Always Pay Attention to Your Inspector

You can see the three pieces of undersized rebar that supported the foundation in the two-story duplex.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-11-25.

We bought the Villa Park property almost two years ago because there was a nice house and a duplex behind it for a total of three rental units. It was one of the last properties Sue Ann and I bought before forming Hermit Haus with Carol and Russell.

At first blush, it was going to cash flow really nicely. The previous owner had done a bunch of cosmetic work to make the property more presentable. Curb appeal was absolutely gorgeous.

I hired my friend, Bob Smith, to do the home inspection. I’ve worked with Bob on several other houses, and I’ve even walked away from deals based on his recommendation. This time I didn’t listen, and it bit me in the butt.

There was a seemingly innocuous line about the duplex in the inspection report. It said something like, “Have a foundation professional inspect the foundation.” I thought, “Yeah, I know the foundation is bad. No problem will just have it leveled.”

Well, the first time it rained we had water coming up through the foundation into the duplex. Luckily we hadn’t rented it yet because we wanted to level it first. When we ripped up the carpet, we found that the foundation was not just unlevel; it was crumbling. That lead to our first experience with the Wall of Dis. I mean trying to get permits in Austin.

But this post is about the foundation.

To dismantle and repour the foundation, we had to lift the building off of it. When we started demolition, we found out that none of the electrical work in the duplex was to code. We found bare wires spliced with electrical tape inside the walls and numerous other problems that could have caused a fire at any time.

Thank God we had a bad foundation.

With the second round of permits in hand—the first having been “erroneously issued”—we begin demolishing the original foundation. It turns out there were only three pieces of rebar in the entire slab. (Rebar is the thin metal poles that run through concrete to give it its strength.) No wonder our foundation crumbled. There was nothing to hold it together.

We’re finally back on track. The trenches are dug, and we will pour the beams that will support the main slab. Once that’s done we can reattach the building to the foundation.

The moral of the story remains, “Always listen to what your inspector tells you.” If I had brought in the foundation company before closing on the house, I could’ve saved around $150,000 in rebuilding the duplex. I might have at least been able to negotiate the purchase price down a little. Maybe not, there were three backup offers on the property.

When we’re done we will have a three-bedroom home instead of a duplex behind the main house at Villa Park. It will take about 10 years of rental income to recoup the expense.

I’ve learned an expensive lesson. But it’s one I’m glad to share with you.

Technology at Work

This image from Google Maps is literally the only picture we had to work from while we were in San Diego. Would you buy a house this way?

This post originally appeared on the Hermit Haus Redevelopment website on 2015-11-18.

While we were in San Diego learning how to change lives, we were able to put a house under contract in Cedar Park, Texas. The house was brought to us by our network, proving Phill Grove right when he told me, “Your Net Worth equals your NetWork.”

Docusign, the MLS, and cell phones enabled us to make this offer within a few hours after learning of it. What did we do before technology shrank the world?

Carol and I were able to look at the house yesterday. It needs a little more work than we were originally told, but that’s not unusual. The bones of the house are good. My friend Bob Smith, who has been my go-to guy for years, performed a very thorough home inspection. We’re going through the report today.

I will post more as we progress through the purchase and redevelopment.

Home Again

The Hermit Haus team: Carol, Russell, Suna, and me Suna is ready to go home.

Here I am with Than Merrill of Flip That House, CT Homes, and Fortunebuilders Grand Coast Capital took a few investors to see the San Diego Chargers play. Suna is in the front. Paul Esajian stands behind her, and I’m peeking over his shoulder. I blurred all the face except for us and employees of GCC.

Traveling at night, the headlights were bright

And we’d been up many an hour

And all through my brain

Came the refrain of home and its warming fire

— Karla Bonoff

We’re finally home. It was a long weekend in San Diego, but we survived and we learned. A lot. I’ll be posting about what we learned on the Hermit Haus blog over the next couple of months.

More importantly, we came together as a team and had a good time. Thankfully Russell and Carol rented a car, so we were not stuck eating the dreadful hotel cooking. We were able to get away for a few quiet meals, including on nice sushi meal somewhere in SD proper.

Fortunebuilders put on a mixer for those of us who joined the “Inner Circle,” which gives us better access to the big three: Than Merrill, JD Esajian, and Paul Esajian. From what I can tell, Than is the CEO of Fortunebuilders and its subsidiary companies. JD runs the renovation business, and Paul runs the financials, including Grand Coast Capital, a national hard-money lender.

Because Suna and I invested in Grand Coast, we got invited to see the San Diego Chargers play a home game and network with other investors. They put us on a bus and led us up to the Fortunebuilders skybox, where they put on a board of finger foods and booze. We had to leave before the game was over, but that’s okay. I wasn’t really interested in the Chargers. Apparently, nobody else was, either.

But the important thing is that I survived flying there and back again. I’ve never been a fan of airports and airlines, but now TSA seems to be actively everyone to drive to their destinations. If only Suna had the time. I love seeing the country at ground level. What I can see now may all be overly familiar, but that is comforting. At least I don’t have to worry about “special screening” at home or in my car.

 

Why I Want To Stop All Foreclosures

I want to stop all foreclosures.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-11-10.

Growing up in a real estate household, I was an early bloomer. I bought my first house at 19. It was a 2-1, built in the 1940s. Being so young, I didn’t have enough credit to get traditional financing, so I bought it with a Contract for Deed—a vehicle that is now illegal in Texas because of abuses by unscrupulous lenders.

Everything was going great until one day I did what many people do. I lost my job and couldn’t make the payments on my little house. I tried to make partial payments, and the contract holder accepted the first two. When I found work again, he refused to accept anymore payments and foreclosed on the house.

Luckily, I had an “unfair” advantage. My mom was a Realtor®, and she knew a good real estate lawyer. The contract holder was surprised to see me in court and even more surprised to see I had a lawyer. Most of the people in my situation apparently just walked away from the house.

The judge (justice of the peace, actually) ruled in my favor because I had the money to catch up the back payments plus interest. My lawyer didn’t even have to speak. The contract holder protested, “I don’t want the money. I want the house back! It’s worth more now than when I sold it to him.” The JP picked up his gavel to say something else, but the contract holder’s wife pushed him away from the bench, telling her husband, “Shut up, Harry. We lost.”

Even though almost 40 years have past and Contract for Deeds are now illegal in Texas—as are lease purchase options of any substantial duration… Even though we had the Crash of 2008 and the resultant Dodd-Frank legislation is in place…predatory lending still goes on.

While I’ve been working to save the credit of the homeowners I’ve seen banks do everything in their power—from repeatedly “losing” paperwork to intentionally dragging out the process for months—to force houses into foreclosure. It still makes me as angry as it did the time I almost lost my own house. I understand the home owners’ frustration and sense of powerlessness. I really want to help in the only way I can, by trying to salvage what’s left of their credit. I have more than one tool at my disposal to help, and I feel really frustrated every time I see a big bank take a fellow human being’s house away.

That’s why I work so hard to stop every foreclosure I can.

Don’t go through a foreclosure yourself without at least looking at the options. And don’t let anyone you know go through an unnecessary foreclosure. Learn how you can stop foreclosure by downloading our free booklet.

San Diego

Suna and I waiting to fly out of ABIA yesterday Suna having dinner in the hotel restaurant

Does this look like a $30 meal

I never saw my hometown until I stayed away too long

I never heard the melody until I needed the song

—Tom Waits

Suna, Carol, Russell and I are in San Diego for a Fortunebuilders “bootcamp.” It turns out they have a special meaning for that word that goes far beyond my previous usage. A Fortunebuilders Bootcamp is a large educational event that offers a range of classes to hundreds, if not thousands, of investors and potential investors. Russell is attending the “Internet Intensive” while Suna, Carol, and I are in the “Rental Intensive.”

The Internet Intensive focuses on using the Internet, including a proprietary system called Realeflow, to market to a range of buyers and sellers. Russell is a good choice for that since he is in charge of our back office systems and website.

I’m looking forward to the Rental Intensive and hope I learn a bunch of stuff about managing my rental portfolio.

I can’t say I’m impressed by the hotel hosting the event. The restaurant is overpriced as only a “artistic” or “trendy” place can be. Unfortunately, the quality of the food was not up to the pricing, once again demonstrating the difference between confidence and arrogance. I also wonder if the leadership isn’t looking at the hotel as a distressed commercial property that they can add value to.

 

Perseverance Pays Off

The back of the Bob Cat house showing the two porches that overhang the utility easement.

This post originally appeared on the Hermit Haus blog on 2015-11-06.

Some projects take longer than others.

Different cities have different cultures.

I think everyone will agree to those two statements, and I, too, would’ve agreed when we started the Bob Cat Run project more than a year ago. I just didn’t realize how much the second statement could affect the first.

When we purchased Bob Cat Run in September of 2014, everything looked great on paper. We approached it from the standpoint of a homestead flip for Sue Ann and me. (I’ll explain the concept of homestead flipping in a future blog post. For now, the important consideration is that we planned to make Bob Cat our primary residence for at least two years.)

There was only one small problem. One small corner of the house protruded into the utility easement, and the back porches overhung it.

This killer view from the main (upper) wrap-around porch is one of the reasons we know we will eventually have a winner.

Everywhere else I’ve worked, this would not be a big deal for a house that was built in the 1980s and stood vacant for more than a decade, especially since it was built in an unincorporated area.  Most county inspectors (where they exist at all) would simply have noted the encroachment on the paperwork, and we would have moved on.  At worst, we would have paid some kind of “fee” or “fine,” and that would have been the end of the problem. I have never seen this kind of problem take longer than a few weeks and a couple of thousand dollars to work around.

The real problem started when the City of Austin annexed the subdivision. It got much worse when Austin implemented a Geographic Information System (GIS) a few years back. As one city employee put it, “Until then, we knew that these problems existed, but we didn’t have a way to track them.  Now, we have to do something about it.”

Well, when a city decides it has to “do something about it,” havoc ensues. The easement “belongs to” 13 separate city departments. Twelve of them looked at the degree of encroachment, not even enough for a closet, and agreed with us that it was no big deal. The water department, however, went into a tizzy and stopped the permitting progress. We have been negotiating with the city ever since. In the interim, we have accrued more than $12,000 in additional holding costs, almost all of it in city taxes. We were literally paying them to screw us over. And let’s not even think about opportunity costs.

A city manager who is part of this process explained it thus, “We know of thousands of people in the same boat as you are. You are just the first ones who have gone all the way through the process legally to enable us to develop a procedure for handling it.”  Great.  No good deed goes unpunished.

But, in the gripping hand, my dad used to say, “If it was easy, everybody would do it.” Persistence really does pay off...eventually.

The good news is that yesterday, we signed paperwork with the city that should bring this nightmare to an end.  I would like to thank the team at the city who have been working with us to resolve this issue.  I hope I will soon be reporting on the progress we’re making on Bob Cat.

The Saddest Sentence in the English Language

This is how foreclosure feels. First there’s the dread of the inexorably rising debt as the event draws near. Then your house gets swept away in an impersonal flood of legal procedure. Photo by Carsten Knoche

This post originally appeared on the Hermit Haus blog on 2015-11-04.

Foreclosure is a financial tsunami.  It sweeps away years of good credit practices into a black hole of future agony.  For years, up to a decade, after a foreclosure,  foreclosed persons can’t escape the enormous gravitic pull of the black hole as it stretches pulls, stretches, and tears at them, trying to suck them down into a pit of financial oblivion.

Losing a house to foreclosure is just the start of a decade-long nightmare that makes Freddy Kruger look cuddly.

• It will be years before they can buy another car or truck, except at a “note lot” that specializes in taking advantage of people with poor credit—often by requiring them to come up with an astronomical down payment that covers the seller’s total investment in the vehicle.
• They won’t be able to buy another house, and since most apartment communities use credit score to qualify prospective tenants, they may not even be able to get a nice apartment.
• The foreclosing bank can file a 1099 showing the unpaid balance of the mortgage plus fees and additional interest as income, which causes the IRS to come after them for unpaid taxes on that income.
• Even in states that don’t allow creditors to garnish wages, the IRS can.

It’s a process that can be avoided. One of our primary goals at Hermit Haus Redevelopment is to help distressed homeowners avoid foreclosure. We have several tools to chip shore up against foreclosure in our tool box (buying the house for cash money is only one of them). And, of course, we make money doing it.  If we didn’t make money, we couldn’t continue to help more people.  And our whole reason for existing is to help as many people as we can.

But people have to let us help.  And that brings us to the saddest sentence in the English language.

Are you ready for it? Here it is:

“No, I trust my bank.”

Carol and I had been working to get a family to allow us to help them avoid a foreclosure.  Last Thursday, the homeowner said, “No, I trust my bank.  They said they would help us with the loan.”  Yesterday, the house sold at foreclosure auction.  The bank’s opening bid was higher than the after repair value of the house.  They really wanted it.

Please don’t trust the bank.  And please don’t let anyone you know suffer through the financial nightmare that is foreclosure.  Call us.  Call our competition!  Please, call someone who can help.

The Heart of the Business

This guy is just so cute! How could we not recycle him into another post or two.

This post originally appeared on the Hermit Haus website on 2015-11-02.

Carol, Russell, and I invested three days in an intensive real estate business development seminar lead by Austin real estate guru Phill Grove. Like many of these seminars, I found myself suffering from retention exhaustion before each day was over. There is just so much information a brain can process without a break. On the other hand, there was more useful information and actual strategies in Phill’s seminar than in any two other seminars I’ve been to combined. No wonder I couldn’t absorb it all at one (or even three) sittings. Phill is a masterful presenter who actually practices what he preaches. He and his wife Shenoah are also among the nicest human beings I’ve ever sat down to dinner with.

So what was my number one takeaway from this event? It’s simple. The head makes the money, but the heart gets the deal. If you’re not doing this business for the right reasons, it will eat you alive. Sure, you can bully your way into a deal or two, but that won’t get you far. To be successful you have to really want to solve people’s problems. It’s good to have your fundamental values reinforced.

Phill and Shenoah gave me a half-dozen new problem solving tools for my toolbox this weekend. Now it’s time to put those tools to work.