Hard Knock #1

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Hard Knock #1

Rob C.
Investor · CA · Member since 2012 · 170 posts · 28 votes

My first attempted deal in REI turned into a bust yesterday as the seller failed to perform. I'm hoping to field some advice from the biggerpockets crowd on how to handle this situation. It's a bit of a long post (sorry for that), so I've highlighted the main points for those who like to skim.

It was as an estate sale, and my offer was accepted at the listing price (a figure just high enough for the seller to pay off the loan balance). At some point the estate (sister of the deceased) stopped making payments on the loan, and in turn the bank evidently ran up large amounts of late fees and penalties to the tune of $6000! Suddenly, the seller was short thousands of dollars she couldn't come up with, and couldn't close at our contractual price without lender forgiveness on the fees. Apparently the estate attorney was pushing down to the wire to get the bank to forgive the fees, but when it came time to close ultimately the bank said no. Consequently the seller refused to sell. Now she is planning to put it back on the market at a price that will cover the bank penalties, or otherwise let it go into foreclosure.

I can't help but feel like I got treated unfairly. Yes, I'll get my earnest money back, but between appraisals, inspections, utilities, travel, etc, I've sunk about $2500 into this. Most everyone I talk to says I have the legal right to demand that money be reimbursed by the seller because she defaulted (i.e. there was no contingency of lender approval in the contract). However, I'm not the type that likes to take matters to court. I feel like reasonable people ought to be able to arrive at reasonable compromises without the judicial system. Moreover, while I want to be upset at the seller, I actually have sympathy for her. After all, her sister just passed away, which is a much more painful situation than I am in obviously. And evidently she was just trying to do the right thing in selling off the property rather than let it go into foreclosure in the first place, but she misstepped along the way and found herself at her wit's end trying to make the transaction work.

Is this problem worth exploring creative solutions, or should I just suck it up, and move on to the next one? If anyone has any advice, I'm all ears.

Thanks, Rob

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
Originally posted by Rob Condy:
At some point the estate (sister of the deceased) stopped making payments on the loan, and in turn the bank evidently ran up large amounts of late fees and penalties to the tune of $6000!

No, the seller ran up $6000 in late fees and penalties. For whatever reason, the seller stopped paying then note. Were agents involved? Or were you buying directly from the seller? Agents should have kept the seller on track toward closing and advised against such stupid actions as stoping paying the note. If there were not agents involved and you were buying directly, then you should have been the one to bird dog the transaction all the way to closing.

Did your attorney say you have some recourse against the seller? Frankly I think "everyone I talk to" are a bunch of fools who don't understand this business. I've spent money on inspections and dewinterizations on properties only to have the deal fall through. That's part of the business.

That's good. Because, unless there is something that specifically addresses this in the contract, you have no case. Almost all real estate contracts limit the buyer's remedy if the seller fails to perform to return of the earnest money. That's it. Your agent, if you have one, should have advised you against spending so much money before closing. Inspections and even an appraisal should have been maybe $800-900 total, unless this is some really expensive, complex property. If you chose to spend a bunch of money on utilities (really?) or travel, that's your choice.

Pay the extra $6000.

Or, wait them out. If it was a good deal at your price, it is still a good deal at the higher price? If so, someone will pay the extra. Consider the $2,500 tuition to the school of hard knocks and don't do that again. If its not a good deal at the higher price, they will eventually come down. They're falling into the "this is how much we need" trap sellers often do. How much you need from a sale is absolutely irrelevant. The value of the property is the only thing that matters.

If it forecloses, you have a shot at buying it at auction. If the opening bid is too high (frequently the case), the bank will take it back and it will eventually come on the market. Then you have yet another chance to buy it.

Real estate investing is a numbers game. Properties are nothing but dirt and sticks. Sounds like you fell in love and your love made you forget the are thousands of other properties. Move on.

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  • Chris Weiler
    Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
    13y

    Rob, what are your intentions with the property? Are you flipping or plan on renting it out? If you plan on renting it sounds like a perfect opportunity for a seller financed "subject to" deal. From your post it seems the bank is OK with the sister continuing to make payments on the loan. You could set up a deal where you pay the penalties and the month to month payments under the current loan. If the math works, she can get her price and you could get a great opportunity for seller financing.

    0Reply
  • David Egger
    Indianapolis, IN · Member since 2012 · 47 posts · 46 votes
    13y

    Is it worth another $3k to you? It's $6k in fees, they owe you back earnest money + $2500 in costs you incurred. Offer to buy it for $3k more then your original offer and make it clear if they don't accept you expect to receive that $2500.

    Their risk is that the house sits for a couple months before it sells, costing them that much in interest anyway.

    0Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    Does the estate not have the $6,000, or do they have it, but don't want to pay it?

    I believe that a deal is a deal. I'm not the type that likes to take matters to court either, but I think I would lawyer up in this case and hold them to the deal. I would look into filing some type of claim of interest against the property and see if that makes them find a way to come up with $6,000. Their financial problem should not become your problem. I would explain to them that you did everything that you agreed to do and now you expect them to do everything that they agreed to do.

    Good luck and keep us posted. This is a very interesting dilemma. I hope it works out for you.

    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    13y

    @Rob Condy, @Rob K. Is right that the seller is failing to perform on the contract. You basically have 3 options. 1. Walk away and go spend your time and energy finding another deal. 2. Sue for specific performance and record a Lis Pendens so that they can't sell to anyone else. 3. Increase your offer by $6K (if the deal still pencils).

    2 might sound like the right approach, but it will cost you thousands in attorney's fees. At the end of the day, you are just as we'll off taking option 3, no matter how much you hate to do it just on the principle of it all, unless the deal is too skinny...in which case option 1 will be your best bet.

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  • Ibrahim Hughes
    Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    It's possible that the property may go for a lot more than what's needed to clear the liens and late fees. If so, I'd want my $2500. Thus I might opt to file something that would cloud title and let them know that you agree with them pricing it higher. But if it sells for more than x amount of dollars, you want to be reimbursed the $2500.

    With situations like these I always try to see if there was something I could have done to prevent this. $6k is a lot of late fees. How long has this deal been going on? Are you sure your purchase price was enough to cover everything. Or is the listing agent telling you that to cover her oversight (it was her job to make sure she had all the numbers in to make sure everything was covered). I think in my agreement I would have had a copy of the payoff statement to see how close we were to being able to pay everything off.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y
    Originally posted by Rob Condy:
    At some point the estate (sister of the deceased) stopped making payments on the loan, and in turn the bank evidently ran up large amounts of late fees and penalties to the tune of $6000!

    No, the seller ran up $6000 in late fees and penalties. For whatever reason, the seller stopped paying then note. Were agents involved? Or were you buying directly from the seller? Agents should have kept the seller on track toward closing and advised against such stupid actions as stoping paying the note. If there were not agents involved and you were buying directly, then you should have been the one to bird dog the transaction all the way to closing.

    Did your attorney say you have some recourse against the seller? Frankly I think "everyone I talk to" are a bunch of fools who don't understand this business. I've spent money on inspections and dewinterizations on properties only to have the deal fall through. That's part of the business.

    That's good. Because, unless there is something that specifically addresses this in the contract, you have no case. Almost all real estate contracts limit the buyer's remedy if the seller fails to perform to return of the earnest money. That's it. Your agent, if you have one, should have advised you against spending so much money before closing. Inspections and even an appraisal should have been maybe $800-900 total, unless this is some really expensive, complex property. If you chose to spend a bunch of money on utilities (really?) or travel, that's your choice.

    Pay the extra $6000.

    Or, wait them out. If it was a good deal at your price, it is still a good deal at the higher price? If so, someone will pay the extra. Consider the $2,500 tuition to the school of hard knocks and don't do that again. If its not a good deal at the higher price, they will eventually come down. They're falling into the "this is how much we need" trap sellers often do. How much you need from a sale is absolutely irrelevant. The value of the property is the only thing that matters.

    If it forecloses, you have a shot at buying it at auction. If the opening bid is too high (frequently the case), the bank will take it back and it will eventually come on the market. Then you have yet another chance to buy it.

    Real estate investing is a numbers game. Properties are nothing but dirt and sticks. Sounds like you fell in love and your love made you forget the are thousands of other properties. Move on.

    3Reply
  • Account Closed
    Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
    13y

    I must agree. One of the most important lessons any investor must learn is not to fall in love with an investment. The easiest way to insure this is carefully defining your exit strategy and understanding the most you might be willing to pay.

    I have seen so many at auction bidding items up past a point that make sense simply because they got caught up in the moment.

    In this case if you have done your homework it should be a simple matter to know if 6K is still doable. If not you still may be able to get the property at a number that makes sense as others have suggested otherwise better to walk away. There are always other deals.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Thanks everyone for the invaluable feedback! To provide a little bit more background and perspective, the agreed upon price was $82k. The story as it has been relayed to me was that the listing agent told her client to keep making the payments on the loan, but for whatever reason she did not and therefore ran up the $6k in late fees. And although $6k may not seem like a lot, it is relative to the sales price. And I personally don't think the property is worth $88k in its current condition. In fact, I'm not even sure the property was worth $82k. Quite opposite to the impression I gave Jon Holdman and Charles Perkins, I was actually kind of hesitant at one point to pull the trigger on this one. As discussed in an earlier post of mine (https://www.biggerpockets.com/forums/88/topics/78539), it has been very difficult for me to figure out what market value is for this property. In the end I kind of thought I may have been overpaying relative to market comps, but from a cash flow perspective it still made just enough sense to me to pull the trigger (10% cash-on-cash). It was far from a love story between me and the property, but I'm not going to lie, I was (and still am) anxious to start actually taking action in this industry. I've been actively putting in offers for 9 months now and this is the first property I've gotten under contract. The market where I live in San Diego is down to about a month's worth of active inventory, and the competition appears too intense for a small rookie investor like me to acquire any real deal. I started turning my attention to metro Atlanta (where my company has a satellite office, and I go for business trips from time to time) hoping I'd have a better chance of acquiring properties because I could afford to pay cash for some low-tier properties in that market. The competition is still pretty intense there though as well. So when I hear folks say to move on and not forget that there are boatloads of other deals out there I know that's true but in my personal experience as a newcomer it takes a loooong time to get one.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Chris Weiler That's a great idea in regard to buying the property sub2. Based on my limited understanding of "subject to" purchases, I'm not quite sure whether it would make sense on this property. For starters I'm not sure what the loan payments are currently but let's assume they are small enough for the cash flow numbers to make sense. Given that I already qualify for bank financing, the only advantage I can think of that I'd get from a sub2 deal is a low down payment. However, I'd probably need to come in with at least $6k to cover the bank fees, and then there are about $15-20k worth repairs that the property needs. So it would appear to be about the same as a 25-35% down payment. Not much of an advantage there. Is there another advantage I'm missing out on? Perhaps it would be easier to resell later to someone who can't get bank financing? Is it worth it though? Thanks again for your advice.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    David Egger I like your thought process. However, as stated above I'm not sure it makes sense for me to go any higher in price than the originally agreed $82k. And unfortunately the seller doesn't have much risk because they can just let the property go into foreclosure. It won't affect the credit of the seller (i.e. sister of the deceased) because title is currently in the name of the deceased as I understand it.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Rob K Good question and good point. Although I don't know for sure, I like to think I read people well, and to me the listing agent and the estate seem to be good, genuine, honest people. Again I could be wrong, but I do genuinely believe the estate doesn't have the money.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Brian Burke Thanks for laying out the options. Unfortunately the deal is pretty skinny, so option 1 may be the best bet as you indicate :/

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Ibrahim S Although I have a hard time believing it's worth $2500 more than the amount needed to clear the late fees and liens, I guess I won't be surprised if the property does go that high given the low inventory and crazy competition in the marketplace right now. You're right that I should demand my $2500 back in that scenario.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Jon Holdman Thanks for the detailed response. I respect your opinions a lot. You give a lot of great advice on this board, and I just want to let you know how much it is appreciated

    I'll doublecheck with my attorney on Monday whether he thinks I have some recourse against the seller. I haven't really approached the subject in detail because I didn't intend to take legal action if it even was an option. However, I am curious so I'll look into it

    I do plan to keep an eye on the property if it goes through the foreclosure property. I'm a bit hesitant to make my first purchase at the courthouse steps, but I'm hoping it might go back to the bank as an REO, in which case I could put in a strong offer given that I've already done the due diligence. Do you know how banks come up with the starting bid at the auctions? I was under the impression they set it at the amount still owed on the loan. However, I've been told recently that's not the case.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Charles Perkins Similar to my comments directed toward Jon, I also wanted to let you know how much I appreciate all the invaluable feedback you provide on this board. Thanks!

    I wish it were a simple matter for me to determine whether the property is worth another $6k. However, given my inexperience and the crazy market it's really hard for me to tell. I wrote a bit about it in my earlier post. And even since then it's gotten even more difficult to determine the market value. There have been two comps that have come on to the market. One is an REO less than a half mile at pretty much the same size (it needs some work according to the listing agent, but I don't know how much)- it went pending at about $60k within a day of being listed. The other is a homepath property literally next door that is listed at $115k. It has an additional bedroom and half bath, and is 2400 sq ft as opposed to the one I had under contract at 2100.

    0Reply
  • Chris Weiler
    Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
    13y

    @Rob Condy, I'm not sure what bank fee's you are referring to. The original loan stays the way it is and there are no bank fees. Even though you already qualify for a loan, you can use that to finance another property. The 15-20K in work you allude to is going to happen whether you do Sub 2 or not so I'm not sure how you are tying that to a down payment. It all boils down to the numbers. If you can make it cash flow, using someone elses credit can really help to start your career in real estate. There are plenty of people that have numerous Sub 2 properties and do quite well. Good luck!

    1Reply
  • David NilesBusiness Member
    Property Manager · DeLand FL · Member since 2012 · 860 posts · 243 votes
    13y

    If 6k is throwing the deal out the window, you were cutting it awfully close to begin with IMO. Too many issues can arise that could eat 6k in a heartbeat so I like a little more cushion on my side.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Chris Weiler Your questions made me realize I wasn't very clear. Let me try again: The $6k in bank fees I was referring to were the late fees that the seller has recently run up by not making the payments on the loan. There's no reason for her to pay them since she can just let the home go into foreclosure. That would mean I'd probably have to cover these if I opted to purchase it sub2.

    As far as the $15-20k in work, yes this will need to be done either way. However, I was expecting to do a cash-out refinance subsequent to the purchase which would effectively let me recoup the money spent on repairs and leave me at about 75% LTV.

    Hope that makes a little bit more sense.

    The one advantage that you touched on is that I can use my qualifications to finance other properties. And since there is a limit of 4 bank mortgages an investor can have (or is it 10? I still don't fully understand this point) I could see how I'll probably run into a dilemma at some point where I want to acquire more properties than the banks will let me use financing on.

    Any other advantages I may be missing?

    Thanks again, Rob

    0Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    Rob Condy I read your other thread. I didn't realize that the property was in Georgia. Why are you looking so far away? I know that prices are sky high in San Diego, but couldn't you find some deals closer to home?

    Do you have family in Georgia, or did you just choose that area for the lower prices? Have you looked at Michigan or Ohio? You can get huge returns on rentals in those states. Georgia is a nice state, but if you're going to go that far away, 10% return is a pittance. I don't consider any rental that is less than a 20% return.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    David Niles I don't disagree with you. The deal was a skinny one. But because I was interested in buying to rent out and hold long-term I was willing to take a chance on it in order to get my first deal done and out of the way (in hopes of building some cash flow and a little momentum, the latter of which I hear from other investors tends to happen for whatever reason).

    Moreover, I'm having a hard time coming across anything that you professional investors would consider a true "deal." So I've lowered my expectations as I start out. If it's a marginal deal and the numbers pencil as a rental, I'm happy to take it.

    Ironically, another major reason I went through with it is because I was under contract, and I gave my word I was going to buy the property. And I hear in this industry it's important not to walk away from many deals because you'll start getting a reputation you don't want. Obviously the irony is that the seller walked in spite of it all.

    From a cash flow perspective it would still probably work at $6k higher (albeit less than 10% cash-on-cash). However, it's a question of whether I'd be paying over market value, and how much. As indicated in detail above, I'm just not sure what the fair market value is of the property. I got the impression I was already overpaying a bit at the originally agreed price of $82k. At $82k it was a marginal deal at best. Any more than that, and it's, well, less than marginal.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Rob K I started with the idea that I'd be investing locally, but after struggling so much to get an offer accepted I started to consider out of state real estate. Around the same time, it seemed like I might be able to transfer to one of my company's offices in Atlanta. That's been delayed for a number of reasons since, but it got me looking at the market over there. Aside from the low prices as you already mentioned, I started to discover a lot more appealing reasons to invest in Georgia versus California. For example, Georgia law is a lot more landlord friendy, whereas California law pretty much caters to the tenants. Unemployment percentage is in double digits over here, and businesses continue to leave California because of higher taxes and regulations. Meanwhile, Georgia appears to encourage business growth through their legislation. And with our deficit in California soaring to mind-boggling figures over here, the folks in Sacramento will have to find a way to raise revenue- I won't be at all surprised if it's through property tax hikes. etc. etc.

    I couldn't begin to make a comparison to Michigan and Ohio. I'm sure those markets are good as well, and maybe in a couple/few years I might look to them. However, I've already done a lot of research on Atlanta so I might as well stay the course for now. Moreover, I'm pretty sure I could transfer to the office over there if I really pushed the issue. For now, I've worked out an agreement with my supervisor that I can work remotely as needed over there.

    I should also mention that I realize the 10% cash-on-cash I'm targeting does seem like pittance to most investors. However, this property was in a pretty good, safe, middle class neighborhood with great schools, where I considered good potential for appreciation. Overall, I'm looking to strike a balance between cash flow and potential appreciation. There are LOTS of properties in metro Atlanta, where you can get 20% cash-on-cash. They're not even necessarily in bad neighborhoods, but they're in neighborhoods that are just a little more unsightly than I'd like to start out in. My plan is to graduate to those once I have a bit more experience. I'm not looking to hit a home run on my first deal. Just looking for a relatively low-risk safe bet.

    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    13y

    Rob, to answer your question as to how opening bids are set at the courthouse steps: write a variety of opining bids down on several small pieces of paper. Place them in a hat. Stir. Draw one. Seriously though, there is no predictable way to figure out in advance what the opening bid will be. Think of it like Christmas morning...when you get up on auction day, you unwrap the opening bid, and you will either get a great gift, or a lump of coal. Be prepared to go, and be prepared to watch for it to go REO.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    hahah, thanks for the clarification (or complete lack thereof) Brian

    0Reply
  • Account Closed
    Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
    13y

    Rob Condy, I work out my highest bid based on the numbers and some nonnumerical information that's important to me. I never start out with my highest offer because in so doing I have little or no bargaining room.

    In my situation I would know if 6K might still make sense.

    When your getting started you may not yet have a good feel for the numbers. You need to know the market value of the property. The value as a rental property that yields a return that makes sense. You also need to know if the property is currently being used at its highest and best use. Some of this is subjective and can depend on your knowledge, experience, resources and creative insight.

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    13y

    Thanks Charles. I'm intrigued to learn more about what non-numerical information could possibly go into the decision process for establishing market value...

    After a bit more brainstorming, I came up with a couple potential compromises: I'm thinking of asking the seller to re-list the property at a price high enough to clear the bank fees AND my $2500 sunken expenses. If it in fact sells at that price, then the seller could reimburse me my expenses. In the event it doesn't then I'd have a chance to buy it as a foreclosure.

    One other thought I had was to retain a first right of refusal on the property. If I had evidence that the property would command $88k on the open market I'd probably consider it a bit more at that price. In that scenario as I understand it I would be entitled to match any offers that come in. Furthermore, I'm wondering if it's possible for me to request that any offers from other buyers must come with a non-refundable earnest money deposit of $2500 (well, only refundable in the event that I exercise the right of refusal). That way I know that they are serious offers. Furthermore, that could be another avenue in which the seller could reimburse me my $2500 (i.e. if I waive my right of refusal, and the buyer walks)

    Do these compromises make sense? Or am I asking more than I should, and ought to just let it go?

    thanks again everyone!

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