15 Oct Ep. 1 Four Family Unit, Credit Repair, FHA, HUD 203K, & Rehab
In this episode, Adam gives the low-down on a 4-family unit he just bought and is now renting, interviews John Charlton of Midwest Mortgage Capital about a credit repair scenario and FHA HUD203k rehab loans, offers a deal of the week on a 1500sq ft 3BR home in O’Fallon, MO, answers questions about VA loan inspections, and explains why doctors tend to have trouble getting loans.
Email Questions To: PODCAST@HERMANNLONDON.COM
Host – Adam Kruse https://hermannlondon.com/realtor/adam-kruse/
Guest – John Charlton
Mortgage Calculator –https://hermannlondon.com/real-estate-tools/
Facebook – https://www.facebook.com/HermannLondon/
Twitter – https://twitter.com/HermannLondon
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Address – 7350 Manchester Rd, St. Louis, MO 63143
Phone Number – 314-802-0797
Search For Homes on http://www.wizah.com/
Producer – Joey Vosevich
Theme Song by Trastornobeats
Segment 1: Billiards tournament & crunching the numbers on a recently purchased 4 family unit Welcome to the podcast today, guys. My name is Adam Kruse and I am going to be your host today. And also with us we are going to have John Charlton from Midwest Mortgage Capital step in here in a little bit. First off for today’s show agenda we are going to have a ouple announcements to start and then we are going to jump into our first topic which is going to be all about a recent fourfamily I purchased and go through the numbers of that. We’re going to have a story from John Charlton about his crazy deal of the week and then we’re going to have an agent tell us about a real estate deal of the week that is actually available to you if you’re interested in making a real estate purchase at this time. We’ll follow that up with some listener questions and we’re going to wrap it up. So jumping right in to the general announcements, we want to welcome everyone to our first show and we are excited to be sitting here on the rooftop at the Hermann London Group in beautiful downtown Maplewood, Missouri, and we’re looking forward to making this podcast, trying to provide interesting information, and we definitely want to hear from you, so please, please, email PODCAST@HERMANNLONDON.COM. We’re going to be doing this live, bi-monthly, every other week and we’re going to have different listening parties but we also wanted to invite you to get involved with the pool table tournament going on here at our office. I know you are probably wondering why does a real estate office have a pool table tournament, but we just like to get involved with the community. We recently upgraded our pool table and it now has our company Hermann London logo on it and one of our main property managers is a big pool table guy so email TOM@HERMANNLONDON.COM if you would like to get in on our pool table billiards tournament.
So I guess I’ll just go ahead and jump right in. I’ve got my producer looking at me, like, keep it going. Keep it going. I’ll just jump right in here on my first topic. What I wanted to tell you about is a four family building I just bought recently. I’m going to go through the numbers of how it worked, the process from start to finish of buying the property, finding tenants, and starting to make money. So what I did is I found a property that was available for sale. This one just happened to be not listed, but you know, working with a realtor, we have access to homes that are listed, properties that are not listed, and different people that contact us that want to sell their properties. So what I did was I bought a four family building in South City; you may have heard of the Christy Park area. We paid about $60,000 for this property. I actually bought it with a partner of mine; a friend of mine. We both actually put $10,000 into a bank account. So we had $20,000 in the account, we put down the 20% that they required, and we ended up putting about $7,000 into the property. We got it inspected of course before we closed on it, so we had a list of what we were going to need to do. We were able to make budgets. I’ve got an accounting background. I love a spreadsheet. I even made the agenda for today’s show on a spreadsheet. So we got the property inspected, we knew what we were going to need to do, and we ended up finding a guy named Handy Man Larry. Big shout out to Handy Man Larry. He has been a big part of making my real estate investments successful lately. We also did a lot of the work on the property ourselves. So now we’ve got $60,000 into the property, we put an additional $7,000 into the property, and we ended up with four units, totally rent ready; upgraded probably even a little bit nicer than we needed to do for the area that the property is in. We ended up renting each unit for an average of $600 a unit. So that’s $600 a unit times 4 units at $2,400 a month in rental income. Our monthly payment; that’s principal interest, taxes, and insurance, totals $750. We actually had insurance that was a little bit higher than we had planned because it is a full brick building. So our monthly payment is $750 for a total profit per month of $650. Now we, myself and my business partner, neither one of us wanted to be the property managers for the property so we do use a property management company. It happens to be the Hermann London Property Management Group, of course, and that way we really turn this into an investment that is just like owning a stock, just like owning a bond or whatever. We don’t really have to deal with the property very much. Occasionally there is a little something that needs to be fixed. The property manager calls us, we say yeah go ahead and fix it, and he takes care of it. It really works quite well that way. The other things we had to do along the way is find a tenant. To find a tenant you do have to pay a realtor an upfront fee, well not an upfront fee, but a fee equivalent to about one month’s rent, so we paid a realtor to find us the tenants. The tenants themselves actually apply. They pay the $40 application fee. We use a service here at Hermann London called Triple A Screening. Triple A Screening does a background check, a criminal history report, a credit check, a rental verification, an income verification, and the great thing about this company is they actually call the current employer and verify that the person works there. They call the past landlords and ask them whether they would rerent to these people. They really put together a really great looking report and it’s very full of information that helps us make a decision on who to rent to. And we’ve had to deal with some things, not necessarily on this property, but on another recent property, that I rented out where the people’s credit, and kind of the whole situation, was a little bit less than the exact desirable situation, so what we did is we asked them to pay a higher security deposit than normal. They are actually paying a double security deposit and after one year we are going to give part of that back assuming that they are good tenants, keep the property in good condition, and they’ve signed a two year lease, and we are happy about that and we will have to see how that goes. You can see more information and pictures about this building on the site. The building is on the street of Rosa. You can see pictures of the building at HERMANNLONDON.COM . We also have links to the Triple A Screening Company that we use if you go to HERMANNLONDON.COM . At the top you click on PROPERTY MANAGEMENT, scroll down a little bit, and you can find a link to the rental application. Because Triple A Screening is not our company we definitely suggest anyone who is looking for a screening service or background checks for potential tenants for their properties, give Triple A Screening a shot. And we also have on the website, if you click on TOOLS at the top, we have a mortgage calculator if you want to get down to the real nitty gritty numbers. We had the property purchased for $60,000, you know, you can enter in your exact down payment, you can enter in your estimated insurance , what the taxes are for the year, and you can truly find out what your mortgage payment would be. I was just trying to give you rough numbers today. Well up next we’re going to get John Charlton in here into the studio and we are going to ask him to tell us a crazy story of the week. You know, you’ve all probably heard of lenders. Every time you log onto your website or your email all you see is this is what the interest rates are and this is what your down payment needs to be. We assume most of you have a general idea of the rates so we don’t want our lender buddy to come in here and tell us the rates. We want him to actually tell us some interesting stuff. So we’re going to get John in here now.
Segment 2: Conversation with John Charlton about a credit repair scenario Adam-Okay. Well, thanks for coming in here, John. You had to come all the way from the office right next to mine but forward to hearing your crazy story of the week. I know it’s kind of tough to make a mortgage story a little bit crazy but what do you have for us today? John-I was just going to talk to you about a credit repair scenario that I just recently completed. Adam-Okay, let’s see where this one goes. John-Okay, well, so people are aware that credit matters on mortgages. Let me give you a concrete example of that. So I talked to a customer about two months ago and they were looking into doing a HARP refinance. And HARP, as you know, is like a rate and re-term refinance for eligible homeowners for Fannie May and Freddie Mack products. Adam-Home Affordability- John-Refinance Plan. That’s correct. Adam-There you go. John-…and basically, this customer, the scenario they initially gave me, I could do the loan for them. Refinance and get them a 5%. They were at 6 and a quarter on about a $200,000 loan and they were pretty excited and happy about it. I also looked at their credit report and saw that there were some things on there that could be easily fixed quick so we did a rapid re-score on them and raised their score 60 points and I was able to get them a 4 and 3/8ths instead of the 5% on an interest rate. So overall, they ended up saving about $250 just on a monthly basis on the mortgage. Um, but in addition to that I had them call their insuracne company, get them a new quote, because as you know, credit also effects your insurance rates, and they were able to get their insurance lowered by $150. So overall savings to the customer was $400 a month. Tax free raise of 4800. So, the reason I wanted to bring that up is- Adam-Can I ask you–sorry to interrupt you. Overall savings per month of how much? John-$400 a month. Adam-Wow. That’s nice. John-Yeah. So, customers don’t always realize they know they got a credit score and they know it’s something on their head. They don’t know how to fix it. They don’t know how to improve it. It’s something that when we have education on, we can share that with borrowers and prospective homeowners, because the same thing would apply for a customer who is looking to buy a house. If they could do some small things to enhance their credit, they are going to get a better interest rate. It is just that simple of a scenario. Adam-So the crazy part of this story is that you were able to refinance them. They basically had to do almost no work. No out of pocket money. John-No out of pocket expense. They just had to basically get a dispute removed off of their credit report, they had to put money on a Home Depot credit card that had a zero balance, and that raised their score. Just those two things. Adam-Okay, so now is their loan…they had almost paid it off and now they’ve got ten more years? Or, how does that work? John-Well, they were about five years into their current home loan and they refinanced, but the key thing is they dropped their interest rate by almost two full percentage points so their long term savings are huge as well as their monthly savings. Adam-Are there a lot of people still out there in that kind of situation? John-Absolutely. Home owners that have been in their loan for more than five years roughly, are people that are almost assuredly going to qualify for HARP. Adam-Do you see a lot of people with credit issues? John-All the time. Every day. Adam-And they don’t really want to do a whole lot about it do they? John-No. Never. I mean, they always are, they just don’t know what they can do, and that’s one of the things is that there’s all these myths about credit scores and what credit credit is. People think that if they pay their bills they’re going to have good credit; not always the case. So, one of the things that is important is to educate every person, you know, on these things and give them an opportunity to better their lives in a very simple way. Adam-Cool. One of the great things, or one of the benefits we have learned about having John here in our office is I got a call, as an example, I got a call the other day from one of my tenants, as you know, John, is interested in purchasing a property of mine that he lives in. He said, “…but, I’ve got some credit issues, got a few things to work on. Maybe I’ll call you back once I’ve get those things figured out, and maybe I’ll buy the property six months from now, 8 months from now, whatever.” John-Indefinite. Adam-Indefinite. John-That’s kind of what it is. Adam-I know from my experience that means I’m not going to but the property because he’s probably not going to do what he needs to do to get his credit fixed. John-He probably doesn’t know what he needs to do to get and most people don’t and that’s the thing, it is not rocket science, but it’s not something you have access to every day. People don’t know what their credit is. They don’t know what’s on it. Most people are scared, you know, if they paid one bill late in their life they think that their credit is screwed and their never going to be able to get a mortgage and their never going to be able to do this and that, and one of the things that I always tell people is, “Look, you know, my credit when I got married was probably in the 500s and now I’m at a 740”. And I can say that has everything to do with my wife but it also has everything to do with just looking at what I had and being serious about it and understanding that if I want to buy a house, if I want to get a new car, if I want to do anything that involves credit, that it’s something that has to be taken care of. Adam-So if someone wants to find out what their credit score is, if they want to start working on their credit score, if they want to get pre-approved for a loan, and anything like that, if they want refinance, how can they get a hold of you? John-Um, best way to get me is always by phone. My direct line is 314-744-7851. You can call at anytime. If I don’t get you right then I will always call you back if you leave a message. Adam-Call you by phone. I like that. I respect that. It’s, you know, I’m tired of Tweeting people and text messaging. John-Tweets have their place. I like to see what’s going on in the world. Adam-Do you have a Twitter? John-Yeah. Adam-What’s your Twitter handle? John-I’m not telling. Adam-Just give John a call. All right, thanks very much, John. John-All right. Thank you. Segment 3: Conversation with John Charlton about FHA HUD 203k rehab loans Adam-All right, we’re going to have John Charlton back because I’ve got a few questions, John. I’ve got a few buyers that I’m working with and we look at homes and it’s a little bit tough to find a home that has exactly what they want. We’ve been looking at some homes in an area where the people might not have been keeping up their properties. You know, they’ve been living there for 20, 30 years and, you know, the style was really in style back in the 80’s or the 70’s but it is not really in style right now. John-Right. Adam-And they don’t necessarily have the money to buy a home and put all the money into that they would need to bring it up to their tastes, right? And I think a lot of the buyers up front are thinking; Hey, John told me he’d give me a loan for 200, I’ll just buy a house for 170, and we’ll just use the rest of the money for our rehab. Well, that’s kind of the case, that’s not the case exactly, right? What do you call that when we do that type of thing? John-So, I think what you are talking about is like an FHA203K. Adam-Okay. Yeah. Exactly. John-So, yeah, I mean, FHA203K is a great product for a home buyer that is wanting to do some rehab to the property. Basically they are broke down into 2 different categories depending on the amount of money you need for the rehab and kind of the scale of the rehab, but in general if the repairs are less than $35,000 it is called and FHA203K Steamline. If it’s above that then it’s called a full 203K. Adam-So we, when we’re looking at the home we need to have some sort of general idea on how much we think we’re going to have to put into it to bring it up to their standards. John-Kind of the first thing I always tell people about that property, and we’ve talked about this in the past, is that, the person, if they’re in love with property, a 203K is a great product to kind get it up to speed. If they’re dreaming about what they would do, how they would enhance the property, that’s kind of the perfect scenario. And basically the way it would work is that, in a lot of cases you have customers that are thinking about doing sweat equity type things, you know, painting the walls, you know, which might sound like a small thing, but if you go buy paint it’s expensive doing it to the whole house. Adam-Doing the landscaping. John-Sure. Landscaping, you know, maybe doing some new cabinets, something like that. But in general, mostly sweat equity that they would do themselves. It’s kind of hard for them to gauge how much those improvements would cost or how much improvement it would do to the house, so in general, a person like that would just make a list of what they’re looking to do. We would provide that to our appraiser who would appraise as a subject 2 property with those improvements being made and they assign a value to the property based on all that. So, that would limit the amount that they could borrow but it would also tell them the amount they could potentially borrow as well for improvement that they want to do. Adam-Okay. So we, we’re working with a buyer, let’s say we’re looking at home in a subdivision where the homes are $200,000 on average. You know, currently, right, at today’s market we have to be careful about that, and we find a home that is maybe a foreclosure, and it needs a lot of work, not just standard updating stuff, but it’s maybe missing a toilet, and it’s missing a kitchen sink, and the railroad ties that are holding up part of the yard are all breaking down and we need to put something like $20,000 into the property, right? So, we can but it for 140, we’re going to get a 203K loan from you, hopefully for $20,000, and now we’ve got 160 into it. How does that work? Does it need to appraise for 160? Does it need to appraise for more? John-160 or higher is going to be the threshold for that and the borrower is going to bring 3.5% down as they would on any FHA loan. You know, it would just be off the higher amount, that subject 2 value, and the appraiser’s going assign that value, so I mean, in that scenario it’s possible that that subject 2 value might be higher than what they’re even needing for their improvements. So, let’s say they needed that $20,000 but the appraiser says, “Hey, if this is updated, and you do these things, the value might be 180.” Adam-It gives us a little bit more room in case we decide we want get a nicer- John-If you want to get a higher loan amount. That’s correct. Adam-Can we buy a refrigerator with this money? John-You can buy appliances, I mean there are some restrictions on that. That would be a case by case thing. Anything that you would want to do would certainly be a case by case, because the problem with appliances is they can be removed so it’s not necessarily going to enhance the value. Adam-So we’ve got the one that’s under 35,000. It’s a streamline, you call it. For that one I can use crazy uncle Mike and my handy brother to do the work but still I need to get their bid up front. Do I need to get that bid before we put the property under contract? John-No, you don’t. No, you can have the property under contract because the contract is going to read whatever the sale price is independent of the loan. Adam-I like that answer, John, because I like to tell my buyers that we need to take control of a property before we put a whole lot of work and time and effort into it. John-Yeah, you don’t want get bids from contractors if you don’t even know if you’re going to buy the house. Adam–buy the property, right. So then let’s say we do take control of the property, we get the bids, and we’re going to be out at $50,000 now, can we still use crazy uncle Mike? John-You can’t use crazy uncle Mike at that point. So when you go to a full 203K you have to hire a HUD Consultant, and those are listed on FHA’s website, and basically they need to have plans drawn for the property, and it doesn’t necessarily need to be architectural plans if they’re not changing or altering the building, but they have to be plans from a contractor as far as the jobs and what they’re going to do and the costs associated with those jobs, and the consultant’s going to basically say whether it’s a feasible improvement or not. Same thing would apply with the appraisal, so if in your scenario there you needed to appraise for the 190, they’re going to need to know what all the scope of the work is. Adam-So I need a HUD Consultant. That sound’s expensive. Can I wrap the cost of him into my 203K loan? John-HUD Consultants, they can be paid that way, they normally are going to ask for some money up front and it will be a cost to the buyer typically. Adam-Okay. If I need a HUD Consultant, can I get a list of those from you? John-You can. Yeah. I would just pull it off HUD’s website, which I could show anybody how to do as well. Adam-HUD has a list of those people that we can use? John-That’s right. Well, HFA and HUD are kind of synonymous in the the loan world, so yeah, off the HUD website, the HFA website, same thing. Adam-A lot of red tape here. John-Not necessarily. I mean, the thing with full 203K’s is that they’re very time consuming. You know, it’s not a 30 day start to finish. It’s not a 45 day start to finish. It’s usually more in the 2 to 3 month range because of the amount of people that need to see the scope of the work and the banks have to believe that it’s a good loan for them. Adam-Okay. Now I get why you said at the beginning that you have to really really love the property. John-You’ve got to really really love the property. Adam-And it’s got to make sense. Why would I do it on the house when I can go 2 doors house and buy basically the same house that’s already had the work done? John-So my only reason for it, I guess, is because that place that they might be buying that’s already got everything done might not be the style that they like. I mean it does give you the ability to pick your style for your home. So I mean, that’ my real argument, really. Probably my only argument I would say for doing a full 203K is if what you can do with the amount of work you can do is going to enhance that property and make it totally you, and the customer is dreaming about it, they’re thinking about all the things they’re going to do to that house to make it so them. You know, if that’s your borrower, then we have the program for them. If it’s not, then I suggest something a little easier. Adam-Perfect. All right. If you have any more questions about 203K’s, we would love to hear from you. Just send us an email at PODCAST@HERMANNLONDON.COM . And John, once again, how can we get a hold of you? John-Always, you can get me on my direct line 314-744-7851. Leave me a message and I will call you back if I don’t get you right when you call. Adam-I know you are a lender and do you have any sort of disclosures you have to give us? Do you have to tell us your NMLS number like I hear on the radio? John-Well, wait, I don’t know..where is this recording is going to? I can tell you my NMLS number is 188910. Adam-Thank you very much. John-Hey. Done. Adam-All right. Thanks, John. We look forward to hearing from you in the future. John-All right. Thank you. Segment 4: Listener questions about VA loan inspections and why doctors are often turned down for loans All right, well, next up what we want to talk about is a deal of the week, and the deal this week is actually a listing of mine. I have a property that is listed in O’Fallon. This is a family property or it could be a great investment property too. It is on the highway 70 side of O’Fallon. It is about less than a mile from Ethyl’s, if you’ve ever been to Ethyl’s, played a little sand volleyball. Basically this home is a 3 bedroom home. It is a little bit over 1,500 square feet. It’s been totally updated; 2 car garage, walk-out basement, one of the biggest decks I’ve ever seen, backing up to the woods so you have privacy back there, and your master bedroom has a full walk-in closet. Of course it has it’s own bathroom. 2.5 baths total in the house. Basically it’s listed right now at $179,900. We’re talking about a price reduction and I think it would make a great home for a family. I also think it would make a great investment property, like I said. Most likely the rent would be somewhere around $1,500, so get out that mortgage calculator I talked about earlier–on our website at HERMANNLONDON.COM–and enter in how much of a down payment you can afford, and you can figure out if this would be a great deal for you. We also have more pictures and more information about this house on our website, of course, like I’ve already said, but also on social media. So you can go to Facebook and search for Hermann London Real Estate Group and you’ll find our Facebook page and on there we have information on there about this house and some of the other homes we have listed that, many of them are also great deals. So next up is my favorite segment. I wish the entire show could be just about listener call-ins and question answerings. As this is our first show, we don’t have any listener call-ins right now but we do have some questions to answer that people have asked, and I really, really, really, want to encourage you to ask your questions. No question is too detailed, too not-detailed, too high-end or whatever you want to call it, so please ask your questions–PODCAST@HERMANNLONDON.COM . First off we had someone who asked; What is different about getting a VA Loan from an FHA Loan or a conventional loan or from paying cash in terms of the inspections? The main difference is that there’s no real difference in the inspections that are available to you. Most buyers these days are getting at least the building inspection, the termite inspection, the radon inspection, and the sewer lateral line inspection. The main difference with the VA Loan in terms of inspections is that the seller has to pay for the termite inspection and the buyer is just simply not allowed to pay for it. Now you’ll see that on our VA Loan rider that we’ll attach to the typical residential sales contract. Next question. Why do doctors have trouble with loans? Interesting enough for me I’ve been dealing with a couple different doctor clients the last couple months and it does seem like, hey, this person makes tons of cash and they should have no problem getting a loan, but a few things come up; whether they’re self-employed or whether they’re a W2 employee. The other thing is whether they’ve been in the job for more than 2 years. Kind of a third issue is that they often want to get what they call a jumbo loan or a loan that it larger than $417,000. The first part of that is if they are a self-employed doctor and instead of being a W2 employee they’re going to have a little bit more trouble because they’re basically owning their own business and people that own their own business always have bit of more trouble getting loans especially when they’re newer to owning their company. Like I mentioned in the second part of that is they’ve been a doctor for less than 2 years then essentially they’ve owned their own business for less than 2 years which makes it harder for the loan company to say; Hey. We know for sure that you’re going to be doing this, you’re going to be making money, and that you have a path of payments. Those are actually all of our questions for the week. Please go to our website, and email us in, and ask us some questions. Last but not least we’d like to send a special thanks out to our producer, Joey Vosevich, whose been sitting here in the Hermann London studio with me all day and working on our podcast, so he’s going to make this thing great along with our whole team here. Thanks for listening. Check out the website. See you in 2 weeks.