How An Irritating “New” Investor [almost] Wrecked my Deal…

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Is it just my imagination or are there a bunch of folks coming out of nowhere calling themselves real estate investors? Yes they’ve messed up a few of my deals, but they can just be downright annoying. But there is something I learned a long time ago; it was to always leave the negotiations with a friendly handshake and leave the door open so you can come back in later.

The Perfect Situation; Both My Favorite Type of House and Motivated Seller

One afternoon recently I met with a motivated seller that had a very nice 3 bedroom, 2 bath brick ranch in my city. Brick ranches are one of the preferred types of investment properties here. This was also my favorite type of seller; the executor of this estate was also an absentee owner. This deal absolutely screamed “motivated seller”. He just wanted to get rid of the house and go back to sunny Florida.

The property had a partially finished walk-out basement with a two car garage which was also in the walk-out. It was about 35 or 40 years old and it was in a good neighborhood. The house hadn’t been updated for many years but even the ugly green ceramic tile in the bathrooms was pristine! The furnace and AC were original which was not surprising. Even though it was outdated, this home had been well cared for. There was however one big issue and it was a structural issue.

There’s Always Something….

This was a hilly neighborhood, and the property was on a fall away lot. It had some significant cracks on opposite sides of the house on the exterior. The floors were badly sloped on one side of the house. There were numerous other signs of this structural problem to be found in the home as well as in affected side in the walkout basement.

By my estimates the house would need about $15,000 worth of piers at one end of the house. Some of you may know that I owned a home inspection company for almost 20 years. So when I saw the obvious signs of structural damage, I knew immediately what the house needed. I also knew that he had just limited his pool of hungry real estate investor buyers. My experience told me that few investors, even seasoned investors, were going to want this property.

This man was like most sellers. He already had a figure in his mind; a price he wanted for the house. Without the structural issue, I could have easily paid him close to that amount for the property. But once the structural defects which were significant were factored in, there was just no way to come close to his asking price.

We had a long conversation and he understood the issues with the house and what it would cost to fix them. We also discussed how a lot of buyers would be put off by the whole issue of the piers and the structural repairs on the property when the house was resold. I made him an offer with a little “wiggle room” left for me which was of course, significantly lower that his original price. He told me he had to call his sister who was the other heir and also lived out of state, and he would get back with me no later than the next morning. I wasn’t really too concerned that he wanted to call me the next morning. When I left that day I was pretty happy and the seller seemed to be OK with my offer.

“Pretend” Real Estate Investors

When I met with the seller that afternoon, he had mentioned in passing that he had someone that held estate sales coming in three days to get the rest of the furniture. I told him that was fine, and that I would take care of removing anything that was left in the house.

Imagine my surprise when I spoke to him the next day and he told me he had received a “surprise offer” from the people buying the furniture. First of all, they were not supposed to be coming for 3 days. And, they had given him the exact amount of money he originally wanted which was $15,000 more than I had offered. This amount was also the projected amount needed to stabilize the house.

I asked the seller if the folks buying the house were experienced real estate investors. He replied that they indicated that they bought a house “from time to time and fixed it up”. I then asked him if they understood the nature of the structural problems with the house. He said he had pointed out the cracks on the exterior and they said, “Oh we find cracks all the time. We are used to dealing with those”. I am quite sure that at this point in their conversation, he simply just shut up! He got his asking price, and the buyers had no idea what they got.

The thing that bothered me the most was that unless this repair was done properly, they weren’t going to have a chance of unloading this house. Inexperience was definitely their enemy. They could “pretty up” the house all they wanted but in the end, they would have to do the structural repairs to sell it to any retail buyer. And once that expensive repair was completed, there was no way they will be able to make any money.

Always Leave the Negotiations with Grace and Leave the Door Open As You Leave

I thanked the seller and told him that if anything changed to give me a call. I set myself up to be “plan B”.

I kept watching the PVA to see if there was a change in ownership over the next 10 days or so. When there wasn’t, I sent him a note and told him I was still interested in the property at my original price if the sale didn’t work out for any reason. I also reminded him that I would pay cash and close quickly. My original plan was to call him in a few days to follow up. I never had to call him thought, because he called me. The potential buyers started stalling almost immediately. The seller said he had to wait for their contract period to run out and that’s what he did.

At some point, the “pretend real estate investors” found out that they were in way over their heads and didn’t close on the deal. The seller was really fed up by that time and never mentioned a price reduction to me again. Who was my buyer? It was a landlord that was thrilled to get the house and currently rents it for $950 a month.

Do you have any similar stories? Feel free to share ask questions in the comments!

Photo: francisco delatorre

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About Author

Sharon has been investing in real estate since 1998. She owned and operated a successful home inspection company for 17 years. In January of 2008 she took the leap of closing her business to become a full time real estate investor.

30 Comments

  1. Great story Sharon. I’m glad it worked out for you. It appears your experience and followup got you this deal.

    I see it all the time when inexperienced investors overbid. One thing you clearly do right is you find homes that do not have the level of competition. For instance, a property on the MLS in a market like Phoenix or San Diego will have tons of offers and many pay within 10% of retail and those numbers do not work for experienced investors, not even close. So finding the off market deals with little to no competition and a motivated seller is key and it appears you did just that on this deal. I’m curious to know more about how you find probate and other deals with little competition, can you share with everyone?

    Your followup was brilliant. Seller motivation often skyrockets when a deal falls through. You positioned yourself as plan B, credible and the seller probably liked you and the fact that you are an expert at the structural issues on a home that may have some sentimental value. Your followup to position yourself as Plan B and get the deal was brilliant. Well Done!

    • Sharon,

      Great story and speaking of “brick houses” I have a story to tell.

      First let me say I thought I was a seasoned home wholesaler, fix and flipper etc.

      I purchased a lovely 75 year-old brick house in a great neighborhood that needed extensive work. A not so sharp son inherited the home from his mother and began major renovations but ran out of money, abandoned the house and a year later lost the house to foreclosure.

      I purchased the house for $115,000 and calculated at least $85,000 to finish the job.

      I estimated once the house was complete it would sell for $260,000 so there was a comfortable cushion.

      Besides the random set backs, delays, minor cost overruns etc. in 90 days the home was completed and I already had an anxious family with three young kids ready to move in. We went under contract and the house was inspected, appraised etc. and we closed.

      One day later the Buyers frantically called us and said the sewer was severely backing up. Yes, I could have said too bad how sad because the Buyers selected the Home Inspector who when inspecting the property did the customary “turn on the taps” and flush the toilets routine.

      When the family moved in used the dishwasher, clothes washer and two showers the waste water backed up

      I agreed to remedy the matter including having a plumber dig a six foot hole to the main sewer connection in the back of the house to determines what was wrong. That did not work so we hired a guy with a snake camera who did a check and caught of video the fact that the sewer line had fractured and part of it lifted upward at a 45 degree angle etc. Unfortunately where the break in the sewer pipe occurred was under the neighbor’s concrete garage floor and we could not get to it. Apparently the sewer line was installed before the neighbor’s house had been constructed.

      Bottom line, we had to run a new sewer line across the front lawn and two blocks over to the hookup point and at a cost of $45,000. Poof, there went my luscious profit.

      My point, if you ever work on an older house or even a new house on a sewer line and the house hasn’t been used for a while, pay the Cameraman and have him use his snake camera to conduct a complete test of the sewer line. Don’t be rely on the traditional “tap water turn on” and “toilet flush” by the Inspector. An extra $350 – $500 spent on the snake camera could save you a bundle later.

      I must say I cried when I turned over my profits to the contractor who fixed the problem but the family was happy and I slept well at night.

      • Sharon Vornholt

        Tom –

        I feel your pain. Buying an older property is a whole different ball of wax than a 35-50 year old house. I rehabbed one, and I probably wouldn’t do it again.

        I recommend a full home inspection for everyone unless you are an expert yourself for older homes. Structural issues can easily set you back tens of thousands of dollars on a big old house. If the inspector determines that you have knob and tube wiring, need a new panel box etc. you can figure that in and get a bid from an electrician. The same is true of the HVAC system. The roof is another area of big concern. Typical home inspectors don’t have ladders tall enough to mount those roofs, and they need to be mounted. So plan on a roofer with really big ladders. That’s another high dollar repair if multiple layers of roofing or the sheathing have to be removed.

        You really nailed the plumbing issue though; it is hidden from view. The normal plumbing inspection by a home inspector wouldn’t necessarily find that. They are only there a couple of hours.

        What my inspectors used to do was run the water continuously at all faucets for 20-25 minutes. It takes time for those leaks and backups to appear. Even then, a crushed sewer line wouldn’t necessarily shown up in that span of time; maybe, maybe not. The camera inspection can save you from some enormous repair bills.

        If you plan to buy the house, just figure in $1000 or so for those inspections in your offer to the seller (whatever the cost is in your area). Always make the purchase of an older home contingent on inspections. Then whatever you find and you will find something big, go back to the seller and re-negotiate. Once you have found the problems, the seller has to disclose them to other buyers going forward so they will be more willing to re-negotiate.

        I think that property of yours falls under the category of “lessons learned”, and we have all had those lessons. You need to allow a much bigger spread for those types of properties, because there is ALWAYS something big you discover and they always take more money than expected.

        Don’t forget that what you left that deal with was an impeccable reputation. I would contact those buyers and get a testimonial (they are great business building tools).

        Sharon

    • Sharon Vornholt

      Ryan –

      A year ago there was hardly any competition for probate deals here. I had a seller tell me last week that she received mail from 9 different companies. So I am working on ways to “stand out and be different” from the crowd.

      I have never gotten in bidding wars from MLS properties. I like the “low hanging fruit”.

      I am very lucky where probates are concerned. They are printed in the newspaper. That’s lucky and unlucky at the same time I guess, because they are there for everyone to market to. The other niche I love is absentee owners. I have written a number of posts here and on my blog about marketing to these two niches. Direct mail sent continuously over time works the best for them.

      I am actually re-doing my marketing as I type this. All the people that were working REO’s are now doing direct mail and those sorts of things. Check back with me in a few weeks, and maybe I will have something to report.

      Good luck.
      Sharon

      • Hey Sharon! Just wondering how your marketing revamp is going. Maybe you’ll be writing a post soon :) Seeing how the experts deal with market shifts and/or new competition is very intriguing to me, and others I imagine.

  2. In my area I call these folks hopeful wholesalers, hoping to make a few bucks assigning the deal. A couple months ago in my own neighborhood a deal fell through due to a higher offer, later that week the wholesaler called me asking if I was interested in buying his contract for $5000. I told him to put everything in writhing in an email, which I then forwarded to the seller.

    The guy actually did me a favor as the time wasted was just enough for the facts to come to the surface. The lender is now foreclosing, the property is most likely going to be a short sale candidate. At this time I don’t think I am interested in bothering with this house.

    • Dennis can you elaborate a little on your story here.
      To me it sounds like you lost out on a deal to a wholesaler that outbid you, this guy then asked you if you wanted to buy the deal for $5K, you had him put the terms in an email that you send to the seller.
      (This is where the interpretation comes in)
      This then pisses the seller off who gets out of the contract which costs the wholesaler his potential payday and since nobody else was willing to buy the property the seller ended up in foreclosure.

      I assume that there is something that isn’t coming across right for me since that doesn’t sound very good.

  3. Good Post Sharon,

    We have a ton of new “wholesalers” in our market place. I get at least 2 calls a week from them. I know our team can negotiate lower than they can so we set up a referral fee for them if we close a deal. Seems like a win-win and lets them feel like they are in the game.

    I am still a little stunned at Tom’s sewer line! $45K is not an easy pill to swallow! We have spent upwards of $5K to satisfy similar issues, you can’t put a price on your reputation. Nicely done Tom.

    Thanks again Sharon.

      • Yes. They are all so new that they really have no experience so they can gum up the works by making a buyer think his property is more valuable than it really is. They all want my time to teach them, so I tell them they get my time by brining m solid deals. Haven’t found a deal yet through one of them (newbies), but it does help us stay in better control of the lead so they don’t scare them off, if that makes sense.

        • Sharon Vornholt

          Glenn –

          It sounded like they didn’t really know what they were doing. Maybe you will get a deal one of these days, and they should learn a thing or two.

          Sharon

  4. Been there so many times before. I feel your pain! Thanks for sharing – part of the healing process is writing about it! Mike

  5. Great story Sharron,. Just like you I am all about helping newbies get started and avoiding mistakes. But I love hearing stories about knuckleheads getting their due when they think they no it all.

    • Ned –

      It worked out for me in this case, but it doesn’t always as you know. There is always someone out there paying too much for deals they ultimately won’t make money on. The thing that really bothers me is that those sellers think the rest of us were trying to steal their property.

      Sharon

  6. Wow, what a story Sharon!! I can definitely relate being on the other side of the table.

    Have been on the seller side with “investors” who have tied up properties — not a good position to be in. I find most “real investors” will not tie up a property that long (including myself) as we all want to move on and get the deal going.

    It’s actually helped to my advantage dealing with sellers who have worked with other “investors” who have tied up their properties failing to close. Going in, they tell me exactly what they want (usually a fast closing) just wanting to move on with their lives.

    Guess it helped on your deal as well, thanks for sharing! :)

    • Hi Rachel –

      It really does work out better sometimes. And sometimes it doesn’t. I just think some deals that don’t work out end up being the best outcome for you in the end, and you just need to move on and go “next”.

      I had that exact situation that you described today where the seller tells you what they want. She told me what the highest offer was that she had received. I acknowledged that I understood she was hoping for more money for the house, but it needed a lot of work. This offer was by the way from a licensed Realtor that wants to buy the house.

      I asked the seller what I could do to make this offer more attractive? If I were to match the price and pay the closing costs would that make it work for her? She said that it would. I told her I wanted to be sure of my numbers, and I would call her morning.

      It’s a process for sure. The second house that I looked at today I would really like to buy. My offer is a lot lower than they have it listed for. The Realtor let “them pick a listing price” which was about 25K over what they are actually selling in that area for AFTER the repairs and updates. Unfortunately the brother who is also the other heir still thinks it will sell for the unrealistic price. It has been on the market for over 260 days at this point.

      I guess time will tell. I hope your business is going well.
      Sharon

  7. Wow !!! Great post Sharon. I have a lot to learn, and would like to learn from others mistakes compared to making these mistakes. Sharon what do you feel that the new investor can do better to alleviate this problem?

    • Learn as much as you can Deborah, and find someone in your area to mentor you. You can find these folks at your local REIA meetings. There is a ton of information here and also on my blog and some of the other blogs.

      You can’t learn everything at once, and the sheer amount of information can be overwhelming. Figure out which strategy you think you want to pursue and start there. Learn about that one. If you master one thing at a time, it will be easier.

      Sharon

    • I add to what Sharon said:

      1) Learn as much as you can up front. Real estate investing isn’t about guessing or hopping it will go up in value or be a good deal. That is speculating. RE investing is KNOWING what makes a good deal.

      2) You learn by doing. You are NOT going to know it all when you are starting. You do need to know enough that you are confident in your numbers and what you are getting into. Had those investors had a properly written contract with appropriate contingencies they could have done an inspection, got their deposit back, learned the lesson, and been that much smarter on the nest deal.

  8. I am seeing lots of new investors that might be setting themselves up for epic failure.
    It blows my mind how much some of these terrible properties are going for!

    I am pretty conservative in my numbers and I have a fairly high minimum profit target but I see people paying like $60K more than I think a place is worth (This is with ARVs in the low to mid $200s).
    There is just noway that those numbers can work!

      • I wish them the best of luck, but I assume that you’re right and they will just learn some very tough (and expensive) lessons.

        Hopefully they won’t be the ones trying to kill everyone else’s dreams since they KNOW real estate doesn’t work.

  9. Hi Sharon,

    Great story, I enjoyed every bit of it.

    Does this mean the new investor should not start with wholesaling?

    Without hands on experience like you have for 20 years in inspection, how would a newbie know the signs for structural problems and how much each fix up cost?

    • No –

      I think wholesaling is the perfect place to start Eve. There are certain signs you will learn to recognize. Any crack in a foundation that you can put a “nickel” in is cause for concern, but there are a lot of other things. Just google “structural failure” or “signs of structural problems in houses” and you will get a lot of information. You will find problems in houses on fall-away lots a lot of times.

      You will have to get an estimate if you suspect structural problems. Even people with a lot of experience do that. Over time I have learned how much piers will cost for a house, but that took a long time. Just get bids or second opinions if you have any doubt.

      Sharon

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