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Rookie Reply: Seller Financing & How to Buy MORE Real Estate on YOUR Terms
We got to talk a WHOLE lot of real estate in 2023. With topics ranging from partnerships to home renovation hacks, we covered a ton of ground this year and hope the information helped YOU on your real estate investing journey!
Today, we’re taking a trip down memory lane—reflecting on all of the amazing guests and conversations we had on the show over the last twelve months. For this very special episode, we’ve handpicked a few of our favorite moments to share with you. Whether you’re looking to find your first deal or already own several rental properties, we hope this compilation gives you the inspiration and motivation you need to start the new year off strong!
Tune in to learn everything from getting your spouse on board with real estate to replacing your W2 income with rentals. You’ll find out why house hacking is perhaps the best entry point to real estate investing and why rental arbitrage is a cheat code for easy cash flow. You’ll even learn about the “open house” hack that one rookie investor uses to estimate rehab costs, as well as some clever ways to get more money out of your current portfolio!
Here is the link to the Spotify playlist for the full episodes clipped for this show!
Ashley:
This is Real Estate Rookie episode 352. My name is Ashley Kehr and I am here with my co-host, Tony J. Robinson.
Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, we’ve got another Rookie Reply for you guys. We’re going to be answering your questions. And if you want to get your question featured on one of our episodes, head over to biggerpockets.com/reply, drop your question there, and we might just pick it for the show.
Ashley:
So today, we are going to be answering two questions on seller financing. Creative financing is hot, hot, hot right now. So if you have questions about seller financing, this is an episode for you.
Tony:
We have a question about scaling and what does that look like for rookie? And then we finish off with the question about contractors as well. So everyone’s favorite thing is working with contractors, we will talk about how to do it the right way.
So last thing before we get into the questions, if you guys haven’t yet, please do take a few minutes, leave an honest rating and review of the Rookie Podcast on whatever platform it is you’re listening. The more reviews we get, the more folks we can reach. And when we reach folks, we tend to help them, and that’s all we’re about here at the Rookie Podcast. So take a few minutes, leave that rating/review and we just might read it on the show.
Ashley:
Let’s get started with our first question from Roosevelt. “Hey, BP, what’s the best way to get seller financing? Is there a down payment? Is a realtor involved? And what other fees are you associated with getting it?” Great question. Seller financing.
Tony:
It’s a loaded question.
Ashley:
Okay, so the best way to get seller financing, let’s start with that one. My recommendation would be to ask the seller if they would be open to seller financing or just submit an offer that is seller financing.
Tony:
I’m going to go a little contrarian here and I’m going to say I think the best way to get seller financing is to actually go bigger. And let me explain myself. In the single-family space, a lot of times, a seller might need to be educated on what seller financing is. In the commercial space, it’s far more common, especially if you’re going after an older building with maybe a retiring owner whose books maybe aren’t all that great, a property that will be hard to get traditional financing with because there’s no P&Ls, there’s no tax statements, tax returns in those situations. Oftentimes, sellers know that they almost have to offer seller financing.
So we’ve got a deal in Utah right now, it’s a 13-unit hotel and a really nice property. Honestly, the owners did a pretty decent job with it, but one thing they didn’t do a great job with was their books. And the property itself isn’t necessarily bankable because the P&Ls aren’t really up to snuff. There’s no two years of previous tax returns to really highlight the property and its real income potential. So the seller knows and was very willing to offer seller financing to us because they know that if they didn’t, they would have to sell it at a pretty major discount for someone to be able to buy it. So my advice is to kind of go out there and maybe look at some of the more commercial properties.
And we had AJ Osborne a few episodes ago and he talked too about people get this misconception sometimes that commercial is more difficult than the single-family stuff, but if you find the right deal, sometimes commercial might be a little bit easier than getting some of the single-family homes.
Ashley:
How do you talk to the sellers when you’re looking at the deal and their books are horrible? Did they say they would do seller financing or did you have to ask for it?
Tony:
For this specific deal, I don’t remember. I want to say that they might’ve offered it because we’ll even just search. Because we’re looking at small motels and hotels, there’s only so many across the country the kind of fit our buy box. But when we’re searching on Crexi, one of our search parameters is literally seller financing, or seller carry. And we’ll try and find those owners that are already open to having that conversation. But I think on this one, honestly, they might’ve offered it to us just from the jump, like, “Hey, if you guys want it.” And then we just had to negotiate the terms on that one.
Ashley:
How would you do that if they hadn’t offered it? How would you kind of approach the seller as to, “This is why you should do seller financing,” and kind of explain, “Nobody’s going to be able to get a loan from this property because your bookkeeping sucks”?
Tony:
And that’s what we tell them from the beginning, it’s like, “Hey, can we see your P&Ls?” And they’ll send us some photos they took on their old flip phone. And we’ll ask for tax returns and it’ll show that the property lost half a million dollars every year for the last six years.
And we can go back to them and say, “Hey, look, we really like the property. We feel that what you’re asking for is a fair price, but this property is impossible to get good bank financing for. So if we do have to go out, we’re going to have to go out and get some kind of hard moneylender, short-term bridge debt that’s very expensive, which is going to pull down the purchase price that we can offer to you because we still have to get our returns.
But if you’re open to it, we can give you your purchase price. We just need to work out better terms on the seller financing.”
And we’ve made that pitch to a few commercial properties as well and a lot of them are biting because I think they understand that they can’t move that property given either its condition or the condition of their books.
Ashley:
Or they just weigh and hold out because they think they can get a cash offer, somebody is going to come in with the golden ticket.
Tony:
Yeah. Yeah, with the golden ticket. All right.
Ashley:
You had mentioned Crexi, but I pulled up landwatch.com and right now, across the US, they currently have 13,954 listings that are owner financing right now that specifically say the person is open to doing owner financing.
Tony:
Isn’t that crazy?
Ashley:
Yeah.
Tony:
I could just imagine if you hired a team of VAs to comb through all 13,000 listings, how could you not get at least one of those deals?
Ashley:
Yeah. Yeah.
Tony:
Right? You’re almost guaranteed to at least get one. It’s a numbers game.
Ashley:
I think that honestly could coincide with Ariel who we had on episode 349, a couple episodes ago, and I’m sure she has some tech that we can use to have somebody comb through all of those listings.
Tony:
I think that was, honestly, one of my favorite most recent episodes. If you guys haven’t listened to that, go back and listen to it. But Ariel had some really cool web scraping tools that she had kind of put together to systematize that process, but yeah, I couldn’t have set a better, Ash. But what about for you? You’ve done some seller financing as well. What does that look like for you? How did you broach that conversation with the seller? What kind of documents were involved? Walk us through what it looked like for you.
Ashley:
Yeah. And I can kind of tie this into the second part of the question, is there a down payment? Is there a realtor involved? And what other fees are associated with getting it? So I’ll do my first time ever doing seller financing, I’ll do that as an example. And I actually was buying a couple of properties from this person and the only way that I could do it was if one of the properties was seller finance and the rest I was going to purchase with my line of credit. So there was no real estate agent involved.
And I think this is a lot easier in states where you need to use an attorney to close, which New York is one of those. So my attorney drew up the paperwork for the seller financing, put it into the purchase contract for the property, and I didn’t really have to do anything.
What I did was create a letter of intent. So in my letter of intent it stated the purchase price, the property, the buyer, the seller, and the terms of the purchase. So if there’s any contingencies, one of the contingencies was this is valid upon attorney approval, also, the terms.
So what I did was I put a $20,000 down payment, the rest was seller financed for a 12-month term at 7%. And it was interest-only payments until the full balance would be paid at the end of the 12 months. That is one of the nicest things about seller financing is the terms can be whatever you agree upon, whatever you negotiate. So you could do a 50-year fixed at 3% interest rate, you could do a 50% down payment, you could do no down payment. And that’s actually very common what I see in a lot of listings that have seller financing is they will ask for a 50% down payment, and I think that’s to attract somebody who maybe has a lot of money but maybe doesn’t have good credit, so they can’t go get the bank loan. But as an investor, putting down 50% is not attractive to me, I might as well just go to the bank and put down 20%.
Tony:
20, right.
Ashley:
Yeah. And then, as far as other fees associated with it, I would have an attorney draw up your seller financing contract or if they put it together, an attorney look it over and approve it.
So along with the fees, the other fees that are happening are just your usual closing fees. So any title work you have done, if you did use a real estate agent, if you’re doing 0% down, is the seller going to still pay the commissions for the agent or is that something you work into the agreement where I’m not going to pay a down payment to you per se, but I will pay the seller’s commissions? Or something like that too.
Tony:
That honestly ties pretty nicely into our second question for today, Ash, which is from Tee Hoover. And Tee’s question is, “For those of you that seller finance, do you increase your asking price for the convenience of that seller offering seller financing or do you sell at the estimated value? And then also, do you charge any interest or other fees for agreeing to that service?” So I think I just want to break down a little bit because there’s a few terms we’re throwing around.
But when you think about seller financing or when you think about any kind of debt really, there are a few levers you can look at. You can look at the term, the amortization period, the interest rate, the down payment, and the interest-only period.
So the term is how long are you going to be making those payments? So Ashley said for her first one, it was a 12-month term, that means she had 12 months worth of payments and then, there was a balloon due at the end of those 12 months. On a typical primary residence, you’re either signing up for a 15-year term or a 30-year term and you’re going to pay that over the life of 15 years or pay that over the life of 30 years. So you have your term.
Your amortization period is kind of similar to your term but slightly different. Your amortization is how far or over what time period are those payments being stretched out? So you could have a one-year term, but a 30-year amortization. So basically, you would make payments over the course of one year as if you were going to pay for 30 years, you’d stretch it out as if you’re paying for 30 years, but on month 12, instead of paying that regular payment, you’re going to pay the entire balance that’s due. Right? So your amortization, the longer you can stretch that out, the lower your payments are going to be. Right?
There was like talk earlier this year, Ash, I don’t know if you heard it too, about the banks starting to offer 40-year mortgages. Did you hear that?
Ashley:
Yeah. Yes, I did.
Tony:
Right? So that’s an extra 10 years to pay off your mortgage, which would effectively reduce the monthly payment you have to put out. I’d be curious to see if they actually end up doing that. I feel like a lot of people would take it.
Ashley:
As an investor, that sounds attractive, like, “Yes, more cashflow because I have this lower monthly payment,” but as a homeowner, you now are building up less equity in your property because you’re paying less to your principal every month now than you would’ve been with a 30-year mortgage and you’re paying way more interest upfront. You could literally, for the first five years, only paying $5 per month towards your mortgage payment. And then, what happens if the market does go down and all of a sudden you are now underwater on your property because you haven’t built up any equity? Maybe you’re in an area that doesn’t have a lot of appreciation. And that’s where I see the concern of people not paying down any equity in their property and then them having to sell and they can’t sell because they don’t have any equity in it because they haven’t paid anything down on it.
Tony:
Yeah, it’s a tricky spot to be in, but that is your amortization period. How long are you stretching out those payments?
The other piece, like Ash talked about, is the down payment. What percentage of the purchase price are you putting down upfront? And then your interest-only period. So like Ashley was just saying, when you make a payment on a typical loan, on a typical mortgage payment, that payment is split between your principal and your interest. So early in the loan, the majority of your payment is going towards interest. And then as you get later into your loan, the majority of that’s going towards your principal pay down.
If you have an interest-only period, it means you’re only paying the percentage of the payment that’s going towards your interest. So it means your monthly payment’s going to be slightly reduced because you don’t have to worry about that principle reduction.
Now the downside to that is that your principal is staying the same. So if, say, you get a loan for whatever, a hundred thousand bucks and you’re interest-only, at the end of whatever period, you still have that $100,000 to pay back, whereas opposed to the principal and interest would be pulling down that $100,000. But if your is goal to maximize cashflow in the short-term, it tends to help.
Ashley:
I was just going to say another reason is if you’re remodeling the property and you’re planning to go refinance, having that low payment as you’re holding cost instead of paying a high mortgage with principal and interest, you’re having less holding costs because you know you’re going to go and refinance out of that interest-only alone anyways.
Tony:
I think those were all the big pieces that you would look at when you’re doing seller financing, your term, interest-only period, amortization, interest rate, down payment, and then, purchase price, obviously, too. Right? So that kind of ties into what Tee’s question was is…
You could, in theory, offer a higher purchase price on seller financing because typically, if the seller’s financing this note, they don’t really care about the appraisal. You just have to, as the buyer, be comfortable knowing that you have a seller finance note out for an amount that’s higher maybe than what that property would appraise for. But if the deal pencils out and you’re getting really good cashflow and there’s other things that you’re getting from that deal and then maybe it makes sense.
Have you ever done a seller finance deal, Ash where the purchase price was higher than the appraised value?
Ashley:
No, definitely not the appraised value because I don’t even buy properties at the appraised value, even if they’re being financed or even if they’re cash deals, I won’t buy it what it would appraise for, I always buy under market value.
But to go along with that is asking the different price or whatever, as a buyer, I will submit two offers, a lot of times, where one is a cash offer or getting a bank loan and the other one is seller financing. And the seller financing offer will be higher. It will be more attractive than getting the bank financing because the bank financing, I’m going to have to pay loan fees, I’m going to have to pay more closing costs because of those loan fees, I’m going to have to have an appraisal done, I am probably paying more interest.
And then, I have the seller finance offer, which usually I will definitely put way less than what I would get at the bank to make it even more attractive, but also maybe extend it out, make way better terms and it’s more attractive to me. So I want to make it more attractive to them by increasing that purchase price of the property. So I will do that.
And I did have a real estate agent come back to me one time and be like, “5%? That’s way below market rates you could get at the bank right now.” And this was maybe two years ago. And I was like, “Exactly, that’s why it would be an incentive for me to pay them more money to purchase the property.” And she was just like, “Oh yeah, okay.” It kind of like clicked like, “Okay, it makes sense though.”
Tony:
That’s the beauty of it is that you can really set it up however you and that seller agree to. Pace talks a lot about getting zero down for some of his sub-2 deals.
Ashley:
And he has like an apartment complex that’s zero down and amortized over 40 or 50 years too.
Tony:
Yeah, it’s just crazy. Right?
Ashley:
And then, for the last part of that question, do you charge interest or any other fees for your service? Yes, you can definitely charge interest. Most of our examples we’ve talked about, they do charge interest. But there are deals too where there is no interest. It is literally the balance, loan, amortized over 10 years or whatever it may be, and no interest at all on that loan. So if you can get a deal like that, that’s great.
Okay, before we jump into our last few questions, we are going to take a break and hear a word from our show sponsor.
Welcome back from our short break. We are going to take a question from Samuel Hall. This is a question about scaling. So to give us some background, he says, “the mortgage for our primary residence is completely in my wife’s name. I have one rental property that is cash-flowing well, it is owned by a trust between me and family members. The mortgage is in my family member’s name and I have no mortgage and one and a half houses.
I’m about to be under contract for a cash-flowing rental using traditional financing, and the mortgage will be in my name. I have about two years of landlord experience.”
First of all, Samuel, awesome. Congratulations. What a cool start.
“I am working towards the goal of economies of scale and the purchase multifamily units. Are there any benefits to putting loans in my spouse’s name? I am aware of the Fannie Mae caps of 10 loans per person, but are there required time periods between the loans? How can I increase my per loan borrowing power? At the amount of my current pre-approval rate, I would not be able to purchase one multifamily even at a discount in my market. How can I get the banks to stop looking at debt-to-income and start looking at DSCR? At this stage, I am unconsciously incompetent. I don’t know what I don’t know. Thank you for your response.” And thank you for your honesty.
Tony:
Yeah, I was just going to say, I’ve never heard that phrase, “unconsciously incompetent.”
Ashley:
I know I stuttered for a second if I didn’t read that right.
Tony:
Yeah, I like that though. I might start borrowing that, Samuel. I mean, this is a loaded question though, Ash. Well, first, like you said, kudos to you on already having a few rentals with no debt necessarily tied to your name because…
And maybe just even breaking this down for all the rookie audience first is that the deed, and we’ve heard this from other people before, so Pace talked about this when he was in the podcast, but the deed and the mortgage are two separate documents. And when looking at your debt-to-income ratio, they’re not looking for deeds tied to your name, they’re looking for mortgages that are tied to your name. So you can be on the deed for a property, and that won’t necessarily count against your debt-to-income ratio as long as you’re not also listed on the mortgage. So for you, Samuel, you’ve got no real estate debt tied to your name right now, so you’ve got a clean slate. So I just wanted to clarify that for folks to understand that being on the deed and being on the mortgage are two different things.
Ashley:
Yeah. So it would just be the one property he’s about to close on, correct? Yeah, he’s under contract for one that would be his first one, traditional financing, and the mortgage will be in his name.
Tony:
Yep.
Ashley:
Okay. So then, the first question is, “Are there any benefits to putting loans in my spouse’s name? I’m aware of the Fannie Mae caps of 10 loans per person, but are there required time periods between the loans?” So if you are getting investment loans, there is no time period. If you are getting these loans as a primary residence, yes, you usually have to occupy the one property for one year before you go into the other, but it seems like you’re purchasing them as investment properties, and as far as I know, there are no time period requirements for this at all.
The one thing I would do is maybe wait until you close on the first loan before going and starting the second loan because if you go and get approved and it’s outside of that specific window, it’s like 60 to 90 days I think depending on who’s pulling your credit, where it could actually count against you. They’ll do a final credit check before you close. And I think it’s a soft pull, I’m not sure, but they’ll check again. And that’s why they always tell you don’t go and buy new furniture before you close on your house and put it on store credit or go buy a new car because they’ll ask you, “Why was your credit pulled for this situation,” and it could mess up your loan. So close on one loan before you go and start the next one would be my advice on that.
And then, as far as putting them in your spouse’s name, I would definitely do that to kind of break up the debt-to-income for that too.
Tony:
Here’s the thing, just because you guys are husband and wife doesn’t mean you both need to be on the mortgage. The goal is to have the least amount of people on the mortgage as possible because that gives you more opportunity to go out and get more loans.
So like for us, when we were buying vacation homes, I had one in my name, my partner had one in his name. We didn’t both go on the mortgages because we wanted to leverage the debt-to-income ratio of ourselves separately because the crazy part when they’re doing this math is that even if one of you could have qualified, if you’re both on the mortgage, it counts against both of you. And even if you only own 50% of the home when they’re looking at your debt’s income ratio, they’re looking at the entire mortgage, not 50% or 25% or whatever percentage you own, they’re looking at the whole mortgage.
So the least amount of people you can put on the mortgage to get approved, the better. So if your wife can go out and get 10 by herself, get her 10. If you can go out and get 10 by yourself, get your 10, because that gives you 20 as opposed to getting 10 and total between the both of you.
Ashley:
The next question is, “How can I increase my per loan borrowing power? At my amounts of current pre-approval rate, I would not be able to purchase one multifamily even at a discount in my market.” And I think that’s what happens to a lot of people is they run out of that borrowing power before each spouse even has those 10 loans in each of their names too, especially if you’re trying to do this pretty rapidly over time, but I honestly don’t know. Tony, any way to really increase your pre-approval besides getting more income, but then you kind of have to wait until it’s on your tax return or getting a letter that you got a new job where you’re making more money and you have your first pay stub.
Tony:
I mean, that’s what I would say, right? So income expansion, can you get a side hustle? We had that side hustle series we had-
Ashley:
But remember, it has to be a side hustle that you are tracking and reporting income.
Tony:
That you tracking, right, that you’re reporting. Yeah. Yeah. So it can’t be a little under the table type side hustle. But yeah, if you get a second job doing something that can bring you income in, promotions, skipping jobs to get a new job. But yeah, the income growth I think is big.
The other thing too is can you look at a loan product, and this kind of ties into your next question, but can you look at a loan product that maybe takes some of the revenue from those properties and allows you to apply it towards your approval amounts? So for example, I know that NACA, Neighborhood Assistance Corporation of America, we had a guest, gosh, I wish I can remember his name, but he got a multifamily property through NACA, and so did Nancy Rodriguez, she also got hers through NACA.
Ashley:
Oh yeah. Yeah.
Tony:
And NACA’s really cool because it’s 0% down. And when you buy multifamily, and I think you can go up to four units under NACA, but they’ll use the rents from the other four units to help offset the cost of ownership for you. So even if maybe you can’t afford the entire purchase price, if the market rents for the other units bring the payment down to a point that you can afford yourself, that’s an option for you to get into one of those properties as well.
So I think a big misconception, Samuel, that a lot of new investors have is that they have to fit the box of the loan products that they’re aware of, when in reality, you want to go out and find the loan product that matches your unique situation. And guys, there are so many loan products out there. There are so many lenders, so many banks, so many credit unions, so many mortgage brokers, so many, you just got to do the legwork to find the loan product that matches your unique situation. And Sammy, we don’t know what market you’re in, but I can almost guarantee if you go knock enough doors, you shake enough hands, make enough phone calls, you’ll probably find a local regional bank that’ll underwrite this deal and give you a little bit more flexibility when it comes to getting closed.
Ashley:
That actually reminds me of an episode we have coming out, actually, on Thursday. So on Thursday we have Matthew McDermott talking about how, I think it was like 22 banks that he cold called until he found one that would actually lend to him. So that’d be a great episode to listen to talk more about that.
Tony:
The other thing I think to add to that too, like how do I increase my pre-loan borrowing power is for the rentals that you guys have, once they start showing up on your tax returns, then you can also use that to kind of offset your income as well.
We’ve had one loan product where it hadn’t been a year, but they were able to take a signed lease agreement and use that to count towards our income as well. So again, it’s about having the right lender that understands real estate investing that can kind of know all these nuances of how to best show your income to the underwriter.
Ashley:
Because if you go to the bank to get a loan, especially on the commercial side, I haven’t done a residential loan in a while, so I don’t know on the residential side, but on the commercial side, this could be another option for you is switching from residential to commercial, you’re not going to get as great of terms. But they will ask you for a personal financial statement. And on that personal financial statement, they will ask you what is your rental income for that property? What are the property taxes and the insurance? And what is your net profit?
And they really only take into account your mortgage payment for that, your property taxes and your insurance. And then they say, “Oh great, you’re making $10,000,” when in reality, you’re most likely not because you have repairs, you have maintenance, you have vacancy, all these other things. But they will take that into account and add it to your income too when they have you do those personal financial statements on the commercial side.
Tony:
Even on the short-term rental side, I’m starting to see loan products for single-family homes in the short-term rental space where they’re projecting the income as an Airbnb and then using that to help you get approved for loans. So when you’re out there and you’ve got 20, 30, 40, 50 properties, the debt-to-income starts to kind of crazy, they’re all in your personal name, so it’s another loan product as well.
So I’d say, Samuel, just go out there, again, shake some hands, knock some doors, pick up some phones and let people know what it is you’re trying to accomplish. And ask them, “Hey, what’s the best loan product for me given my unique situation?” And let them tell you what’s the best option for you.
Ashley:
So let’s move on to our next question by Juan Alvarez, “Any tips that you guys have when dealing with contractors? Is it fair to negotiate with them, tell them you’re getting quotes from others, et cetera?” Just going to start reading like I’m talks texting to my car to send text messages and you have to add the question mark and the period, exclamation point.
Tony:
Period. Yeah, smiley face.
Ashley:
You know what? I haven’t done that. Does that actually add an emoji? I’ll have to try that.
Tony:
I don’t know actually. I haven’t tried that yet. I’d assume it does. This is 2023, I thought those things are happening.
But dealing with contractors, I always say my billion-dollar idea is to start a general contracting company and just be the guy that picks up the phone. And I feel like I would have clients lined about the door.
So contractors, hit or miss, right? Sometimes you’re going to find some amazing ones. Sometimes you’re going to find the ones that run off in the middle of the night with $20,000 of your money. So it is tricky, I think, trying to find the right one.
But Ash, you’ve done a lot of rehabs as well, what’s been your experience? Maybe let’s handle that first one, that first part of his question, is it fair to negotiate with him?
Ashley:
When I started working for this other investor, long time ago, and before I had any properties of my own, he would have me help with a lot of the bidding for stuff. And I’d be like, “Okay, this person said it would be this much,” and he’d be like, “Ask him for a 5% discount.” And I’d be like, “Ugh.” I just felt so uncomfortable. I hated it. I disliked it. I was like thinking inside like, “Let’s not be cheap. Come on, these people are working. Whatever. It’s fair to pay them this and stuff.”
Every single time he asked for a discount, he got a discount. And eventually, I just start doing it on my own and I’d be like, “You’d be so proud of me. Look, I got a discount.”
So I don’t think that it’s unfair to ask for a discount. The worst they can say is, “No.” And you say, “Okay, I just thought I would ask.” And you can always try and barter in some way as to maybe why they should give you that discount. Maybe you can offer to shout them out on social media or whatever that may be. But no, I don’t think it’s wrong to try to negotiate. What about you, Tony?
Tony:
No, not at all. Right. And I feel like it’s almost expected for a little bit of haggling. But I think there’s also, to Ashley’s point, you want to make sure that you’re balancing that line and not just focusing on cost. Because sometimes, the cheapest contractor is not the best contractor.
And if you’ve gotten three bids, one comes back at 80,000, one comes back at 75 and one comes back at like 40, you might want to be a little bit concerned about the 40 because they maybe underestimating what the job is about, maybe they have no intentions of actually finishing the job. So you want to haggle. But also compare to kind of see who’s ballpark and who’s way out of range. And the inverse is true, right? Like if you get three bids and two people at 40, one’s at 80, well then, don’t talk the 80 and kind of negotiate with those folks at the 40 line. But I do think it’s normal to try and negotiate those rates upfront.
Ashley:
And with getting quotes, build your own scope of work. That’s something I’ve had to learn the hard way. Then you can give it to each person that’s bidding out and you’re comparing apples to apples instead of getting one estimate back that says roof repair, $10,000, roof soffit, tear-off, detail like this type of roof…
Like I think it was last year maybe we did four roofs across this apartment complex. And one was literally new roof, 50,000 or whatever it was per building. And then, the other one was super detailed. And then, another one was kind of detailed but also had the brand of roofing. So it’s like to the other ones, “Are you using super cheap roofing? What’s the difference?”
And literally, it was so time-consuming having to go back and forth, but if I would’ve just went and said, “Okay, we know it needs to be torn off. It’s a tear-off. We want ice shield put on. We want a 40-year guarantee shingle, or whatever, put on. And tell us the brand that you’re going to use, what the guarantee is and that you’ll be doing the caps around the chimney, things like that, everything.” If we would’ve just done that, would’ve saved so much time. We could have just picked a bid and went with it.
But that would be my recommendation is building your own scope of work and then giving it out to the contractors to actually estimate. And that saves them so much time too from having to build out their own scope of work too.
Tony:
I just learned something new about Western New York that you guys have ice shields on your roof. I’ve never heard that before.
Ashley:
Here’s a really awful story is this building that was a hundred thousand dollar roof. Right next to it, I had a contractor who was building out brand new patio homes and he calls me the one day and he’s like, “So I’m watching these roofers and there’s no ice shield going on the roof.” And I was like, “What do you mean? There has to be because that was part of the whole reason we ripped the roof off because of all the ice dam.” And he is like, “Yeah, there’s not.”
So I called the owner of the company and he’s like, “No, that wasn’t in our… No, that’s not included.” And I was like, I know for sure it was because there was no way I would’ve done this roof without it.” And he looked back and he was like, “Oh yeah, I have the email here where you wanted the ice shield in it.” And so they had to go back and redo that part and put the ice shield down.
Tony:
Can you tell once a roof is installed whether or not the ice shield is there or does it have to be before shingles are laid and all that?
Ashley:
I mean, I can’t. Maybe someone who’s an experienced roofer could or I’m sure there’s some way probably you can tell.
Tony:
But you never would’ve known is what I’m saying had that person not called [inaudible 00:33:34]-
Ashley:
Until we had another issue with the roof and people started to pull up shingles, see what’s going on or what, then probably would’ve been told. But yeah.
Tony:
Crazy. Yeah, I just learned something new. Didn’t know ice shields were a thing, not something we have to worry about here in California.
So your scope of work is basically the list of everything you want to fix, repair, change, et cetera, inside of that property. BiggerPockets has a great book by J Scott. He has actually two books. One of them is The Book on Flipping Houses, the other one’s, I think, The Book on Estimating Rehab Costs. Two great books that teach you how to build out your scopes of work.
But literally, if you just walk through your property, start in the exterior, walk from the front of the house all the way around the perimeter of the property looking for everything you want to change, open up the front door and walk around every single room notating every single thing you want to change, that’s your scope of work right there.
And it’s like, “Hey, replace this receptacle. Change this baseboard. New flooring. Tear out these old lights.” Literally, just in super layman’s terms, write out every single little thing you want to do and then there’s your basic scope of work that you can then give to the contractors to get your quotes back.
So I think a lot of people overthink that scope of work, it seems super intimidating to come up with, but if you just look at your comps and say, “Hey, I really like this flooring. I really like these kitchens. I really like these bathrooms. Really like these living rooms. Really like how this looks.” Then just point out all the things that need to change between your property and the property you want it to look like, and then there’s your scope of work. And then, put it on them to kind of go out and price it out.
Ashley:
We just had on the Real Estate Rookie bootcamp yesterday, we had Tarl Yarber on and he was talking about going in and doing photos. So he has someone on his team who goes to every property that they’re looking at. Before they even put an offer in, he sends someone out and is taking photos of it. And that’s how they actually build their scope of work off of the photos.
And we actually started doing this too because you can concentrate so much more sitting at your desk looking at the photo of what needs to be repaired, then standing there with your clipboard, probably this time you’re in Buffalo freezing because nobody has their heat on if the place is vacant, trying to write like, “Okay, there’s this, that.”
But there was 180 pictures for a two bedroom, one bathroom, mobile home, okay, so small, maybe a thousand square feet or less. A 180 photos of the outside, the inside. And it was like he kind of scanned through the photos and it was almost like a slideshow of all the pictures. You could see the layout of the house and the movement of the flow because it was just click, click, click, click as you’re walking. You can zoom in on the photo to see.
And that’s how he would build his scope of work, he would sit and look at each picture and be like, “Okay, this railing here needs to be replaced,” and just add that and just go through each thing and keep going. And eventually, he outsourced that, and someone else on his team does that now, but he said that’s a really great method that has worked for him.
But also it gives you the chance to Google things too as to like, “Is this normal? Is this how it should be?” And you can pretty much add any photo to Google now and do a search just on the photo too as to like, “Somebody tell me this.” Or you can take the photo and you can post it in the BiggerPockets forums and say, “Is the roof supposed to look like this?” And you’ll get a million responses and feedback from people and they’ll most likely probably turn that picture into a meme of, “Here’s a slum landlord trying to fix his roof himself.”
Tony:
I do love the photo method and I kind of picked that up from Tarl and Serena as well. Serena Norris was on one of our recent episodes. I’m sure you guys can look it up, just [inaudible 00:37:22]-
Ashley:
And so was Nate Robbins, he’s actually the one that takes the pictures.
Tony:
As well as Nate Robbins.
Ashley:
Yeah.
Tony:
Anytime we do a rehab now, I try and get as many photos of that place as I can as well. And I have found that going back home and doing the scope work at home is easier. When I’m at the property, I’ll take photos of every single room along with measurements and I’m usually doing on our iPad. And I found that to be the easiest way to move through the property. And then I’ll also do a video walkthrough of the exterior and the interior, so I have all the photos and the videos and I can just go back anytime I want to try and piece everything together.
Ashley:
I was just going to say, Nate was episode 326 and Serena was episode 330.
Tony:
Boom. Ashley stepping up for our producers, snoozing on the job. But the last part or the first part of this question is just any general tips you have for dealing with the contractors? The first thing I’d say is get it in writing, especially if this is your first time working with the contractor. Get your scope of work in writing, get them to agree to everything that you have in that scope of work. And make sure that not only is the work that you want done clear, but also the schedule of when they should be completing that work by and what the payment schedule is.
Typically, we want to back load that last payment, so we want to hold back maybe 20% until that very final last thing is done, that way there’s some incentive for them to move through the job quickly and you don’t want to give that final payment until every single thing that you’ve identified to be wrong has been corrected because as soon as they get that last payment, it’s going to be harder to get ahold of them. So those are my recommendations in dealing with contractors. Ash, do you have anything you’d add to that?
Ashley:
Go through with your blue tape and mark everything that needs to be fixed. And sometimes, it’s beneficial to take a second set of eyes with you. Take a friend who’s maybe never been to the property and be like, “Okay, walk around, what doesn’t look normal in here?” And just send them through your property. And maybe some things you’re like, “Oh, well, we had to do it this way,” or whatever, but it just gives that second set because you’re already, well, at least I found this with myself is sometimes when I’m going through I’m just like, “Oh my God, it looks so good because it’s already 100 times better than it was before,” and I’m not looking at the actual detail of stuff. Then there is other times where I’m so focused on the detail that I’ve nitpick things. So definitely going through and blue-taping before the contractor completely is done on the job.
Tony:
I was trying to find, because I feel like it was either Tarl or Serena, one of our friends mentioned there’s actually an app that they used as well that was basically like a virtual blue tape where they could note take.
Ashley:
It’s James Dennard.
Tony:
James said it, huh?
Ashley:
Yeah, it’s a Punch List, I think it is.
Tony:
Okay, there you go.
Ashley:
Yeah.
Tony:
Yeah. Yeah. So there’s so many different ways to kind of mark off, because there’s always going to be something when you do that final walkthrough. Sarah and I, because we’ve got a pretty good relationship with our guy, we just send him a text or everything, [inaudible 00:40:16] about knocking it out, but having that system to really dial it in in the app, I think works pretty well as well.
Ashley:
Yeah, I guess, such a great point, I should clarify, it is very easy to not remember where you put blue tape, so the constructor just pulls it off and like, “Oh, there’s no blue tape.”
Tony:
“No blue tape.”
Ashley:
“We fixed everything. Here’s your check.” So yeah, with James’ app, you take a picture of the imperfection and then you write a little note and the description and then you can print it all out and he will literally nail it into the house or tape it up or something and the whole list will be right there and then he’ll still have that copy on his phone too.
Tony:
Yeah.
Ashley:
Thank you guys so much for joining us for this week’s Rookie Reply. I am Ashley here with my co-host, Tony J Robinson. And you can find us on Instagram. Down in the description you can find our socials. And don’t forget to join the Real Estate Rookie Facebook group and to hit that like button on YouTube if you’re watching our videos. My son, my 6-year-old just started editing videos and so, he’s been posting and he’s had his own YouTube channel. And I have to say, every day, home from school, “How many subscribers do I have?” So I have to find a way. I am very glad he’s getting into a skill for sure, but I am not sure about the obsession of subscribers.
Tony:
Yeah, Mr. Beast is changing the next generation, huh?
Ashley:
Yeah. Yeah. Thank you guys, and we’ll see you next time. (singing).
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.