1228: Rate Buydowns, Housing Inventory & Protecting Yourself at Closing

I first started reading the rich dad books. That led me to looking at different motivational speakers and I stumbled on Jason's podcast about seven years ago and then from then I was hooked and after listening to him and I really got us sold on his philosophy on how he looks at the market and real estate in general. And I wanted to jump in seven years ago, but I decided to open up a few businesses that went pretty well, but you know, I live in New York, so there's a lot of expenses over there. So those went not as according to plan. So now I saved my money up again and I'm here.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Well, it's always great to have our investment counselors on the show. And we have Sarah back on with us today and she wants to talk about a few things. First, a warning to investors and that is to read the pro formas carefully. Then we're going to talk about some different markets. We've got some new markets to mention to you. We're going to talk about maybe if we get time, insurance claims and make readies for your properties and some frequently asked questions and just kind of a barometer on the market as well. Sarah, welcome back. How you doing?

Hey Jason, thanks for having me on.

So you are coming to us from Southern California and I'm in Florida. We've got some new markets to talk about. But you know, before we do that, let's talk about the performas a bit. These performas, the property performas that show the expected or projected performance on a property, you really gotta look at them because people make mistakes. They make mistakes a lot on things like association fees and taxes and things like that. And it's just really important to number one, go to jasonharbin.com, if you haven't done so already and watch that video right on the front of Our page that will make you an awesome investor. It's about how to analyze an investment property. And really that's about reading the pro forma and the numbers tell us a little bit about that and what you hear from clients. Sarah?

Yeah, So I was looking at a property today, and at the surface it looked like a great deal. Had a projected 15% cash on cash return, which is really unheard of these days. And so I started looking through the numbers to find out where the mistake was because I knew that it had to be too good to be true. And so what I found was that there was a decimal placed in the, in the wrong spot. And I moved the decimal over and the property taxes went from $200,000 for the year up to you over 2,000 for the year. And that basically cut the cash on cash in half.

So if you have an expense that is $1,800 more per year that is going to affect your performance on a little single family home.

Absolutely. And what I find is, you know, inventory is hot right now. Properties are still moving quickly, there's high demand, the interest rates are still really low. And so sometimes it can be a little bit of a feeding frenzy to get your hands on a property.

Yeah. And what you, what you mean is inventory is scarce. Right. You said it was hot. So I just want to make sure we convey the right meaning.

I'm not sure if it's scarce. It's just they're selling quickly. We do get a lot of properties. We get a lot of really nice properties, but they move quickly.

Yeah, it's, it's better than last year. Right. I mean, there's definitely more inventory now than last year, but it's not like there's an incredible amount of it. Right. It's still, you know, it's overall like looking back over the last. By the way, I got to say happy anniversary to you. You've been with us for 12 years.

Yes. Happy anniversary. Where's my gift?

Yeah, yeah, I know. I gotta send you a gift. What should I get? Hey, folks, go to jasonhartman.com ask and tell us what gift I should send to Sarah or what gift she should send to me.

Give me a solid, pick me out a good gift.

Okay.

Love it. Happy anniversary. 12 years, Sarah.

Yes. We've had our ups and downs, but mostly ups we have, we have.

Sarah and I get in some heated arguments once in a while, folks. So, you know, but that's kind of healthy. I think it's good to have some arguments once in a while. If you're. If you're not fighting a bit, it's probably not good.

Let's tell the listeners what you said to Alexa this morning when we got on the phone.

I am not telling the listeners how I sometimes cuss at Alexa.

Hey, by the way, I gotta tell you something. Little side note there. Amazon just made a deal with some apartment developers to include Alexa built in to the apartments, meaning it'll be hardwired into the entire.

Unit. And I mean, this has huge implications for privacy, which is totally gone. I mean, there's no such thing as privacy anymore, sadly. But think about it. Think about what that could mean. If to some extent, somehow this technology, I mean, fast forward into the future, it determines your moods. I know they're already working on that. Where Alexa can determine your mood and cater to your mood. Okay, what if it knows if you're talking about moving? What if it knows if you're talking about looking for another place? What if it knows if you're upset with your landlord? Who knows what this will turn into in the future? And the scary thing is, if you don't have any choice, it just comes with your apartment. It's not like you can turn it off, right? So it's kind of a Big brother is watching you, you know, so that's pretty creepy.

And. And, you know, what if you don't know that, Alexis? I mean, there's got to be some disclosure. But, you know, what if they build it today and 30 years goes by and you don't even. You move into an apartment, you don't even know it's there.

Right. It's interesting. It's definitely interesting. So we'll. We'll see what happens with that. And that just came out in the news, so more to come on that one, I'm sure. But anyway, go back to what you're saying about the Performas.

Yes, that was a huge tangent. Tangent alert on the Performas. All I'm saying is because people want to get the Performas out quickly to their list, or I'm on a bunch of different lists where I get other people's Performas, and I find mistakes all the time. And so you definitely have to double check the numbers. Actually, I found something on Zillow the other day where if you go under. If you search the property address and you go under property taxes, you know, there's that category in a really teeny, tiny small print. You can click the link and it'll take you directly to the county assessor's website. I just found that you know, within the past few months and it's really, really handy. And you can get the whole, you know, 10 year history of what the property taxes have been because that's the most common mistake that I see on these performas. And then of course the other thing is just know the rent range. You know, we try and put in a conservative number, but just know there's probably $100 rent range on any given property. So you want to know what the high and the low is. And I always run a best case and a worst case performa for each property that I'm looking at, you know, so I know what the real deal is going to be.

Yeah. Okay. So these taxes, one thing that happens occasionally is the local market specialist will put the amount of taxes they're paying on the property now. So of course they bought the property for less money than you're going to pay for it because it was a wreck. Right. That needed rehab. They got it as a short sale or a foreclosure or whatever and then they rehab the property, sell it to you at a higher price. I mean, hey, they're in business to make a profit. Obviously then your taxes are going to be reassessed. So be sure you are getting accurate numbers. Look it, our commandment number one is thou shalt become educated. We want you to be your own best advisor. Advisor. Don't depend on anybody else. Don't take their word for it. Make them answer questions. Ideally, get those answers confirmed in writing in an email. You know, do your own due diligence too, so you know the tax rates. Make sure you know the association fees. Sometimes the local market specialist might not be aware that the property's in a homeowner's association even. And you'll have an extra $30 a month HOA invoice that you weren't expecting. Now granted, the HOA might improve your value because it'll keep the neighborhood nicer. But these are all things, you just want to know what you're getting into. That's the point. That's the point. So like Ronald Reagan famously said, trust but verify. So we want you to verify things.

Yeah, absolutely. And also another due diligence item would be obviously the inspection that happens after you put the property under contract. And I've had just a couple hiccups with inspections lately that I wanted to share. You know, two different situations. One was that the investor put two properties under contract, had their inspections done, and there were a couple major items that came up. A lot of them I didn't think were major at all. And right away this investor just, you know, canceled the contracts without even sending the reports to the seller to see if they'd be willing to fix these items.

That's just crazy. Why would you do that? You're just walking away from money and maybe a great deal. That doesn't make any sense.

Yeah, I would say nine times out of 10, the seller will come through and fix the items before you close. So I would at least give them the opportunity to see the report. And, you know, look, if it's something so terrible that they just didn't know about, it comes up and you end up canceling the deal. Occasionally you might be able to say, hey, you know, I spent $300 on this inspection. Can you help me find another property? And maybe they'll pitch in on your next inspection. I mean, it's no guarantee. That is your expense.

It could be negotiated. Right, Right.

We could try, you know, but if we don't give them the opportunity to even make an offer to fix the problems, then there's just. It was just kind of wasted time. So that was one and then. And then the other is just don't let sellers rush you to close. Once you have your inspection report and, you know, some line items come up and you send it back to them, they're going to fix it. Send your inspector back out to verify that they fix those repairs. A lot of times you're coming up to the closing date and it's just not your fault that the closing has been delayed. Don't let them bully you into closing quick. Just say, no, I need an extra week. You need to complete these repairs and I need to send my guy back out to verify. Trust, but verify. There, there it goes again.

Yep, yep. Absolutely. Absolutely. Let's talk about the seller rushing you to close. Okay. Don't let the seller rush you to close. Be on your own timetable. Theirs. Now, that doesn't mean you get to delay and horse around. You don't get to do that either. You need to close in a timely manner. But if the repairs aren't done to the property, you know, you have an inspection, there's a punch list. And you must have a re inspection where you have the same inspector go back out again. That's a couple extra bucks. It's not too expensive. Have that reinspection. Make sure the stuff is done. If it's not done, the choices are you can close and trust the seller. I would never do that. One or number two choice is you can close. And before closing, there's an agreement that the title or escrow company or closing attorney will hold money back from the seller's proceeds in an escrow account. And if you do this, I think this is an okay option, but with a couple of stipulations. Number one, you need to know how much these repairs might cost. So say, for example, you think that it's $1,000 to finish these items. Well, don't just agree to have them hold back $1,000. You tell them you want them to hold back $2,000, like double the money, just in case. Also, maybe the amount will be more than you think in case the seller doesn't keep their promise and do it and you've got to hire someone else to do the work. Or the other part of that is it gives the seller an incentive to do it so they can get the rest of their proceeds out of the escrow account. And the third component of. Well, I guess the second component of that. But there's three things. We're on the number two thing. Now, the second part of that, though, is that you make a stipulation that the escrow money will be released to you automatically on a certain date if the repairs or the final rehab work is not completed. Okay? So you don't want that money to just sit in the escrow account indefinitely because you don't get it and the seller doesn't get it. It doesn't do anybody any good. Right. You want a provision that it be automatically released to you in, say, 30 days or two weeks or something like that so that the seller has an incentive to get that work done and get it done quickly. Now, here's how that works out. After the closing, the seller goes and presents proof to the escrow holder that the work is done. And then both of you have to sign an addendum that says it's okay to release the money. If you don't both agree, the money just would normally sit there forever. But if the provision says it automatically releases to you the buyer after a certain amount of time, maybe two weeks or 30 days or whatever you agree on with the seller, then it will automatically go to you. Okay, that's what I would recommend. Now, the third option is just tell the seller, look, I'm not closing until everything's done, period. That's the deal. So you can do that.

I would go. I would just make him finish the job. This particular client did want to get to close, and so he did that same setup that you recommended with the escrow account. So that's good. But I had another client months ago that closed, didn't do the escrow account, and, you know, the seller just. They were just dragging their feet to get the repairs done. You know, there were excuses, the weather, and, you know, they couldn't get in touch with the tenant and this. And that just wasn't a priority. I think inevitably the work got done, but it just took a little while. So. Yeah, I like that suggestion of the escrow account.

Yeah. So here's the thing, though. The issue that may be problematic is you might need to close because you might be in a situation as the buyer where you've locked the interest rate on your loan, and that can really rush you. Okay. So if you are rushed, you know, you can go ahead and close. But look at. Get more than you think. Those repairs cost, hopefully double. Okay. And have an automatic release provision by a certain date. If that work is not done, the money just automatically transfers to you, and that'll really incentivize the seller to get the job done. Okay. Make sense? Sarah, does that sound good?

Yeah, sounds great. Good advice.

Okay, what else should we talk about?

Well, just maybe touch on some markets that are hot right now where we're seeing the best inventory. It is really scattered. One of our newest markets is South Central Pennsylvania. Very good for cash flow. Nothing too exciting in terms of appreciation, like most of our markets.

Now, there. There's something that, you know, imagine a new listener listening to this. Nothing too excited. You probably shouldn't invest in real estate. You know, it's nothing too exciting. Okay, Sarah, look, we have to explain that a little bit.

I did have a client call yesterday, and the guy's like, thank you. That's exactly what I'm looking for. Because he's from California and he gets it.

Okay. Yeah, he gets it. He gets it. That good, solid, linear markets, conservative, prudent markets, like we recommend, are the best investment markets because they have good cash flow. We invest for yield, not for capital appreciation. If the appreciation comes, hey, congratulations, icing on the cake, and you'll have some appreciation. It's just slower and you don't have the big depreciation. By the way, I've got something interesting on that. I interviewed, and I don't know if this interview will be published before this one or not, because I'm on my way to Europe and recording some interviews in advance here. But I did this great interview today with a writer, a real estate reporter who. Who lives in Vancouver, and we talked about the Canadian market a bit and how Vancouver is the poster child. For bubble markets of the entire world, really Right now, the prices in Vancouver in the last two years, she said, have come down. You ready for this now? Now, Vancouver is a cyclical market. Vancouver, British Columbia, Canada. Right, a cyclical market, a high flying market, enormous media interest, prices going through the roof, everybody feeling like they're a genius making money until the game of musical chairs stops and it's over. And what she said, Sarah, I hope everybody's sitting down for what I'm about to tell you. She said that in two years the prices have declined. The loss in prices in Vancouver has been 40%. A 40% correction in just two years. That's crazy. Wow, wow, wow, wow. And hey, listen, I lived in California through some of those big cycles like that. So.

Yeah, well, I think the last downturn we had here in California was about 40% during that last recession. So, you know, for anybody that's thinking about investing in California right now, I just think it's just crazy because nobody knows what the peak is. But I mean, we're probably close, so it's not somewhere I would feel comfortable putting my money right now, that's for sure.

Yep, yep. Very, very interesting. So anything else on those other markets? We've got some new inventory and it's kind of nice. So maybe we should talk about that a little more.

Yeah. So, you know, inventory, it's kind of crazy, right? So I would say for the past three weeks inventory has been great. I've been sending out a lot of hot lists, properties that have been selling quickly. And then just this past week it just kind of slowed down a little bit. I haven't seen anything really great. I've had sent out a couple here and there, but that's how it goes. So we're getting a lot of deals in south central Pennsylvania, Memphis, of course, we've got the new construction on high demand in Jacksonville, Florida. Those are selling, you know, a year out before construction. So what a lot of our clients are doing are putting those under contract in Jacksonville and then moving on to other markets to close on in between while they're waiting for those to be built out. So that's, that's one investor strategy. I'm also working with a lot of clients on 1031 Exchange right now. They did really well years ago with us in other markets and they're selling and moving their capital into more of the linear type markets just to start the clock over again.

Let's talk about that a little bit on. Unpack that one for a moment. So a lot of These markets that our clients, I mean, over the past 15 years, they've been doing this and they think thought they were investing in boring, linear markets. Like you said, nothing too exciting in terms of appreciation. But they were pleasantly surprised. Yeah, they were pleasantly surprised to find that those properties appreciated very nicely. And I've done this personally with my own portfolio several times. And they basically got the 2 for 1 or even the 3 for 1 deal where they'll trade one property. I did this in Houston. I did it in North Carolina, in the Charlotte, North Carolina area. And basically I did it in Phoenix market, basically, where I'll sell one property and get two and increase my cash flow a whole bunch. I moved that to Memphis a couple of those times and I moved it to some other places. So, yeah, that's a great deal because you expand your portfolio, you reduce your risk because you gain additional diversification, and of course, you increase your cash flow dramatically.

Yeah. And can we touch on just one more thing? It just reminded me because one of my clients is doing the 10:31 exchange. Our good client Phil sent me an email yesterday, and he's like, wow, these interest rates are awesome. You know, one of my deals was at like 6% years ago, and he's getting down into the fours. And then another. Another one of my clients sent me another email. He found a great interest rate just through a local credit union. And he was asking me about the interest rate buy down. And he goes, I don't really know, like, if I should do that or what that means. And most of the time you'll be a lot better at explaining this. I'll defer to you. But most of the time, if you're going to hold on to the property for a while, it usually makes sense to buy down your interest rate with a point.

Right.

And so we went back to the lender and said, okay, what is the break even? If we pay to buy down this interest rate, when is the break even period? And it was like a couple years. He said, well, I'm definitely going to hold onto this for more than two years. So it made sense for him to do that.

Right.

Low fours, which is just unheard of.

Yeah, those are. The interest rates are pretty awesome. Again, we thought they'd go up, and why wouldn't we think that? Jerome Powell at the Fed told us they would go up, but they changed their mind. Hey, a Federal Reserve has the right to change its mind. So they did. Okay, so remember points, the loan fees you pay up front? A point is 1% of the loan amount. Points are just prepaid interest. That's all they are. It's just part of your interest rate. So points are prepaid interest, understand that. And you can pay more in points to buy down your interest rate. So that interest rate will last for. If you get a 30 year fixed rate loan, it's 30, 30 years long. So you got a three decade mortgage and you might buy it down with 1% or 2% or even 3% extra points paid up front and it's a really good deal. Usually a buy down that's maybe a one point or one and a half point buy down. What I mean is you're just paying to buy the interest rate down. It's a buy down. You'll do that and you'll find that it'll break even in about three years. Now every deal is different. It's subject to whatever the climate on interest rates and points is at the time. But it's a simple analysis to do. Okay, when a loan is offered to you at zero points, you can also buy the rate up, in other words, by paying no points and you can pay a higher rate. And so that would make sense if you were just keeping the property short term and flipping it quickly. You would want to do that because you're not going to hold it for very long. So the carrying cost doesn't bother you. But just always remember, something might change and you might waste your money buying it up because you might be holding it longer than you think. Or you might buy it down and then sell it quicker than you think of. Some circumstances change, but the likelihood is they won't. Okay, so here's the way you calculate that. And Sarah, I just thought this was good because it's funny you mentioned this because someone just asked me about it recently. You simply take the rate being offered. So say they're offering you, just for round numbers, 4% and 1 point. Okay, that's probably a little better than you're going to get today. Yeah, it almost surely is probably going to be four and a half percent. Okay, but just for example, let's say it's 4% and one point, by the way, I can't even believe how low that is. It's so cheap, it's amazing. And if you pay three points, in other words, two points extra, okay, and say it's a $100,000 mortgage, so the two points adds up to $2,000 more, 2,000 extra in points. But that will knock your interest rate down by a half a percent. For example, simply calculate the payment on Both interest rates and maybe do a little spreadsheet and just look at the break even point. You go forward in time and look at the time horizon to when those break even. So for example, if you save $50 a month on the buy down, and I'm just plucking these numbers out of thin air. Okay, but you get the idea. If you say $50 a month, that's going to be how much $600 per year is in your reduced mortgage payment cost. So in two years you're going to save $1200. In three years you're going to save $1800. So it's going to take just over three years to get to the $2000 extra you just paid in points. Right. So you're going to break even in just over three years. And when you go beyond three years to your four, five, all the way through year 30, if you keep that loan that long. Wow. It's pretty good. It's worth it, right? It's a good deal. So that's how you analyze whether the buy down is worth it if the loan is offered to you at zero points and a higher interest rate in the mortgage business. Because remember I used to own a couple of different mortgage companies over the years. That's called at par. Okay, at par just means no points. Here's the rate. So you can pay more points and buy the rate down or you can take it at par. Right. Or you can even. And I don't know if they still do this, but in the old days when I owned mortgage companies, they did do this. You could even get money back where you say, I'll take a higher rate if you'll give me some money back. Okay. I don't know if they still do that. They may not. But you know, you could use that money to pay your closing costs, your other non point closing costs. Right. So just a little lesson there. Was that helpful?

It was great. Yeah. A great explanation. And it just depends if you're trying to get into the deal for as little money out of pocket or you're trying to get in and have the best cash flow possible just depending on your individual goals.

And Sarah, that's a good point you raised because there's a balance to that. Right. A lot of times if the investor will put say 25% down rather than 20% down, they'll get a little bit better rate on that higher down payment because it's less risky for the lender. So that's not a buy down in points, but it is an automatically lower rate because of that. Okay. So that's important to know. And you don't want to go overboard on this because you're using up your cash that you could use to buy another property. So there is a certain sweet spot, a balance. Okay. So just know that.

Yep. Good point.

Yeah, Good. Good stuff. Okay, good. That's one thing. That's a good one. Anything else before we wrap it up?

Oh, I think we covered a lot.

Okay.

I have all my bullet points here, and I think we checked them off and then some. So if you've got other podcast questions for us, you know, shoot me an email. You know, I always forward them over to Jason, even if I'm not on the podcast with him. We have a content group, and I forward over your questions all the time because usually if you have that question, somebody else or a handful of other investors have the same question.

Yeah, we love your questions. So if Sarah is your investment counselor, you already have her email address, but if not, just go to jasonhartman.com ask jasonhartman.com Ask and ask us anything you like. We'll be glad to answer your questions, and that'll be sent to an investment counselor. So they'll call you and answer that question. But we also may well answer it on the air as well. And we just love your great questions. Sarah, I want to ask you about one last thing before you go. One of our clients a few years ago gave you a really funny T shirt that said your title is investment counselor, but the T shirt said investment therapist. I thought that was really funny. And I know you. You did, too. One of the things you do is when you're helping an investor determine out of all the different markets across the country that we're in, where they should buy their properties. You know, we always say you want to be in at least three markets, but not more than five. You don't just match them up with the best properties. You also think about the team and the support team that we have there, the boots on the ground, and who's a best fit for that investor, right?

Yeah, absolutely. One example I have. So a while ago, the Jackson, Mississippi, market was pretty hot for us. We had a lot of good inventory, and then we started having some communication challenges and that sort of thing. And the deals were still great, but the deals were not great for somebody who did not have the patience to deal with the person on the other end. So that is just one of many examples I have. But, you know, some of our clients are newer. They need more High touch communication. I'm not going to put them with somebody who sends, you know, one sentence responses and that sort of thing. So I do really try and be mindful of that and help bridge any communication breakdowns, you know, as they may occur. But yeah, every market specialist is a little bit different. You know, some of them need a phone call, some of them want to text, some of them, you know, email late at night. Some of them get back to you right away all day, every day.

Some, some of them don't know how to reply all to an email.

You can ask them to reply all to emails for three years and they still won't.

They didn't know there was a reply all button on their email program that they could click. It's folks, this is the kind of stuff we deal with all the time. So hopefully you don't have to, or at least you only have to deal with a little less of it. And we always say embrace the fragmentation because if all of these people work the same and you know, it was really institutionalized, then all the institutions like Goldman Sachs would be in here eating our lunch. That's the reason the opportunity is here for us. Sarah, thanks for joining us today. That was awesome. Of course, a lot of you, you're Sarah's client already, so she's your investment counselor. So you can, you can reach out to her directly. And if not through jasonhartman.com, check out our properties, our newest markets on the website. And until the next episode, we're here with you six days a week. Happy investing to all. Yep.

Thanks for having me.

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