At the end of every year, every one has a Top 10 list. As 2017 ends and we begin 2018, Florida Real Estate Law and Investment Blog is pleased to present its first ever Top 10.  This is my own Top 10 list of my favorite posts from 2017.  It is not based on number of hits or any other qualitative data that I received over the year.  Rather, it is my own list of favorite postings, the ones that I most enjoyed writing and the ones that I think might have the most impact or meaning.  I did receive a lot of positive feed back on many of these posts and, if you haven’t read them, I encourage you to do so.  They are worth a re-read.  I’d love your thoughts this time around.  Looking forward to 2018!

#10 – Proper Zoning Determines Property Value – Posted March 7, 2017. A simple discussion about the correlation between a property’s zoning and the value of the property and how knowing the zoning prior to entering a contract can help in negotiations.

#9 – Renewal Option Language Often Overlooked – Posted July 24, 2017. Lease renewal option language is important for tenants in planning for the future.  It should not be overlooked when negotiating the original lease.

#8 – Offset Language Puts Lender’s Hands in the Cookie Jar – Posted May 22, 2017. I liked this post because it told a good story about a good client to work for, the Girl Scouts.  We had a problem with the loan documents that could adversely affect thousands of girls and their cookie money which no one intended or wanted – and we solved it.

#7 – Could the Grenfell Tower Disaster Happen in the United States? – Posted July 3, 2017. After the fire, many of us wondered how something like this could ever happen and whether it could happen in the US.  The post looked at US building and fire codes in the projects.  Despite our laws and codes, are we protected?  As I am finishing this post, a tragic apartment fire killed 12 people in the Bronx.  The investigation is just beginning, but I think the answer is that we are not fully protected in older buildings.

#6 – 6 Protections for Real Estate Partnerships – Posted July 31, 2017. We talk about real estate every day.  This post outlines some of the protections that should be included when we form entities with partners to invest in real estate.

#5 – US Withdrawal From Paris Climate Accord Met With Resistance From Local Leaders – Posted June 15, 2017. I have blogged many times about climate change and sea level rise and will continue to do so.  This is a particularly important topic to us in South Florida.  South Florida leaders in particular reacted to the news when President Trump announced the US was withdrawing from the Paris Accord.  South Florida will continue to abide by the Accord as it battles rising seas and climate change.

#4 – House Flipper’s Attempted Purchase Exploits Elderly Woman – Posted December 18, 2017. Posted just a few weeks ago, this article has touched a nerve with many of my friends and colleagues.  We see and read so much about exploitation of the elderly, and this post talks about how the real estate industry is also involved.  Beware.

#3 – Riding Out Hurricane Irma – Posted September 18, 2017. This was the single biggest news event in South Florida in 2017. We were fortunate, compared to the people on the west coast and those in Houston and Puerto Rico and elsewhere in the Caribbean.  Nevertheless, we had our story to tell.

#2 – Smart Houses Make Me Feel Dumb – Or At Least Unsafe – Posted October 30, 2017. Amazon Key was the inspiration for this post, but it encompassed all the products that make your house “smart”.  How secure are these products?  I expressed fear about a loss of privacy, not to mention trepidation about Amazon’s physical access to your house.  A few weeks ago, there were news reports of the first hacks into Amazon Key.

#1 – Email Scam/Wire Fraud Hits Close to Home – Posted July 10, 2017. This post has probably generated the most attention.  Hopefully, everyone in real estate will be more diligent and we can stop the fraud and the scammers.  I should put a note on my calendar to re-post this at least once a year as a reminder.

Happy New Year everyone!

My wife is a huge fan of HGTV. She loves the various shows where different buyers go to different cities and shop for houses.  They work with real estate agents who show them 3 different houses that straddle the buyers’ budget and, within 30-60 minutes, the buyers decide on one house.  My wife also loves the renovation and flip shows like Property Brothers. We all know about these shows.  A buyer purchases a beat up house that no one wants, spends an unlimited amount of money to fix it up, and sells if for a tremendous profit.  My wife asks me all the time “why can’t we do that?  You’re in real estate.  You should be able to do that!”

I think back to 2006-2008, before the crash, when “everybody was an investor” and flipping houses.  Many people used a simple model, buy, put minimal, if any money in to fix it up and sell as fast as possible. When possible, simply assign the purchase contract. Most importantly, use OPM – “Other People’s Money.  Sometimes the OPM was the ultimate end user’s money, sometimes it was hard equity loans.  Very rarely was the flipper able to borrow from a big bank.  The flippers weren’t in it for the long haul, their income was not verifiable and their buyers, well, let’s just say, they contributed, in many cases, to the mortgage fraud that permeated the times.

When the crash happened in 2008-2009, the source of many flippers’ money dried up, and, with the crack down on mortgage fraud and the foreclosure crisis, end buyers became scarce.  The market slowed dramatically.  But the smart investor continued to work.  Today, the business has recovered and continues to grow.  The Wall Street Journal reports that a number of big banks are getting into the game by extending lines of credit to companies specializing in lending to house flippers.  These loans aren’t directly to the flippers, but to smaller companies who in turn, make loans to the real estate investor as the loan are not conforming.  This is bringing flippers into the debt financed market at lower rates than if financed through hard money lenders.  Profits, on average are rising after renovation and the subsequent sale.  Lower interest rates and rising home prices contribute to increased profits.

It appears that banks and flippers have learned valuable lessons from the dark days of a few years ago.  The lenders are requiring more equity down and the flippers spend more time with their project to make sure they maximize the return on investment.

But this brings me back to my wife’s question – why aren’t we doing this?  The TV shows make this seem so easy.  While they are usually clear on the costs expended and the budgets, they are not clear on the source of funds.  When a TV show follows a team working on a house purchased for say $500,000 that needs $150,000 or more in renovations so that it can be sold for $850,000, they don’t tell the viewers the source of financing or the carrying costs nor do they tell you the amount of the owner’s equity.  When I put it that way to my wife who is relatively conservative and risk averse, she lets me change the channel to ESPN.

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        Most real estate investors agree with the strategy that it is best to use other people’s money when promoting a deal. I’m not talking about financing that involves debt supported by rising asset values. Rather, I’m speaking of sophisticated developers who put together capital stacks that require as little personal equity as possible. They will use private placement memoranda to solicit friends and family members as well as accredited investors. They will seek institutional investors and mezzanine financing.

             On a smaller level, house flippers often use “hard money” lenders, agreeing to high interest rates and points so as not to inject equity into projects. They do so knowing that if all goes well, they will be in and out of the deal in a short period of time, maximizing the profit and allowing them to be ready to jump on the next project whenever it comes available.

             In these situations, other people’s money works great. The investors and lenders understand the promoter’s needs and goals. Generally, speaking the investors and lenders are sophisticated. But so are the promoters and developers.

             But when one side or the other is not sophisticated or experienced, the transaction is doomed for disaster. In one recent situation, I represented a restaurant owner who had been leasing a building that he sought to purchase. The purchase agreement was convoluted as the building was under contract to a flipper and my client sought to take an assignment of the contract. The Assignment Fee was to be $150,000 which the flipper agreed to fully finance. In other words, zero dollars were to be paid at closing to the flipper. Other people’s money.

             The client wanted to fully finance the purchase price AND the closing costs. In other words, the client needed to find a hard money lender to provide more than 100% financing to acquire the property he was leasing and the flipper had to take a second mortgage for his Assignment Fee. The client thought he had found a loan, at 11.5% for almost all of the cost but when he understood the points, the monthly payment amounts between the 2 loans and the amount of cash still required to close, he realized that he could not afford the deal. So, despite the fact that he was using other people’s money to do this deal, he still couldn’t make it happen. Clearly, when a buyer is not sophisticated or experienced, other people’s money is not enough to close a transaction. Equity is going to be very important and will protect all parties involved.

 

On a smaller level, house flippers often use “hard money” lenders, agreeing to high interest rates and points so as not to inject equity into projects. They do so knowing that if all goes well, they will be in and out of the deal in a short period of time, maximizing the profit and allowing them to be ready to jump on the next project whenever it comes available.

 

In these situations, other people’s money works great. The investors and lenders understand the promoter’s needs and goals. Generally, speaking the investors and lenders are sophisticated. But so are the promoters and developers.

 

But when one side or the other is not sophisticated or experienced, the transaction is doomed for disaster. In one recent situation, I represented a restaurant owner who had been leasing a building that he sought to purchase. The purchase agreement was convoluted as the building was under contract to a flipper and my client sought to take an assignment of the contract. The Assignment Fee was to be $150,000 which the flipper agreed to fully finance. In other words, zero dollars were to be paid at closing to the flipper. Other people’s money.

 

The client wanted to fully finance the purchase price AND the closing costs. In other words, the client needed to find a hard money lender to provide more than 100% financing to acquire the property he was leasing and the flipper had to take a second mortgage for his Assignment Fee. The client thought he had found a loan, at 11.5% for almost all of the cost but when he understood the points, the monthly payment amounts between the 2 loans and the amount of cash still required to close, he realized that he could not afford the deal. So, despite the fact that he was using other people’s money to do this deal, he still couldn’t make it happen. Clearly, when a buyer is not sophisticated or experienced, other people’s money is not enough to close a transaction. Equity is going to be very important and will protect all parties involved

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