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.
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.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
13y
If your exit strategy is flipping or perhaps a short term rental (3-5 years) then market value is very important.
For me, I tend to look at long term holds. Market value is important but much less important than the value I can afford to pay and know that I have an adequate ROI and sufficient cash flow. Many non numeric considerations play into that.
Zoning may allow me to convert the current use of the property to a higher and better use.
The local economy may declining and the long term job market may look poor.
A property might be located near wetlands, lakes or other waterways. While this can be an attractive feature it may mean that you can have trouble with septic systems, trouble in remodeling, trouble rebuilding if a property were to burn down.
There are some beautiful homes on the Puget Sound near where I live. Many of these homes are now on lots that would only allow minimal remodeling and in many cases if the homes were destroyed the lot would be unbuildable.
There are many nonnumeric things to consider. They may or may not be factored into the market value, but in my case market value is not the most important value I consider.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Rob: IMO, you are making some incorrect assumptions about what you are entitled to when a seller fails to perform. If you used a standard realtor board contract, there is usually a clause that states that you are entitled to nothing (no damages) except return of your earnest money, and sometimes you are bound to mediation. You can sue for performance, but you are on shaky legal ground (again, just my opinion) trying to recover your expenses. The seller owes you performance, in this case selling the property at the contract price, but does not owe you for travel or other out-of-pocket expenses. If you decide to threaten the estate with a law suit (as opposed to actually suing), even just a couple of hours of attorney time and you might be throwing good money after bad.
As for the estate not being able to bring the needed additional cash to closing: Something is not right about an estate without assets going forward with a short sale in a nonjudicial state (GA). The attorney and court and (and sometimes executor) all have to be paid. Typically they would be paid with funds that either the estate or one of the heirs has or expects to have. There is no incentive for an estate to go forward with a short sale unless they have other assets (or future income) bound up in the estate or potential liability issues. That being said, it's possible the estate previously had assets that have already been spent (or wasted) and now the executor thinks she needs to get rid of the house in order to close the estate. The attorney doesn't get paid until the estate closes.
It concerns me that you say you're interested in paying more for the property if it gets better offers once back on the market. (I believe it will as many new landlord buyers are now paying what it takes to get in, not what makes sense as an investment) . Basing your buy-and-hold purchase price on what others will pay is just a bad idea. That's like going to an auction and making your bid a little over what everyone else will pay. That might work to test a market for an immediate re-sale, but doesn't really make sense when you're looking to buy a rental.
If the bulk of the $2500 is travel, I think you really need to look at whether it makes sense to invest out-of-area. It's one thing to lose inspection and/or appraisal money. That's happened to me and most experienced investors I know. Due diligence is at your own risk. :)
Investor · CA · Member since 2012 · 170 posts · 28 votes
13y
I appreciate your response K. Marie Poe. As far as my incorrect assumptions, they're based on a lot of mixed input I've been getting. A fair number of people like you have told me I don't have much of a case to stand on. However, others have told me I absolutely do. I'm using the standard GAR (Georgia) contract and it doesn't mention anywhere as far as I can tell that I'm limited only to the receipt of my earnest money in the case of seller default. I've copied the relevant sections below (at the end of my post) in case others want to offer their interpretation.
The legal part is kind of moot regardless. I don't want to take this to court. It's not my style. What is my style is coming up with a creative compromise that can make both parties feel satisfied at the end of it all. Granted it takes two to play ball, and I can only hope the seller will be willing. And I do acknowledge that they will probably be more willing if they know they're in a vulnerable position legally speaking (regardless of whether I plan to take advantage of that or not)
To reply to your point about the estate proceeding with a short sale, they won't. Their plan at this stage is to try and sell it for the higher price to clear all liens and loans. And if they're unsuccessful with that, they will let it go into foreclosure.
Your point is well taken that it seems like I'm interested in the property if it gets better offers on the open market. Frankly I am. I just want to make sure as a newbie, I'm not letting myself walk into a sour deal. I would like one of my fallback exit strategies to be a break-even short-term resale if I find that the out of state investment is too much headache to carry on with (as others indicate that it can be). Do you think I should instead disregard market value, and simply pursue it based on the long-term potential? If that's the case perhaps I ought to continue to pursue it, and throw in the extra $6k. The cash flow would drop to about 8-9% cash-on-cash (as opposed to the 10% minimum I was aiming for), but to be honest that still makes sense for me. Especially given that I'm using conservative numbers in my cash flow spreadsheet. Hell, it's better than my stock portfolio has done the past 5 years, or the .1% my savings account is yielding.
Lastly, I do admit that about half of my expenses were travel related. I understand now that this is one of the risks of out-of-state investing. Live and learn. For now it doesn't deter me from continuing to invest in Atlanta. We'll see what other risks I encounter along the way. I admit I'm a rookie, and I know I have to expect some hard knocks. At the same time I can only roll with the punches and persevere. I've changed my strategy so many times, I feel like I've got to ride out this one as long as I can endure.
Thanks again for your response, and giving me some food for thought.
[i] Disbursement of Earnest Money: Holder shall disburse the earnest money upon: (1) the closing of Property; (2) a subsequent
written agreement of Buyer and Seller; (3) an order of a court or arbitrator having jurisdiction over any dispute involving the earnest
money; or (4) the failure of the parties to enter into a binding agreement (where there is no dispute over the formation or enforceability
of the Agreement). In addition, Holder may disburse the earnest money upon a reasonable interpretation of the Agreement, provided
that Holder first gives all parties fifteen (15) days notice stating to whom and why the disbursement will be made. Any party may object
to the proposed disbursement by giving written notice of the same to Holder within the fifteen (15) day notice period. Objections not
timely made in writing shall be deemed waived. If Holder receives an objection and, after considering it, decides to disburse the
earnest money as originally proposed, Holder may do so and send notice to the parties of Holder’s action. If Holder decides to modify
its proposed disbursement, Holder shall first send a new fifteen (15) day notice to the parties stating the rationale for the modification
and to whom the disbursement will now be made.
Holder shall offer to disburse the earnest money to Seller by check in the event Holder: (1) makes a reasonable interpretation of the
Agreement that Seller has terminated the Agreement due to Buyer’s default; and (2) sends the required fifteen (15) day notice of the
proposed disbursement to Buyer and Seller. If the check is accepted and deposited by Seller, it shall constitute liquidated damages in
full settlement of all claims of Seller against Buyer. Such liquidated damages are not a penalty and are instead a reasonable preestimate of Seller’s actual damages, which damages are difficult to ascertain. Nothing herein shall prevent the Seller from declining
the tender of the earnest money by the Holder. In such event, Holder, after giving [/i]
[i]17. Default.
A. Rights of One Party Against Another Party: A party defaulting under this Agreement shall be liable for the default. The nondefaulting party may pursue any lawful remedy against the defaulting party.
B. Rights of Broker Against Defaulting Party: In the event a party defaults under this Agreement, the defaulting party shall pay as
liquidated damages to every broker involved in this transaction with whom the defaulting party does not have a brokerage
engagement agreement an amount equal to the commission the broker would have received had the transaction closed. For purposes
of determining the amount of liquidated damages to be paid by the defaulting party, the written offer(s) of compensation to such broker
and/or other written agreements establishing such broker’s commission are incorporated herein by reference. The liquidated damages
referenced above are a reasonable pre-estimate of the broker(s) actual damages and are not a penalty. In the event a real estate
broker referenced herein either has a brokerage engagement agreement or other written agreement for the payment of a real estate
commission with a defaulting party, the real estate broker shall only have such remedies against the defaulting party as are provided
for in such agreement.[/i]
Investor · New Haven, CT · Member since 2012 · 285 posts · 175 votes
13y
@Rob Condy I have a couple of thoughts for you. In terms of the long distance investment do you plan on having a property manager to take care of the property? if so and the numbers still work out I would pay the extra 6k and go for it. After all the monthly payment on the 6K shouldn't change the cash flow all that much.
When I am evaluating a rental property the biggest thing for me is cash flow. Period. cash on cash return is a good guide but that can be misleading because you can put less down to buy the property and get a better cash on cash return but your cash flow will plummet. At the end of the day it's the cash flow that you want in your pocket every month. (I hope) because that is what will get you out of the rat race.
As a resource to see other investment properties in the atlanta area check out the Jason Hartman website. He has some properties listed there that you could use as rental comps.
Investor · CA · Member since 2012 · 170 posts · 28 votes
13y
Thanks for the feedback Shawn Mohovich. Yea, I'm definitely planning on hiring a property manager. I've taken a look at jason hartman's website. I was even thinking of buying through that program at one time. Have you had any success with it? I get the sense that most investors on this board would scoff at the deals on their website.
Maybe I should just go for it after all, and put it in the extra $6k. It's probably not the kind of cash flow that would get many investors excited about. But for a first deal for me I guess it could still make sense. It seems pretty low risk when looking at the bigger long-term picture.
Investor · New Haven, CT · Member since 2012 · 285 posts · 175 votes
13y
You know....it's your investment plan. What works for you and your future wouldn't be the same type of investment that works for me and my plan. So as long as the numbers work and you are pretty confident about them go for it. You will never know every factor 100%.
Coincidentally, The first home I bought was a 2 family back in 2005. When I was negotiating with the seller we went back and forth a few times. The listing price was 185K, I offered 170K. They then came back and offered 175K, I countered @ 172K. Then they slept on it and came back to me at 182K and I was pissed off. They were just at 175 and now they want 182. I was told that they were influenced by their parents and were firm at 182k. I was ready to walk away based on principal and the fact that I hate working with people that go back on their word. Thank goodness I had a sensible agent at the time and she encouraged me to look at the big picture and made me realize that the numbers still worked for me at the 182k price. Since then it has been one of my best rental properties!
Investor · CA · Member since 2012 · 170 posts · 28 votes
13y
Thanks again for the feedback Shawn Mohovich. You encouraged me to continue pursuing this one.
I found that one of the comps on the street (about 300 sq ft smaller than the one I had under contract, but likely needing a little less work) had come back on the market after being pending/contingent. I touched base with the listing agent to get the scoop. It was a short sale originally listed and pending at 81k. The bank countered at 85k. The buyer walked (the listing agent thinks they bought another house), and so it went back on the market. The listing agent received 11 offers in two days. The highest and best offer was $100k, all cash, no contingencies! Wow! Needless to say the market is exploding
That tells me me if I wait any longer I might not find anything at a price I consider reasonable. And it made the property I had under contract look like a steal at $82k. And as Shaun suggested, if the numbers work for me at six thousand more, why not go for it? So I did. Unfortunately I came to find out that the seller had already accepted another backup offer, and was under contract with another buyer. Seems unfair to me, but it is what it is. Evidently it's within the rules of the game. The attorney I've been working with still hasn't gotten back to me with a definitive answer on whether I have any legal recourse against the seller, but he didn't think so off the top of his head. Again I don't want to take this to court, but I am still curious nonetheless. My agent tells me that I don't have a case to stand on because the seller had a legitimate out- they were not able to provide a clean title (i.e. the estate is bankrupt and therefore couldn't make up the shortfall due to the bank fees, and that would put a lien on the property)
To say the least, it's been a taxing first experience. At this point I think all I can do is move on, and hope the next one works out. Unfortunately I'm beginning to realize I may need to move markets, or at least counties, because prices are clearly exploding to the point where it doesn't make sense to invest (not even for someone like me willing to settle for 8-10% cash-on-cash)
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
13y
I disagree that the Seller had a legit reason for not performing. Particularly if she was able to provide clear title at the beginning of the deal (when your offer was made and accepted) and then suddenly not able to because she stopped making mortgage payments.