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Our guest for this episode is the man, the myth, the legend himself, Mr. Ashley Patten of Patten Law Firm. How are you?
I’m doing good. Thanks for having me again.
I love all the topics that we get into. We get into all kinds of crazy title questions. I was at our weekend retreat. I have a situation where we’re looking to buy a property, but the son that has inherited the property, lives in North Carolina, and his dad got married 90 days before he passed away from Lou Gehrig’s. He got ALS, met some lady, got married, and now she’s living in the property life estate. She gets to live there rent free for as long as she’s alive. Dad apparently was in his 70s, this young lady in her 40s, so she might live a while. To me it’s like, “We can buy this from the son,” but can’t do squat with it for a period of time. An attorney I was talking to said there’s some subrogation rules. If she’s not paying the taxes, you could buy the tax lien from the county. It was a little bit sketchy. Do you know about those rules?
In Texas, we have what is known as surviving spouse homestead rights. That’s paramount to the survivor rights. In other words, the survivors, the heirs, the rightful owners of the property, they inherited the property subject to her homestead rights. As long as she remains in the property, it’s almost like it’s hers.
It seems like the definition of remains in the property is pretty loose. In other words, if she vacates the property for 60 to 90 days and she wants to come back to it, she technically hasn’t vacated the property, right?
She’s got a year. She could be gone for a year. The key in homestead is presence and intent. That’s the definition of a homestead, the legal definition. Where do you reside? Where do you intend to reside? Intent is objective. It’s objective. It means just like, “I intended that, but you did something totally different,” so it’s just a manifestation of intent.
Something brought up was equitable subrogation. Maybe you can explain that one to me.
You have equitable subrogation when anytime you do something on behalf of somebody, you’re subrogated to their rights. For instance, if you pay someone’s mortgage through equitable subrogation, you have the rights of the former lender. When you lend money for taxes, you got to have a license to lend money for taxes; otherwise, you’re not going to be subrogated to the rights.
You’ve got to have NMLO, National Mortgage Loan Origination. Not just an NMLO, but once you’re NMLO, then you have to have the license with the state and the county, right? That’s an extra step. I understand that second hurdle is not that big of a deal. The first hurdle is a pretty big deal. I know of some other groups in town that are teaching making tax lien loans and all that because that used to be a pretty popular method to take over properties. It’s my understanding that the rules have changed in last two or three years. Is that right?
They’re pretty much still the same in Texas though.
How can I lend money? Can I do tax lien loans and not get in trouble on making those loans?
Not in Texas.
How long has it been that way?
Texas law changed about four and half years ago, so all the big tax groups came in and they squashed the market.
I heard it like three-fourth of all the companies out there are owned by the same group of guys, all owned Red McComb’s out of San Antonio. The guy that owns all the car dealerships and used to own the Minnesota Vikings, used to own the San Antonio Spurs. He dominates the market in Texas, kind of behind the scenes, nobody knows him. They got in there and they wanted to help the little guy, I’m sure, being the lendee, and what they did is they squashed all the competition.
They squashed it all out. Getting back to your original question about as far as using the taxes to squeeze out the homestead interest, the way they do taxes now is they have an auction, the first Tuesday of the month, they auction off taxes to the highest bidder.
That’s the constable sale for taxes. Trustee sale for mortgages.
They are offered to the highest bidder. If $10,000 of taxes, somebody might bid $15,000, $20,000, $25,000 or $30,000. That may not be the smartest way to get rid of homestead rights because you’re bidding against everybody else. Who’s to say that you’re able to get that?
Who knows if you would or not?
Then once you do receive it, they still have redemption in Texas.
Explain redemption. Let’s say somebody owes $10,000 in back taxes, goes to auction, and somebody gets $15,000, but the person that lost the property, they want to redeem it.
They got to pay 25% of $10,000. Obviously that $5,000 is surplus, that goes directly to the court.
The person that bought it at auction for $15,000, does he get $10,000 plus 25% or does he get $15,000 plus 25%?
He gets his $15,000 back.
Then he gets 25% on the $10,000?
$10,000 plus he is able to get back any costs he had to spend. In other words, if he spends a certain amount of reasonable dollars, if he spends a certain amount of money fixing the place up or starting everything ready, he can get all that money back because it’s improvements to the property.
I thought that was the risk that he takes. It’s my understanding that most of the people that get redeemed, if you will, if they’ve put the money in within that six month window, that’s the risk they take, that they don’t get compensated for that. That’d be a big lawsuit?
They get that back. They may have to fight for it, but inevitably they can get that back and they just may have to sue for it, but statute is available.
We got technical, so let’s get back to bread and butter. You see a lot of new investors get started. What do you see as the best way for a new investor to get started?
Find somebody who you can trust to shadow. We talked about shadowing all the time. You run a tremendous program. You train a lot of people. This is a plug for you all, but I would definitely find somebody like the Right Path.
Just find Right Path. If you’re here on the show, you found us.
That’s the best thing in the world because there are a thousand mistakes that people make. Why make your own thousand mistakes? Why don’t you learn from somebody? There’s a price to pay in everything you do, but the problem is most investors, they get one bite at the apple. If their first bite turns out sour, they will never be able to become an investor, which to me, if I died and come back, that’s what I want to be. I want to be an investor.
One thing is a lot of investors can calculate their potential return on an investment pretty easily. They can say, “I can buy this house for $135,000. I can put $105,000 in it, and I’m all in for $240,000. I can sell it for $320,000.” They can calculate what that spread is. What they have a tougher time calculating is what’s the risk in terms of the numbers that they’re using. Are they stretching in all on that ARV? Are they stretching it all on that rehab number? Are they stretching it all on their holding cost, etc.? Where are they calculating a risk factor for the amount of return? It’s easy to calculate the return rate, it’s harder to calculate the risk factor.
Second thing I’d say is what’s the cost of education? I used to be involved in the nutrition supplement business and people used to ask me all the time, “How much are those vitamins that you take?” “How much did they cost?” I wasn’t trying to be a smart aleck, but my answer was, “You mean if you take them or if you don’t?” Because there’s a cost for investing in your health. You take good care of yourself. You go to the gym, you eat right, you’re exercising, those kinds of things, there’s a cost for doing that.
You have to pay the trainer. You’re a CrossFit guy. You got to pay for your CrossFit membership. You got to pay with your time, but what’s the cost of not doing all that? Most people go, “How much does it cost to do that?” You mean if you do it or if you don’t? Because there’s a cost either way. What’s the cost of heart disease and diabetes and having a stroke and those kinds of things? Most people just look at what’s the out of pocket upfront cost. There’s a cost for doing it and a cost for not doing it, and a lot of people don’t know how to weigh which is more expensive.
It’s like when you hire your first assistant, you always worry about what the price is, but one plus one can equal three.
In fact, when Jason and I got started, we talked about synergy all the time. Jason and I bought seven houses in that first five months. We got started from July until December. We bought seven, but the next year we bought 67. When I go back and think about that, “I probably could have done three or four houses that first five or six months and he could probably could have done three or four,” but to do 67 that next year, or by myself to do 35 houses, nobody does that.
I remember when I first met you all, you all told me that you’re all going to do about 50 or 60 houses and I hear that story so many times when I talk to new investors. Sure enough, week two, you’re already blowing and going, so you all made something that synergy. It’s just a beautiful thing. I would tell investors that quite frankly, align yourself up with the Right Path, align yourself up with a network.
It’s Patten Law Firm, PLFPC.om, 713-621-5808. That’s where we get all of our deals done. That’s where we get our title work done. That’s where we get our deals closed. We did three closings with you guys this week. Thanks for coming in man.
I thank you so much. I appreciate it.
Our guest is Jeremy Humphrey of Principle Inspections.
How are you doing?
Doing great. How are you?
I’m doing well.
Principle Inspections, tell me about your specialty.
Our specialty is definitely investors. That’s what we do. We do inspections that are focused for investors only and they’re tailored for that same reason. We keep our prices low and we do very detail-oriented reports in some areas. Roofs, foundations, air conditioners, big ticket items like that, we do very detailed inspections. We know that investors are also looking to do a lot of repairs on the homes and new flooring and new paint and all that stuff, so we don’t cloud the report with a lot of unnecessary detail.
I’ve never been in the inspector. I’ve looked into the educational part of it. A typical retail inspector is going to go through seventeen major household systems that inspectors are supposed to look at, what’s up to code, what’s not up to code. There’s a long list of the items. The hot water heater for example and other things like that, and you may go in and as an investor say, “I’m planning on replacing the hot water heater anyway. There’s no reason to even take a look at it because I already know even if it’s working, I’m replacing it,” right?
Right. We do have to follow the TREC standard when we’re doing pool inspections, so we do have to look at those things and report them, but you’ll find that if you read different inspection reports, some are tailored for retail, some are tailored for investors, and some are somewhere in between, but some of them will have pages and pages of the whole history of water heaters for example.
There’s a lot of boilerplate information is what I say.
We take it from the standpoint of, “I’m in the information business. I wanted to provide that to the customers and I want it to be accessible,” Essentially it’s “The water heater is working,” or “The air conditioner is working,” and “Here’s the temperature differential and here’s the one thing that needs to be repaired on it,” but it’s not four pages of information on just one air conditioner. It’s accessible information.
They have those what I call boilerplate reports where they have a lot of pictures of explaining in pictorial diagrams, so you have two or three pages of stuff that is not related to your property. It’s general educational information and in my opinion, it’s what justifies the $500 for the retail report. You get this 55-page report back and it scares the snot out of a lot of retail buyers.
It scares investors as well.
The timing on that was perfect because it does. I remember when I first got started as a general contractor and I would go out and walk a property, at first I’d say, “The inspector is going to be there at 10:00 on Tuesday. I need you to be there.” I’d start showing up at 10:00 on Tuesday for that appointment and then somewhere about an hour and a half into the inspection, I’m about wrapped up walking mine, giving them the bid and all that, and the inspector says, “You may not be aware of this major issue.” The investor was there and they go, “Really? I wasn’t expecting that.”
That pretty much kills the deal, “Sorry, Tom. Sorry you had to come out.” Then I realized that, “I didn’t ever want to go out and walk a house as a contractor until it had passed the inspection phase because an inspector normally needs to go in for a new investor before a contractor does. In fact, we developed a policy that if the report from the inspector was not already back in your hands and it was still a deal, then we don’t want to go out. Because I’d say about 40% of the deals would die at the inspection phase. Only 60% pass through the inspection phase where they were bought deep enough. Have you found that to be about the same?
My percentage is lower than that. I don’t think that we kill that many deals, but that’s not to say that we don’t. Because certainly as an inspector and my whole team, we’re not in the business of killing deals, but we are in the business of providing fair third party information, which is unbiased. I would think that it’s more like 25% that they walk away from after the inspection.
I’m going to give out Jeremy’s contact information. That is PrincipleInspections.com, phone number is 832-684-5516. Any investor that is starting out brand new, there’s a process of being successful as a real estate investor. The first thing you have to do is you have to find the deal. Then the second thing you have to do is be able to analyze the deal, and part of the analysis of the deal is you’ve got to be able to accurately determine your comps. NextGen Appraisals can help with that. Second thing is you have to determine your repair number. Contrary to popular belief, it’s not generally the contractor’s job to create the scope of work all by themselves.
What you want to do is you want to be able to have an inspector that can show all the major systems that are broken and need replacing or repair. Once you have the list of the major systems, then you can go to the contractor. Contractors don’t typically determine whether or not something’s working or not. What they do is if you say, “I want to replace the air conditioner,” then they replace the air conditioner. If you say, “I want to replace the hot water heater,” they say, “This is how much it costs to do that.” I know you’re different because you’re an investor also, but it’s amazing to me how many inspectors don’t know how much it costs to replace a hot water heater or how much it costs to replace an air conditioning system. Things like that are not in their scope.
Hand in hand, if you’re a brand new investor, you need to be able to have an inspector that you trust and you need to be able to have an appraiser that you trust, and you need to have a contractor that you trust, and being part of Right Path, you get that team. We’ve got Principle Inspections. You can trust them right off the bat. They only do investor inspection. That’s huge. Anytime that you get people that are specialized, like going to the doctor. You don’t want to take your nine-year-old child to a neurosurgeon when all they have is a cough, cold, sore throat or a flu.
You take him to the pediatrician. By the same token, if you’ve got a brain tumor, you don’t want to go to the pediatrician, you want to go to the specialist that specialized in that particular thing. I love anytime you have a trade that is specializes, either retail or investor. Because I’m an investor, I love investor-friendly contractors, and I love investor-friendly appraisers, and investor-friendly inspectors. You’re the best in the marketplace, PrincipleInspections.com, 832-684-5516. I want to go back Harvey. Based on Harvey, what are you seeing? I’m sure that you are seeing a lot of inspections based on Harvey flooded houses. What are some of the surprises? Are you seeing any surprises on things that need to be done that wouldn’t be in a typical non-flooded house?
Not really. There’s the obvious answer, the drywall and all of that stuff, but there has not been a whole lot of other things. The only thing is that air conditioners have to be very carefully evaluated.
The condensers especially. Whatever was exposed outside or if you have a one-story house where you had the coils, furnace, or the heater was in a closet, like a vertical type unit.
Aside from that, that’s going to be contingent on whether the power is on for the inspection or not, there is not a whole lot that we’ve seen that is just crazy different after Harvey, even in the flooded homes.
You don’t have to wonder what’s going on behind the walls.
We can see the pipes, all that stuff that’s just exposed. One thing that is shocking is how many homes have or have had termites that termite inspectors and no one else can see. The termites just get in there, they don’t leave any trace of evidence outside the house or inside the drywall until it floods and you pull that drywall off. That’s probably the most surprising thing. It is insane how many houses have termites.
What percentage would you say that is of the houses that you’ve been seeing?
25%. That’s the older houses.
What would you have anticipated before the flood? 10% or something like that had termite damage?
I would say significantly lower.
It’s more than double of what you would have expected. Especially when it’s opened up like that, it’s relatively inexpensive to fix, because you’re just replacing some 2x4s, and structurally you’re improving the quality of the house, and then you can treat those areas. That was PrincipleInspections.com, 832-684-5516. Thanks for joining me.
Our guest is Jerry Ta. He’s with Propertycare, that’s PropertyCareHouston.com, 713-489-7653. Welcome to the show, Jerry.
Good to be here.
How are you doing?
I’m doing well.
I know Harvey is still on the minds and will be for the next probably two years. We see some incredible buying opportunities, especially in the buy and hold space. We’ve always recommended in the Houston marketplace houses that are three twos or four twos, maybe four two and a halves that are 2,100 square feet and smaller. We like 1,300 to 1,400 square foot houses a lot, but houses below $150,000 ARV that rent for $1,600, $1,700, $1,800 a month. As you get more expensive than that, then the amount of money that you’re paying versus the rent, you can’t get 1% rule. The one 1% rule is that if you have $150,000 house, 1% of that is $1,500.
You want to exceed 1% of the ARV, the After Repair Value, of the house and rent on a monthly basis, then you’ve got typically a good cash flow. Because where your PITI is going to be costing money, principal interest, taxes, insurance, all that, you’re going to cash flow the best. As you move up into $400,000 house, it’s probably going to cost you $3,200 to $3,500 a month in payments. You don’t get $4,000 a month in rent. There’s a different supply and demand curve on that.
Even at $2,000, you’re not getting $2,000 on rent. Here’s a question for you in regards to Harvey since you’re bringing it up. I walked a house with an investor recently and we walked into the house that was flooded. I’ve seen a lot of houses that got flooded. Most of them sheetrock has knocked out, it’s been drying up. This one we walked in, everything is still there. All sheetrock is there, the furniture is still there. We saw walls with mold growing up on it.
How high was the mold?
About my height, so about 5’6”, six feet top.
Any idea how much water it had in it?
About three feet.
From a safety standpoint, you’re going to have to hire a crew. You should hire a crew. Not everybody would do it this way, but the way I would do it is I want to make sure that the crew had eye protection, lung protection, things like that, gloves, and that they were suited up. It’s not like asbestos or anything like that from that standpoint. The problem is that we don’t know how much is too much of mold or mildew to inhale because there is no standard that says this is safe and this is unsafe. The standard in terms of testing is that you have to have less mold inside the house when you do an air quality check and outside because there’s always mold just outside.
If you and I walk outside, we’re breathing mold. It’s in the air. In fact it’s amazing because I’ve been riding a motorcycle a little bit, not a ton, but you go through a neighborhood that’s been flooded and you smell it outside. There’s mold in the outside air. You’re going to have a little bit more expensive demo because most of the time the crews aren’t going to go to the expense of buying all the equipment. It’s not a lot of money, but they just don’t go to Home Depot and buy the mask and buy the glasses and do all those kinds of things, and so I would want that.
Then it’s a matter of throwing all that stuff away because once the mold is out of the house and you bring a dehumidifier in, then from a liability standpoint, the right way to do it is you hire a mold remediation plan writer. It’s a company that does the inspection and all that, and that company has to write the plan of what gets done and a second company has to execute the plan. If you do that, there’s some debate about whether or not you would demo before you bring in one of those plan companies, the technical right way to do it is that’s what you should do.
What is the ballpark cost?
The tough thing about that is it used to be, in my opinion, more expensive than before Harvey because if you’ve got a mold house, there were a limited number of companies that were certified to get to do those kinds of plans. Now, more companies have gotten certified and it’s driven the prices down oddly enough. In fact, one of our one-on-one students bought a house in Sugar Creek and they got it for like $0.55 minus the cost of repairs for a Sugar Creek house. The house did not flood during Harvey, but it had a hole in the roof and had been shut up for six or eight years for mold to just get in.
There was moisture in there and mold started growing, and so they’ve done that and it was a couple of thousand bucks for the company that wrote the plan and it was $10,000 or $12,000 for a fully certified to do everything correctly in terms of removing it. They had more than budgeted that. It was about $10,000 all total in terms of extra expense. That’s probably what you’re looking at on some of these houses. Here’s what I see is going to end up happening because I know that oftentimes properties like that are going to end up being underwater, no pun intended, on the mortgage. A lot of families are going to be walking away from these houses. I don’t think that the banks are going to start foreclosing because
I don’t think that Chase Mortgage or Wells Fargo or Bank of America, the big banks, are going to want to own that asset because of the liability. If you really understand where the liability lies is that you’ve got to disclose to every single person that goes in. It’s not just like putting a SuperBox on the door and calling CSS, Centralized Showing Service, and letting Centralized Showing show the house. In fact, that was one of the reasons why coaching students of ours got such a great deal on it.
Although it was listed with an agent, it was a pocket listing still and the agent and her broker were struggling from a legal standpoint with how do we manage putting this property on HAR as a listing. They hadn’t put it on HAR yet, and they were worried about the fact that they were going to have to be there every single time that someone accesses the property and provide them with the proper protection. They were in the process of having their attorney draw up the legal waiver, the release. Can you imagine what a nightmare that is and does that still absolve you from liability of exposure in this house? We don’t know what the true underlying liability is.
It was 2012 or 2013 when the foreclosure was dying down but we saw banks hire asset managers and instead of selling them as straight messed up foreclosures. They were putting new carpet and paint. You don’t see that happening in this scenario?
I don’t only because they did that post-foreclosure. There’s a difference in liability with Texas law, between being the lender, being the first lien holder, and being the owner. Technically the lien holder is not responsible for the insurance. They oftentimes want to maintain insurance because they want to protect the asset, but they’re not required to pay HOAs. They’re not required to do a lot of things that the owner of the property is. From a liability standpoint, if somebody gets hurt and you’re the lender, you’re not liable for that. You can’t be sued. If you are the owner of the property, then you take on a lot of liability.
What they’re going to do is they’re going to keep the person on the deed that that has defaulted on the mortgage. It’s either going to be short sales or they’re going to unload these as non-performing notes in a tape to some big asset manager or something like that, and there’s going to be somebody that steps in like that. I don’t know if it is going to be 50/50, if it’s going to be 80/20, I don’t know if it’s going to be more short sales. I look at it logistically how many man hours it takes to do a short sale times if there’re 10,000 properties like that, 20,000, 30,000, or do they just sell off 30,000 properties or 10,000 non-performing note units at a time to big hedge funds and stuff like that. PropertyCareHouston.com, 713-489-7653.
What are you seeing happening to rent? Are rents changing at all as a result of Harvey? Because there’s a supply and demand. A lot of people are saying there’s more people that are needing a place to rent. I don’t think folks in Houston realize how many people are living in hotels still that are being paid for by FEMA, that folks aren’t back in their house yet.
We got that big rush in September. At that point, we leased out all our units, anything that was worth leasing out back in September and we did increase here and there in regards to someone with FEMA voucher’s running up, but from what we have seen FEMA vouchers had ended up for the most part at the end of September or month later after that.
However, we just did an event at the hotel and there are still people there.
I guess we’ll find out. It’s one of those things when something’s free to you, you milk that thing for as long as you can.
PropertyCareHouston.com, 713-489-7653. I know you all do flat rate billing on property management, right? Can you give up the amount?
Yes, it’s $85 flat fee.
What if it’s a 1,100 square foot house and it’s like $1,300 a month. How much do you charge?
What if it’s like a million dollar house with $5,000 a month rent?
It is $85.
$85 a month, that’s a steal. Isn’t having your time back worth $85 a month? Why would you do it yourself? Thanks for listening. Our guest has been Jerry Ta. He’s the owner of Propertycare, PropertyCareHouston.com, 713-489-7653. Thanks for coming.
When I was younger, I want to figure out everything myself. There was always that story about a man started working for the company. He started sweeping the floors and he worked up to cleaning the bathrooms. He worked up to being a sales guy, then being an apprentice. The next thing you know, he’s the CEO of the company. Things move a lot faster in the age of technology. What you want to do is you want to stand on the shoulders of other people. You can learn through the school of hard knocks or you can and have other people invest in you in terms of teaching you how to be successful. Go to RightPathRealEstate.com and learn how to add real estate investing to your investing portfolio. Do it the right way.