Intro

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Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast.

A $14,000 repair

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$14,000. That's what a sewer camera just found under the front yard of a duplex you're about to buy. And the seller didn't fight you. He said, fine, I'll cover it. Here's the catch. How you take that money decides how much of it you ever see. Say you're buying a duplex in Milwaukee. Upper and lower units, built in 1926, both rented. You're under contract at 268,500. It's a conventional investment property loan, 25% down. That's $67,125 down, and you're borrowing about $201,000. Call the rate 7-3 quarters. Freddie Mac's weekly survey average was 7.18% on November 5th, and investment loans price above it. Add about $7,400 in closing costs, and you need $74,525 at the table. You're on day seven of a 10-day inspection window. The house checks out. Old furnace, a few ungrounded outlets. Nothing that moves the

01 · What the camera found

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price. Then the inspector feeds a camera into the sewer clean out. Roots. A joint that slipped out of line near the curb. And a sag under the front walk where water sits. Your contractor quotes 14,000 to replace that pipe all the way out to the city main, including tearing up the street. And in Milwaukee, the city is clear about whose pipe that is. The owners. From the house all the way to the main. So the cash you need just went from $74.5 to $88.5, your agent asks. The seller says yes and sends back a menu.

02 · Three options

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So, three options. Pick one before I tell you mine. Option one, take $14,000 off the price down to $254,500. You pay for the repair yourself after closing. Option two, keep the price and take a $14,000 credit at closing. It wipes out your closing costs with money left over. Option three, the seller's plumber fixes it before you close. He quotes $8,900 to line the pipe. The price stays put, and you don't bring a dime for the repair. Three options. Hit pause, decide, then come back.

03 · The breakdown

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Option two, as written, can't close. On a conventional loan for an investment property, Fannie Mae caps what the seller can put in at 2% of the price. And it only counts if it pays closing costs and prepaids, not your down payment, not your reserves. A repair isn't a closing cost, so it can't ride in the cap. 2% of $268.5 is $53.70. Freddie Mac's guide sets a similar 2% limit. Confirm yours with your lender. So what happens to the other $86.30? The lender calls it a sales concession and subtracts it from the price when it sizes your loan. Your loan gets figured on $259.870 while you still owe the seller $268.5. So your down payment jumps about $6,500. Net of the credit, you bring about $75.6 to closing, more than if you'd asked for nothing. And the $86.30 never reaches you. If the lender catches it, the contract gets rewritten in the last week before closing, with a seller who already thinks he said yes. Option three is the tempting one, and it does win on one number. Your cash stays at $74.5. Option one needs about $85,000 all in, counting the repair. 3 needs less because three-quarters of the repair rides inside your mortgage. Add up cash and debt, and the two are identical. $275,000,9 either way. But option one buys a full replacement. Option three buys an $8,900 liner. So what are you giving up? Control. The method and the scope are the seller's plumber's call. A liner doesn't straighten a sag. It's underground. You won't see what went in. But you own that pipe the day you close. Then there's the calendar. On a conventional purchase, the lender generally won't escrow a safety repair on an existing home. Fixed before closing means fixed before closing. Your closing date now runs on his schedule in a Milwaukee November. And we've talked about how the close date is the one variable in the room that's yours. Option three hands it to the seller. The strong version of option three is the seller paying your contractor for a full replacement and you rescoping before closing. That fixes the method. It doesn't fix the calendar, and the seller has to find $14,000 in cash first.

The verdict

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So take it off the price. The price drops to $254.5, which is an easier number to appraise. Your down payment drops $3,500. Your loan drops $10,500. Your payment drops about $75 a month. And then your contractor, the one on your team, replaces the pipe you'll own, the way your own camera says it needs replacing. That's why the Core 5, the investing team you build before you buy, has a contractor in it. Your own number within a day. How you write it matters too. Ask your agent for an amendment that changes the price. Not a credit, not a repair allowance, a new number on the contract, and get it signed before the appraisal is ordered, so the appraiser and the lender are working from $254.5 from the start. Does that make the 2% useless? No. If cash at the table matters, split it. Up to about $5,200 of the $14,000 can ride as a closing cost credit inside the cap, and the rest comes off the price. You bring about $3,900 less to closing for about $28 a month more. Inside the cap, seller money works hardest on closing costs or your rate, the case we made earlier this year. A sewer just doesn't fit in the slot. Now, be honest about what option one costs you. About $10,500 more cash than option three. $3,500 less at the table than $14,000 after. If that drains your reserves, the problem isn't the option. The deal's too thin. And plan the gap. Book the replacement for right after closing. Have the line root cut in the meantime, and ask your insurance agent about a sewer backup endorsement. There's a sewer line in the book, too. It ends as a price cut, with a warning attached. A price cut isn't cash. The pipe is still yours to fix after closing, so get a second quote. One upside you shouldn't count yet. Milwaukee's sewerage district runs a program called Pipe Check that lists $6,000 to $8,000 toward a full replacement on a one or two family home. Its page doesn't say whether a rental qualifies, so ask first. And option one is the simplest way to pick your own contractor. If you already signed a credit for repairs on a conventional investment loan, don't panic. Call your loan officer this week. Underwriting will resize the loan around anything over the cap, so rewrite it as a price reduction while the terms are still yours to choose. Three ways to take the same $14,000. Only the price cut

Tonight's challenge

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arrives whole. Here's your challenge. Tonight, pull up your loan estimate and find two numbers. 2% of your contract price and your actual closing costs. On a conventional investment loan, the smaller one is the most any seller credit can be. Then do this. If the repair runs past that number, ask for the difference as a lower price, not a credit. Get your own contractor scope and written quote before your inspection window closes. And if the seller won't move on price, that window is still open. Use it. The full write up, all three options side by side, is linked in the show notes. I'm Martin Maxwell. This has been the Five Minute Prime Podcast. I'll see you next episode.