Scott Carson elaborates on why it’s important not to simply assume that the home needs to be rehabbed and that there are other options available that keep the borrower in the home.
Scott Carson explains a few of your options that keep the borrower in the home and upkeep maintained while receiving payments on the property.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Scott: Hey, everybody. Scott Carson here and I am the guest host of the REI Classroom today. I’m excited to talk about the subject of rehabbing the borrower and not rehabbing the property.
Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com
Scott: A lot of real estate investors that are looking for cash flow have the idea that they’re going to buy a property, fix it up and turn it into a rental. Which, by all means, sounds pretty good. Not to me. There’s nothing wrong with that if that’s all you know. But there is this huge opportunity, especially in the note game, if you’re buying debt to become the bank instead of the landlord. Now, I’m not a big fan of dealing with toilets and tenants. That’s why I say when I’m buying notes and becoming the bank, no toilets, no tenants, no problems.
Now with rehabbing the buyer, especially with buying distressed debt, we like to target owner-occupied or occupied assets. The reason for that is basically three things. First and foremost, if it’s occupied, it gives us the most amount of profitable strategies without having to out-labor repair costs or attorney fees to take the property back. Our biggest goal is when we’re buying an occupied asset is that if it is owner-occupied, to go in and work with the homeowner to keep them in the property.
We can quote some political stuff and say we’re making America great one mortgage at a time, everybody. Trying to literally help people that have had a financial hiccup happen to them in the last five, six, seven, eight years. It happens. It happens to good people out there. So that’s what we like about the debt game is there are still a ton of distressed assets out there, people that are living in a house, wanting to stay that need just a little bit of help, where they still maybe owe more on a property than it’s actually worth.
But they’re willing to make a decent payment that makes good sense to you, the investor, as far as a phenomenal ROI, return on investment without you having to outlay foreclosure costs or repair costs to keep the property. And then put somebody in who’s not going to take the pride of ownership that you would or that original borrower would.
Let’s face it. A lot of people are going out, chasing distressed properties, vacant properties because they want to take the property back. I don’t want that because when you have vacant properties, you have two things happen almost 90% of the time. One, the AC walks off. It just disappears somehow. I don’t know how that happens. Now you’re dropping another $3- to $5000 in for an air conditioner. Or, two, the copper goblins show up. They strip the property of copper, electrical and your property is trashed. Or, you get kids coming in and just demolishing the property. You don’t want those things in vacant properties.
Now, some people love the smell of shit and makes them smell of money. Sorry about that. That’s money to some people. To me, that’s not. I would rather have a borrower in place who wants to keep up with the property, will take care of the work, pay the insurance and be living in a property and paying me something close to, if not more than, what market rents would be without me having to outlay any money for repairs or foreclosure costs.
Think about this. Let’s run a scenario real fast for you. A $100,000 property, you guys were to pay for it and it was an REO, you’d probably pay something around $70,000, $65,000 if it needs repair, you’ve got to put some repairs into it. And then you’re probably going to mark it up for rent somewhere around $800 a month. That may be a 30-, 60-, 90-day process for you. Great. Congratulations.
For me, that same asset that’s worth $100,000, you’re going to pay $50,000 for it and be able to modify the borrower’s payment for maybe $1200, $1300 down to maybe $1000 because that’s close to what rent would be. And now, I have somebody who’s owning the property, making the payments. I don’t have to do any repairs, there’s zero vacancy, zero repair costs, zero turnover because I keep them in the property.
And then, in 12 months, I can sell that note off as a re-performing loan at close to value. So that’s one of the big reasons why I love rehabbing the borrower versus rehabbing the property. No headaches, no tenants, no problems.
Mike: HomeVestors, the “We Buy Ugly House” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro or looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.
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