Interior and Decoration

Ashley:
This is Real Estate Rookie episode 242.

Tony:
So when you think about a foreclosure, it means that someone is now underwater on their property, right? That they owe more than what they could sell that property for, and that’s when the bank has to come in and foreclosing the property. So are we going to see a bunch of foreclosures in the near future? I wouldn’t think so, just because of how much equity and the appreciation we’ve seen over the last couple of years. So even if someone isn’t necessarily able to maybe afford those payments anymore because they lost their job or whatever it is, there is probably enough equity for them to go to the market and sell it.

Ashley:
My name is Ashley Kehr and I am here with my cohost, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we give you the inspiration, information and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out Joe Kashan on Apple Podcasts who left a five star review saying, “This podcast has been so inspiring to me. Ashley and Tony have created such an excellent real estate investing learning platform. Keep up the great work. I really appreciate you two. Real Estate Rookie, absolutely a must have. Highly recommend.”
So if you guys haven’t yet, please leave us an honest rating and review on Apple Podcasts or Spotify, or whatever platform it is you’re listening to. The more reviews we get, the more folks we can help. And that’s always our goal here at the Real Estate Rookie. Ashley, I can’t believe we’re at 242.

Ashley:
I know.

Tony:
It’s like unreal, right? There’s almost 300 episodes with Real Estate Rookie podcast.

Ashley:
Yeah, it is crazy. And you know what? I think when we get to 500, we need to do something really cool to kind of celebrate that milestone.

Tony:
Why wait for 500? I was thinking 300. 300’s a big deal.

Ashley:
Every hundred.

Tony:
Yeah, every hundred we got to do something big. So Eric, Daniel, if you guys are listening, our producers, we need to plan some kind of extravaganza for episode 300. So let’s start thinking about what guests… Actually, if you guys are listening, why don’t you drop us a note, leave us either in the reviews for the podcast, leave a review and let us know who you want. Or in the Real Estate Rookie Facebook group or on the BiggerPockets forum. Let us know who should we bring on maybe some special guests for episode 300.

Ashley:
Yeah. So Tony, what’s going on with you? Anything new?

Tony:
It’s actually raining for once in Southern California. It’s like the first big rain of the year so everyone’s inside not really doing anything. I went to the gym last night. Usually Monday nights at the gym are like it’s nightclub in there. And it was almost dead empty because no one wanted to leave during the rain. Like Californians do not know how to drive during that first rain so everyone tries to stay at home. But outside of that, everything’s going good. We got a few properties we’re setting up right now. We have a cabin in Tennessee that we bought… Not that we bought, that we put under contract about two years ago that’s finally closing hopefully this month.

Ashley:
Is that one of the new builds?

Tony:
It’s a new build that got delayed and delayed and delayed. But I’m excited for this one. It’s got an in-ground pool on the bottom level, which will be our first property with the pool. So we’re really excited to see this one kind of hit the finish line finally.

Ashley:
When do you close on it?

Tony:
TBD. Hopefully before the month is over. I think they’re still waiting on the certificate of occupancy or something like that before they can give us a firm close date, but hopefully before the month is up. And then we’ll take a quick trip out there to kind of get it set up for the holidays.

Ashley:
That was really what I wanted to know so that I can meet you down there.

Tony:
Come on down.

Ashley:
And you never answered that. And the reason for asking you that question is because after our podcast recordings today, I am actually taking the boys and we’re going down to Florida. And it actually came to my attention, I’ve been so busy and I haven’t even cared to look, but I looked last night at the weather and there’s actually a tropical storm warning that could actually turn into a hurricane, going to hit where we’re going. And so just in case my whole vacation is full of rain and I don’t get to enjoy it, I will be booking my travel to Tennessee to enjoy your new in-ground pool.

Tony:
My new in-ground pool. Fair enough. I’m here for it. I’m here for it. I was giving you a hard time before you started recording. I feel like every time you travel somewhere you run into bad weather. It’s like wherever Ashley Kehr goes, the bad weather just follows.

Ashley:
And honestly, it’s not even bad weather. I just get delayed or canceled. I can’t even tell you how many times I’ve had to stay in random airports because my flight is canceled.

Tony:
Whatever hotel, yeah. I feel for you. I feel for you.

Ashley:
And all my friends, it seems like all my real estate friends at least, they all live on the west coast. There’s a couple on the east coast, but it’s like I constantly have to travel so far. And just to get there it takes forever, and so if there is one little delay, it just messes up everything. Like, “Oh, there’s no more flights to the west coast. You can’t take whatever because we stopped at this time at the airport.”

Tony:
Good times.

Ashley:
Yeah. Yeah, so we’ll see how this travel goes. As far as I know, I’ve not gotten a notification that anything is delayed or canceled, but unfortunately with the kids’ school we don’t have a direct flight. We have a layover for the flight, so we had to wait until after they were done with school to leave. So we’ll see. I could not even make it to Florida. I don’t even know where my layover is, but maybe I’ll be there. If it’s nice weather, maybe I’ll just stay there.

Tony:
Maybe just stay there, yeah.

Ashley:
Yeah. But okay, well we got an exciting Rookie Reply for you guys today. We have four questions that are pulled from the Real Estate Rookie Facebook group. So if you guys have not joined that, highly recommend to connect, network, ask questions, and also answer questions. You guys are going to be surprised at how much knowledge you guys have just from listening to the guests on this podcast or reading books, listening to other podcasts and going through questions in the Facebook group. I’ve noticed in the BiggerPockets forums and the Facebook group, everybody, questions are answered like this. It is hard to be the first person to respond to a question.

Tony:
People must have notifications on or something. Every time I go in that group and I see a question I might want to answer, there’s already 20 great answers. So it’s like-

Ashley:
It’s amazing. I love it, yeah. So you guys check it out if you haven’t already.
So our first question today is from Rose Island. “I’m looking at finally jumping into investing. My questions are, is commercial real estate going to drop residential real estate when all the foreclosures hit the market? I’m looking at a few small apartment complexes or fourplexes. Or is flipping a better option with all the foreclosures coming?”
This is actually a great question and I think even experience investors are asking themselves the same question. So I highly recommend everyone, if you have not yet subscribed to On The Market Podcast, this is where you’re going to get even more in depth information about what’s happening in the market, where is real estate going, what’s going to be happening. So make sure you check out on the market podcast by BiggerPockets. So with this question, let’s take the first part of it. “Is commercial real estate going to drop residential real estate when all the foreclosures hit the market?” So already we are seeing in multiple markets how real estate is already dropping and there’s not a ton of foreclosures yet that are actually showing up in my area. What about yours, Tony?

Tony:
No. No, it’s same for me.

Ashley:
Yeah. And I think commercial real estate, I really am not sure if it’s going to be residential. I think there was a lot of competition for… If you’re talking large, there was a lot of people becoming syndicators overnight and going after these large commercial apartment buildings because the money was cheap, a lot of people wanted to invest. It was easier than other times to raise money. So I’m honestly not sure about that.
I think as far as retail and plazas, that’s where I really don’t have a lot of experience on and know where that’s going to go. I do look at how a lot of business owners that maybe own their properties got PPP loans and got those grants and that could have helped them pump money into their business and into the real estate. And now that those are gone, what’s going to happen when people got accustomed to maybe running their business off of that extra income that was coming in from the PPP loans? So it’ll be interesting if people have adapted to not getting all of these grants and stimulus money and PPP loans and if they’re still able to budget themselves going forward, especially if we’re going into a recession and will these commercial properties go up for closures too.
So I think looking at that. And then also, are there people that just bought these markets for way more than what they actually were worth just because they wanted to get into real estate investing and the market was so hot that for them to get into it or to get another deal they did have to go and buy at a higher price? And if it is decreasing, then maybe you could see some commercial real estate going to foreclosure because they’re just not renting for what they thought it was. And even with the apartment complexes here, I am seeing that we increased rents over the last two years and it was great, but now I have a one bedroom for rent that we increased over a hundred dollars. Over the last two years it went up and now it’s kind of sitting and I’m looking like, “Okay, do we even need to pull back now? Stop raising for sure, but do we need to decrease the rent too?”

Tony:
Yeah, it’s an interesting question, Rose.I think I just want to point out that just because the economy is in a recession, heading towards a recession, depends on who you ask it, it doesn’t necessarily mean that a bunch of foreclosures are going to start happening.
Now again, Ash and I both invests mostly on the single family residential side, so the commercial side is a little bit different. But at least on the single family side, and this kind of ties into some of those small apartment complexes, those fourplexes and triplexes and things like that, but what we saw leading up to where we’re at in the economy right now was a record high amount of equity in properties. The amount of equity that homeowners had today is almost the highest that it’s ever been. I think the highest, right?
So when you think about a foreclosure, it means that someone is now underwater on their property, right? That they owe more than what they could sell that property for and that’s when the bank has to come in and foreclosing the property. So are we going to see a bunch of foreclosures in the near future? I wouldn’t think so just because of how much equity and the appreciation we’ve seen over the last couple of years. So even if someone isn’t necessarily able to maybe afford those payments anymore because they lost their job or whatever it is, there’s probably enough equity for them to go to the market and sell it.
So yeah, I’m just not sure if we’re going to see all those foreclosures. But your question is, and maybe this is the bigger question of [inaudible 00:11:07], like is now a good time to buy those properties? I think Rose that if the deal makes sense with today’s interest rates and the deal makes sense with where rents are and all those other facts you go when you analyze a deal, then you should move forward with buying, right? Because let’s look at the interest rate thing for example, right? Say rates are at 6, 7% today and you buy today at 6 or 7%, the deal cash flows. Imagine if two years from now rates go to 8%. You’ll probably be pretty happy that you bought at 6 or 7, right? And on the flip side, if rates go down, say rates go back to 4 or 5%, well now you have this project that was cash flow at 6 or 7, you’re able to refi back down to 4 or 5, you’re making even more money.
So I think either way, if a deal cash flows in today’s environment, it’s probably something for you to buy and be happy with.

Ashley:
Tony, I’m actually going to give a different perspective on the foreclosures. I think that there actually will be a lot of them. And so first, I won’t look at the investor side of it, especially flippers who maybe bought on the spring, they’re rehabbing and it’s not selling for what they need to make off of it. So I think there’s actually going to be a lot of hard money lenders that are going to be getting houses back because the flips aren’t selling or people aren’t being able to refinance out of their long-term when they do a BRRRR. So I do think that there will be foreclosures on that side of things with investors where they bought at the height of the market, they spent all their money doing the rehab and now it’s time to sell the property and their hard money loan is due.
So I was actually talking to another investor who’s his main lead source right now is talking to hard money lenders and saying, “Hey, when you get houses back, let me know. I’m a cash ready buyer and I’ll buy them and take them off your hands.” I think another part of it too is people who bought houses at for their primary residence. They bought at the height of the market and now they have to move for some reason. So maybe they’re in the military and they’ve been relocated. Or if we are going into a recession, if they lose their job and they have to relocate to somebody somewhere else, but they only put 3.5%t down on their property.
Well in Boise, Idaho for example, in the past year, it’s already decreased 15% home values since the start of the year. So anybody that did 3.5% in the beginning of the year, they’re already underwater on their property. They’ve lost that 3.5% equity that they had in it. So that’s where I will see for closers happening, is when people have gotten into these houses, everyone could afford bigger houses. With bigger houses comes higher utility bills, more maintenance, more upkeep. And just coming into having all of these expenses that not everyone accounts for when purchasing a primary residence. You look at, “Wow, I can afford that mortgage payment.” That’s great, but what about all of the additional expenses that come with a property like that that you may not realize?
So I think those two things too is people who need to move to sell their property and they’re underwater because they only put a little bit down, maybe they haven’t lived there for a while. And then there’s also the people that have went and refinanced their property. Maybe they pulled out more equity to build a shop or a garage or things like that. And then maybe they decide they have to move. So I think it’s people who need to move and have pulled out a lot of equity of their house or have recently bought in the last two years. Those will be the people that will be in trouble. Either they need to come up with the cash or the properties foreclosed on or they sub2, they have somebody else buy their property but take over their mortgage payments to kind of cover it. So that’s where I see the possibility of a lot of foreclosures on the investor side.
And then also people who got their properties under contract or they bought with hard money and then they are refinancing and they have that higher interest rate than what they expected. So now their payment is probably almost double, not quite double yet, but almost double of what it would’ve been if they could have gotten their interest rate back in the spring and not planning for that or not knowing that it would be that high of a spike and now all of a sudden you’re having to afford a $2,800 mortgage payment instead of a $1,500 mortgage payment or whatever that ratio is right now. So that’s where I think people could end up getting into trouble.

Tony:
Yeah, I agree.

Ashley:
And too, think about in COVID how long the foreclosure moratorium is. In New York State, it’s still getting caught up on foreclosures from when you couldn’t do foreclosures for so long during COVID too.

Tony:
Yeah, those are all super, super valid points, but I think if we look at the entire market from coast to coast, the number of folks that’ll fall into that foreclosure pocket is probably smaller than the average person. So I definitely think there’ll be a dose of that. But also for Rose, it’s like if she’s just waiting on this massive influx of foreclosures, I don’t know if that’ll happen, but there will probably in most markets be some kind of opportunity where someone got caught with their pants down that she should be looking for. So all good options. But there’s actually one other question that she has here that we didn’t really touch on. She says, “Is flipping a better option with all of the foreclosures coming?” What are your thoughts on that, Ash?

Ashley:
I don’t think so. I don’t think that right now is a great time to flip. I’ve actually seen two of my friends announce that they’re not flipping anymore. They’re pivoting, they’re transitioning out of flipping. But then I talked to another investor, Ryan Dossey, who said that he’s doing middle grade, low end flips and he’s had nothing set. He’s not doing anything luxury right now. He said everything is moving.
I’m not a house flipper, but I did flip one house and in the past year. It sat for a long time and just went under contract. We actually had to take it off the market, build a garage onto it and then it sold right away. So with flipping, if you are going to flip, you’re going to have to know your numbers. Where flippers are getting into trouble now is that just like everything has changed so rapidly where their numbers didn’t account for that change. And so I think if you just be super conservative on your numbers and understanding that comps from six months ago probably aren’t going to work as to what your ARV is right now.

Tony:
Totally. Yeah. It’s tricky right now. We flip your in SoCal like our turnkey short term rentals. Even those has been difficult to comp some of those out. We actually had two that were under contract at a certain price but they didn’t appraise for what that purchase price was. So yeah, there’s been some challenges I think in this market. But to your point, I think just being a little bit more conservative with your ARVs is what’s going to help you Rose if you do decide to go down that path. I think that’s all I got for Rose. Anything else from you on this one, Ash?

Ashley:
No, let’s head on to Leo’s question. So we have Leo Loser and his question is, “Hello everyone, I’m going to buy a house from someone and am wondering, should I write up the contract first or go to the bank? We won’t have any problem getting the loan. Who normally pays closing costs? Buyer or seller? Or do they split? Last time I wrote up a contract, I used legaltemplates.net and it worked well, but it’ll cost me 40 bucks to make another on there. Do you all have a better option for writing contracts? Thanks everybody.”
First of all, the first thing that stands out to me is I would have a real estate agent that is using a real estate contract from your local, what is it even called? It’s-

Tony:
Like your title?

Ashley:
… brokers of New York, or whatever.

Tony:
Oh, yeah, yeah, yeah.

Ashley:
That actually draws up the contracts where the real estate agent fills in the blank, so whatever your state generic contract is that real estate agents have access to or going to your attorney. So my attorney draws up my contracts. And having a contract that is correct is well worth more than $40 to have that done up. You can even ask your attorney to give you a template of a correct contract. Going to legaltemplates.net, I’ve never used them. I hope if you are purchasing one from there, it’s very state specific to you because there’s definitely lots of different rules and regulations depending on what state you’re buying in. So I would recommend having an attorney do it or going… So Tony, you can maybe talk more about, because in New York state we have to use an attorney anyway so it makes sense for me to have an attorney. But when you go through a title company, what do you do for your off market deals if you don’t have a wholesaler bringing the contract?

Tony:
Yeah, so I would go to my title company first. We would do this quite a bit with a lot of our off market flips that we sell. We just send our title company, the buyer’s name, the details of the transaction and they draft up the purchase agreement for us. And then they kind of manage everything for us from that point. So if you don’t have an agent, I think finding a good escrow and title company is the best way to go to manage those contracts because a lot of times they have that information readily available and they can plug and play for you. So yeah, once you and that seller agree to a price, Leo, I would go find a local titler or escrow company, give them the details and have them write up the contract. And then from there you can get your funding.
And then the other question he had here was, “Who normally pays closing costs? Is the buyer or seller? Or do they split those?” So the truth of the matter is you can set it up however you want to if it’s an off market transaction and there’s no realtors involved. Typically, it’s going to be the seller that’s paying a lot of those closing costs. If there’s agents, they’re the ones paying the agent and all those other things. As a buyer, you’re usually just paying your costs for your loan, right? So a lot of the buyer’s closing costs or loan related, but the sellers are usually carrying I think a heavier burden when it comes to the closing costs.
But if it’s off market, you guys can set up however you want to, right? If you want to say that you’ll take all the closing costs to help get the deal done, you can do that. If you want to push it all onto the seller to make it easier for you, you can do that, or yeah, split it down the middle. So there is no right or wrong answer. It’s whatever the two you guys can agree to.

Ashley:
Yeah. And I would say typically what it is, is that you each pay your own closing costs. So typically if you’re going to the bank and getting a mortgage, you are paying the costs of the bank to do the mortgage. And then the seller is paying to have the survey done, they’re paying their attorney. If you need attorney, you’re paying your attorney. The title work could be split out or one person is paying that. Usually, the seller is the one that is paying for the title work to be done to present it to the buyer. But yeah, all of that can be negotiated. We’ve actually had quite a few people on the podcast talk about getting seller credits lately where they’re putting that towards closing costs. And it kind of seems like it’s a common thing now as the market is transitioning more into a buyer’s market than a seller’s market too.
So yeah, I think the big takeaway from this is that, as much free stuff or low cost stuff there is on the internet, that may not actually be of value to you and it can save you so much money and headaches in the long run to actually not trying to go the cheap route especially with contracts, lease agreements, anything like that where there is a transaction involved or money involved in it. I think it’s great to learn about real estate for free on the internet, but I think when it comes to actually legal documentation, it is well worth it to have a professional help you put that together.
Think about it. If you’re going and purchasing a $250,000 house, that $250 to pay an attorney or what, it’s probably not even going to cost that much to drop the contract, is well worth you spending that if something happens down the road, if there’s a problem with the contract or the seller comes back to you saying, “Oh you know what? We’re pulling out of the contract because you didn’t even put this in it. So we get to keep your earnest money deposit and too bad whatever.”
And so I think it’s well worth paying for a professional. And it’s just the same even Tony with a tax advisor, paying an accountant instead of trying to do it yourself because you’re going to save money in the long run. Yes, okay, maybe it’s going to cost you $500 up front to have your CPA file your tax return, but then they know things and they’ll do things on your tax return that you may be missing because you’re not spending every day learning and becoming knowledgeable about what the tax law is and you’re not constantly creating a tax return. So they’ll end up probably saving you more money than what you’re actually paying them.

Tony:
Yeah, I’d say a good real estate contract is almost like insurance, right? You pay for insurance every month or every year, and the hope is that you never actually need to use it. I’d say a good contract is very much at the same, right? A good contract really comes into play when there’s some kind of disagreement or issues with the transaction, right? I shared on another episode we did that, I purchased a house from a wholesaler that in between the time that I sent my EMD and when we actually went to go view the property, the roof collapsed inside. But there was a clause inside of that contract that any material changed in the condition of the property, it meant that I was able to counsel that contractor or get my EMD back and I leveraged that to renegotiate. So you always want to make sure that you’re kind of CYA and that your contract gives you the protection you need in case things go south. So think of it like an insurance to your real estate deal almost.

Ashley:
Last night in my Real Estate Rookie bootcamp class, we actually talked about contingencies and contracts and in today’s market what are some things that you should be putting into contracts because the last several years we went so long with, “Well, if you want to buy a house, you can’t do an inspection. You can’t have a contingency.” There’s so many things thrown out the window. And now we’re going back to how to protect yourself purchasing property, especially with so many unknowns happening. One of the things we talked about was putting into your contract an interest rate threshold so that if your interest rate on your financing, whether it’s hard money, it’s the conventional loan, whatever that loan is, if your interest rate on that mortgage is going to be higher than X amount, so say 7%, that is the contingency for you to back out of the deal.
Another one is like have that feasibility, do your inspections now. The time has come to make sure that you’re not getting into something that is going to end up costing you more and being a bad deal, especially as margins are getting very slim as the property values are going down. We don’t know how far they’re actually going to go down so you want to have a very tight rehab budget. And you want to make sure that you are not missing anything when you’re going through and doing these inspections up front and putting that contingency in place. Tony, are you doing any sort of contingencies in the offers you’re doing right now?

Tony:
Nothing outside of what we normally do. I’d say most of what we’ve purchased over the last two months has been from folks we already have relationships with, either builders or wholesalers. So we know them. We’ve been working together for a couple years now. And we actually haven’t submitted anything that’s been on market for a while. So when we do though, I do plan to beat the sellers up a little bit more than I have been able to the last couple of years.

Ashley:
Yeah. Okay. Let’s move on to our next question from Mallory Smith. “When you’re analyzing a deal, how do you know what the property will be worth after it’s been fixed up for a BRRRR?” So this is getting harder and harder and we kind of touched on this a little bit with the other question, is to pulling comparables to find the ARV. So the ARV is the after repair value. So this is what the property would be worth after it is all fixed up. So in a BRRRRs, you buy the property, you rehab the property and then you refinance. So in the refinance period, the bank is going to do an appraisal on the property and the appraiser is going to tell you what the property is worth after you’ve purchased it and after you have rehabed it. So the appraiser is ultimately going to come up with your ARV in this scenario.
So if you are doing a flip, your ARV is going to be based upon what people are willing to pay when you sell that property. So with the appraisal, the bank will then finance you X amount, some percentage based on what the appraisal comes back as. So for a BRRRR, it is based off of basically the appraiser’s judgment and opinion.
Doing an appraisal is more of an art than a science. So if you can, get your hands on an actual appraisal, okay? So that you can see how an appraiser calculates what they’re doing and how their mind is working, what they are looking at. And you’ll see they’ll have three to five properties listed out that they are considering comparables that are similar to your property. And then they kind of go through and say, “Okay, well this property has more land so I’m going to decrease $10,000 from the value of your house compared to that house because you don’t have that much land.” So they go through all these different things, the bedroom count, the bathroom count, the finishes of the property, the size of the property, the square footage. Does it have a garage? A carport? Is there a shed? What other features of the property are there? And that’s how they’re going to determine.
So what your job to do as the investor is to look at different properties in your area that have recently sold. So that’s another important aspect of it, that have recently sold. And you’re going to kind of go through and you’re going to do the same thing and compare, “What does this property have that mine doesn’t or vice versa?” and kind of give your property a value based off of that. But the cautionary tale is that properties that have sold recently, they may not be worse. So that’s where you got to look at how much has your market decreased, how much has the value decreased on homes in your area since those properties were sold. And then kind of take that number down by that percentage.

Tony:
That’s a great definition, Ash, and I don’t have much to add. The only thing I’d say is that you oftentimes… Not oftentimes. You can always challenge an appraisal as well, right? We’ve had some success with this, we’ve had some failures with this, but like Ashley said, an appraisal is part art, part science. You can have two different appraisers go to the exact same property and come up with two different opinions of value. So if you ever feel that maybe there is a better comp that the appraiser didn’t use, you have the ability to show that data to that appraiser and say, “Hey, I think you might have missed a mark on this one.” Sometimes it’s going to work in your favor, sometimes it’s not.
But to Ashley’s point, I think the better job you can do of finding properties that have… And recently it’s changing right now as well. I feel like before the window that appraisers ruling to look back was a little bit further, but since the market has been shifting kind of quickly and a lot of places across the country, they’re kind of tightening that window to where they want to see. So that’s sold in last 30 days if possible, whereas before maybe they were going up to 60 or even 90 days in some of the comps or some of the appraisals that I got back.
The other thing to think about, and this is where when you’re looking or you’re building your own set, it gets a little tricky, is how far is far enough, right? I’ve seen some appraisal reports come back where they valued distance over similarities. And what I mean by that is there’s a better comp but maybe it’s two miles away. And instead they chose a less similar comp that was a quarter mile away. And then you have to go back with them and kind of negotiate to say, like, “I think this one’s a little bit further out, but we gutted this house from top to bottom. The comp you chose, it looks like it’s 1980s on the inside.” So you got to try and strike that balance. I think that’s where it goes back to what you said Ashley about looking at other appraisals in that market.
So Mallory, if you know other investors in that city, ask them, like, “Hey, can I see some of your appraisal reports?” and see how far out are they going. Is it a quarter mile, a half mile, three quarters of a mile, two miles? It all depends on that city and what the flavor is in that market.

Ashley:
Tony, I actually had an appraisal done on my A-frame cabin that we completely gutted and remodeled top to bottom. So this was Sunday morning. I hadn’t really thought about this, but it was the first time I’ve actually been present for an appraisal in quite a long time. Usually, I send someone else to meet them. I was so nervous, I was sweating to death. I had two of the kids with me and I’m like, “Okay, you guys, don’t talk. You don’t do anything.” And of course one of them is like, “I have to go to the bathroom.” I’m like, “Nope, you hold it in. We are not stinking up this cabin before the [inaudible 00:34:36] here.”
There’s actually an outhouse on the property. I was like, “Go out and use the outhouse.” They’re like, “Really? I can?” Excited about it. I’m like, “No, it’s disgusting in there. No you can’t. You hold it. There’s no talking. Sit nicely. If she ask you a question that’s not related to the property, you may speak to her. If she asks you something about the property, don’t say anything.” And I was just like, “Oh my god, this is so funny.” I talk about appraisals, I talk about how to prepare for them. And it’s just been so long since I’ve actually met someone that I was like, I lost my cool, I got so nervous. And so the appraiser came in and she’s just walking around. It’s so small and tiny in there, so you’re literally next to her the whole time. My palms were all sweaty. I was like, “Oh, what is she writing on her clipboard?”
So we’re still waiting to get that appraisal back, but it’s in the middle of nowhere. Honestly, the house right across the street, I actually tried to buy that after I got mine under contract and somebody got it. My offer wasn’t high enough, so I know that will be used as a comp, but it was, I mean horrible condition, really bad. But it still will be a comp I know because there’s really nothing else in the area and they’re going to have to go pretty far out. I mean you can’t even get internet at this place. We’re looking into getting a hotspot or something from Verizon. But it’s just that appraisal process, it’s always so different. I have met appraisers before that want me to go through, they ask me tons of questions like, “What did you actually upgrade?” things like that. And this appraiser, the only thing that she asked us was how the stove worked.
So we actually did an induction stove top that’s built into the countertop and it’s electric. It only works if it has special induction pots or pans and they’re almost magnetic. So that if somebody pushes the buttons, it won’t turn on. So kind of a safety feature almost. And it’ll only heat up if the pan is actually setting on top of it. So we went through the whole thing, kind of showed her how that worked and stuff. But there was new things that I realized about an appraisal and that was one of them. She was actually factoring in if there was a stove top in there or not, and that was one thing that mattered to her. She did ask to see the hot water tank and look at that.
And then also one thing was we have a loft in there. So we have a main full bedroom and then there’s also a loft, which we have a ladder too, and then there’s a bed up there. She had actually told Daryl on the phone before she even came that the loft will not count as a bedroom because there is not a stairwell with railings that lead up to the loft area, which is something we didn’t know about. We weren’t aware.
So I think if you have the opportunity to be there with an appraiser and learn these different things, because we’re doing another property right now too that has two lofts in it and we’re thinking, “Okay. How can we do a staircase in even one of them to make it count as a bedroom?” Because those two lofts actually have closets in them too. So it’s just always interesting the things you kind of learn about and see and just how doing one little thing different, like instead of putting a stairwell, putting a ladder now loses a bedroom count. And I mean it’s not like we really had a choice. There’s really no way to put a staircase in that side of the A-frame.

Tony:
Ashley, how far out do your appraisers go when they’re looking for comps? Because like you said, a lot of your properties are kind of a more rural setting. So is it five miles, is it 20? How far out do you see them typically?

Ashley:
Yeah, for this one at least, when I’ve gone on and looked, I mean it’s going to be at least 10 to 15 miles that they’re going to have to go out for anything that’s sold at least in the last six months to find a comparable for.

Tony:
And that’s the thing that varies by the market, right? Because if you’re in a suburban subdivision where every house that’s on an-eighth of an acre, they’re probably not going to go out more than a quarter mile because they can get so many properties and that small kind of sample size. But for us in Joshua Tree, we see the majority of our comps are somewhere between two and three miles away, right? And what you just said, 10 to 15 miles away. So I think what you want to look at Mallory is the density of properties in any given radius. So if you can get a good number of properties within a quarter mile, use a quarter mile, and then just kind of solely creep out from there.

Ashley:
Yeah. Even the flip house that I did in Bothell Washington, there weren’t a ton of comps right in there and we had to look at too. And that’s why it’s great to know somebody who knows that market if you don’t look at it with you because they mean like, “No, if you get on the other side of that freeway, even though that’s closer than this other neighborhood to the east, that is totally different type area, that’s C class and you’re in an A class. You want to use this neighborhood to the east as a comparable and things like that to definitely look at, to know your market that way too. Especially if your appraisal doesn’t come back how you want it, you can kind of look at those things too to dispute the appraisal if you have to.

Tony:
All right. You ready for the last question?

Ashley:
Yeah.

Tony:
All right, so I’ll read this one off. This one comes from, and I apologize in advance if I don’t say this right way, but Mouna Sow, but Mouna’s spelled M-O-U-N-A. So it sounds like Mouna. But Mouna’s question is, “What are the strategies to getting funding for rehab for property that you already own?” And Mouna’s doing a complete rehab. “I’m thinking that I rehab as I save, but that’ll happen slowly over the next five years, which takes too long. So what are my other options?”
This is a great question, Mouna, and it’s interesting that you already owned the property and you’re trying to figure out the funding from there. But there’s a couple of things that I can think of, right? You said you’re doing a complete rehab, but everyone’s kind of got that’s a subjective thing, right? When you say complete rehab, I don’t know if you’re taking it down to the studs or if you’re just redoing the kitchen and the bathrooms or what that is. But a lot of times if the rehab is relatively small, you can use zero interest credit cards and you get 12 to 18 months to fund your rehab. And if you’re selling this property, you sell it, you can pay it off. Or if you’re refining to do a BRRRR, you can do it that way. So zero interest credit cards are an easy way to go.
If you have people in your network that maybe have some capital that isn’t really working right now, maybe they’ve been sitting a savings account or a money market account, those are great people to reach out to and say, “Hey, I know you got 20 grand in the bank you’ve just been sitting on. What if I paid you 10% interest on that for the next year while I rehab this house and I’ll pay it back to you when I sell or when I refi?”
Every rehab that we’ve done, it’s been with private money just reaching out to folks that are in our network that we know. So just right off the bat, Mouna, I think those are two really kind of low hanging fruit ways, either low interest credit cards or friends and family that have some excess capital.

Ashley:
Yeah. The only thing to kind of add to that is private money lenders or taking on a partner, somebody who maybe now wants equity in your property and you give them a percentage of equity and in return they are going to fund the rehab. And then after you’re done with the property, are you going to flip it? Are you going to keep it as a rental? Refinance it? So I think that’s another part of the question that we would need to know is if you’re going to go and refinance the property, are you going to take that money back or are you just intending to rehab the property and not pull any money back out? Because that would be a key piece to it.
If you are going to take money from somebody else, you need to figure out a way to pay them back if you are going to refinance the property. Or if you’re going to flip the property, you want to sell it after you’ve done the rehab, then figuring out some kind of structure where you can go ahead and cut that person into the profit or a payment plan to pay them back once the flip has been done and maybe just a set interest rate that they’re just strictly a money lender and no equity in the deal.
So I think those are a couple options to try to explore. There are definitely a lot of people who would invest with you on the deal because you did the hardest part, you found the deal.

Tony:
Found the deal.

Ashley:
And that’s what so many people struggle with, is analyzing and looking and taking action. And you did all of that to actually get the deal. So you have the deal, and that is gold. That is an attraction right there. You are bringing huge value to whatever partnership you decide to have with somebody. So congratulations on that.
Well, thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson, and we’ll be back on Wednesday with a guest. We’ll see you guys then.