I had planned on writing a very different post today. A triumphant post outlining the details of my very first wholesale deal and what an unmitigated success it was. Alas, such was not the case, as the deal fell through at the last minute. Rather than dwell on losing out on a sizeable assignment fee, I figured I would share some of the lessons I learned in the process.
First, a little history:
A realtor approached me through one of my ads seeking investors. He said he had a great opportunity that I should check out. The house was a single family colonial in an exclusive neighborhood of an affluent suburb north of Boston. It was perfect. Three bed, 2 bath on just over an acre of land backing up to protected woodlands that needed a lot of updating. The owner was a developer who bought it for his daughter and planned to rehab it himself, but his daughter ran off with her boyfriend. Asking price was $375K, and I negotiated it down to $305k.
Comps for the town are in the mid $400k range, but this particular neighborhood was more like the mid $600ks. This part of town is pretty exclusive with two country clubs, protected woodlands and beautiful houses. Because of this, there is very little turnover, making actual comps difficult. I estimated about $150k worth of work on the house to make it worth $600k, and was asking for a $15k assignment fee.
In Massachusetts, we have to submit a written offer that is a binding contract with the seller. It basically protects against a seller accepting other offers. Think of it like a pre-P&S. In the offer, we scheduled the P&S for today 2/15, giving me plenty of time to find a buyer and for them to get their ducks in a row. I sent the property out to my buyer list and got a lot of responses, scheduled three showings, and by the end of the week I had a buyer- or so I thought.
The buyer had joined my list saying they paid cash. Their website said they pay cash. Their business cards say they pay cash. Cash, cash, cash. After they saw the property and did their due diligence, they told me that they wanted to move forward and just had to clear it with their hard money lender. Uh-oh.
Seeing comps for the area at $450k, the lender didn't see the how they could sell it for the profit needed to make it worthwhile. Two days before we were scheduled to go to P&S and I was to collect half of my fee, the buyers backed out. I was left with no buyer, no fee and no time to line up a new buyer before my offer expired. Deal=dead.
Lesson #1: Beware exclusive neighborhoods!
Any neighborhood that is really exclusive is going to have very low turnover, which makes running accurate comps virtually impossible. Inaccurate comps means everybody is going to be working off the wrong numbers, and that puts you at a big disadvantage.
Lesson 2#: Interview your buyers thoroughly!
Cash is cash. Hard money, although not a traditional mortgage, is still not cash. Ask your buyers questions like "Are you financing this, or paying cash?" and "Are you the decision maker, or is someone else going to have the final say on this deal?" When your buyers are using hard money, that's one more party being added to the mix who has to say yes- one more cook to spoil the soup.
I learned some tough lessons on my first almost-deal. While I would have preferred that $15k I had coming to me, I still got a lot of value from the education. And now I'm spreading the wealth.