//best way to succeed as a small scale developer... (Not always true.)
28. Appraisers are not necessarily to be relied upon for accurate Estimates of Value. Too many settle for easy valuations, may be unfamiliar with the neighborhood and/or overlook or disregard values realized in non-brokered deals...
29. Contrary to popular opinion, land trusts are a not good way to protect against liability. Land trusts offer anonymity and other benefits, but not asset protection.
30. Driving an upscale SUV or auto. is a good way to impress you contractors... (Better to fly under the radar...)
31. Your broker (real estate or mortgage) is seldom a good source for contractor referrals.
32. Avoiding permits, delaying dealing with violations, etc., is not a good policy nor “what everybody does”.
33. You cannot rely on, or predict outcomes of Sect. 8 inspections; they’re often arbitrary, reflecting the inspector’s agenda rather than a clear set of guidelines.
34. To advertise yourself as a real estate ‘Flipper’ is to be identified with questionable business practices and occasionally illegal activities. (Better and more accurate to identify yourself as a Dealer or Rehabber.)
35. Hiring locals a good practice? In fact exposes you to unnecessary risk...
36. Don’t avoid neighbors: They can enhance your security and may help with marketing.
37. True or False? “Having a realtor sell your house is your best marketing strategy.” --You’ll often do better on your own...
38. Seldom will an MLS listing be critical in selling your house.
39. Brick is not necessarily better than frame: Homebuyers will be attracted when you are selling; but Investors care more about rental income (which is not sensitive to brick/frame). Frames are less costly to buy yet generate the same rents, often resulting in better return on investment (ROI).