Hello Bigger Pockets! I am trying to close on my first deal and I am running into a few issues, here's my story; I am under contract for a duplex where I plan on house hacking. The agreed selling price is $139k and he is paying $4800 of my closing cost. To make a long story short, I have paid $435 for inspections, $635 for an appraisal and $500 of earnest money. The appraisal for property came in today and it came in for $135k. The reason for this is because one unit is in really bad shape. It needs a complete remodel (luckily I run my own contracting business). My contract with the seller states that he is going to replace the refrigerator, stove and paint the walls in that unit. Originally, he wanted to include replacing the carpet in the unit but not pay as much closing cost, but I offered back, for him not to touch the floors and pay more closing cost. The reason for this is because I want to upgrade to laminate (more durable). Well now, because the appraisal came in low, my realtor is trying to convince me to start replacing the floors with laminate (before the closing date). I have rejected and told her I already have a lot of money on the line (with the inspection and appraisal money) and I am definitely not installing new floors on a unit that isn't mine yet. Her reasoning is because the bank is going to require new floors to be put in before they loan out the money because the current ones are so bad. (This is an FHA loan). She is afraid that with the bad news of having to replace floors, and having to come off the selling price of 4 thousand dollars that the seller is going to walk. I am confused why the bank wouldn't just allow the house to be bought as is if the seller lowers the selling price to the $135k. To sum up my question, why does the bank have a say in the condition of the property if it is being bought for what it appraises for? Also, with this being my first deal, I am wondering if my agent is trying to pull a fast one on me because I am young and inexperienced with buying. I want to believe she has good intentions because she is a family friend, but I am not ignorant to the fact that at the end of the day, she just wants the deal to go through for her check.

No. Never improve a property you don’t own before closing. The property is likely worth what it was appraised for or less... likely less.

I understand where your realtor is coming from, and she's right. Now that being said, I don't agree with doing the floors before closing. I side with you on that one. The bank has a say because it is an FHA loan. Its a government loan requiring 3.5% down. That is one of the hardest loans to get approval for. The units have to be completely move in ready. No broken windows. 9 systems are in working order (foundation, roof, electrical panel updated, etc) So because of the type of loan, that's why they require some things to be done. I know it can be frustrating. I just finished that process on a home for myself. If I didn't answer your question well enough just hit me up and I'll do my best to explain further.

So then the alternative of paying rent and building NO equity is better? His biggest and also most-unlikely risks are a lawsuit and foreclosure, and both of those have no effect after a number of years. Rather than just sit and pay each month to build someone else's equity, I always advocate buying as soon as you can qualify. I can imagine there is someone out there with much more money than you have saved who also feels you were a fool and irresponsible for purchasing without reserves at his/her level.

No kidding :) Of course, it's better be healthy and wealthy than sick and broken - who wouldn't agree? All people start from something and this is not the worse start ever. I know much worse stories and everything worked out just fine. If he had 20%down and money for closing, he wouldn't ask that question, would he?!?

Since it's a duplex (2-unit) he wouldn't be eligible for 5% down conventional. Max LTV on a 2-unit FannieMae is 85% - meaning 15% down minimum. Freddie Mac is 80%/20%

FHA loans are more difficult to satisfy than conventional loans when it comes to condition of the property. There is a lot more risk for the bank when you put less than 20% down so they generally are more strict on the condition of the house in case of foreclosure. The minimum requirements for FHA are: • Safety: The home should protect the health and safety of the occupants. • Security: The home should protect the security of the property. • Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity. I would assume the bank wouldn't loan to you because the floors are unsafe and may lack structural integrity. However I would definitely not start working on the house before you close in case it doesn't end up going through.

Your lender/bank is the one that would impose flooring due to FHA guidelines and since there is "flooring" although bad this should not have any bearing on the loan being funded, as long as the carpet is there. Definitely do not improve the property until the deed is in your name, that will create a whole mess of other problems. Since it only Appraised for $135K and the contract is for $139K, the seller can add an additional $4K credit towards closing (must be used for closing costs so if your closing costs are only $5K, the remaining amount will go back to seller), or reduce the purchase price by $4,000. If you decide to move forward, you will have to pay that $4K out of pocket to the Seller as the Lender/Bank will only lend to the Appraised price of $135K. Hope this helps!

I would never consider making improvements to a building that I did not own yet under any circumstances whatsoever.I think the error you made is in taking an FHA loan. FHA loans suck. For investors they doubly suck. In a situation like this, if you can't afford to put the necessary money down on a conventional loan instead of the FHA loan you got (and can't find a hard money partner), then I would say, oh well, you can't afford the property then and have to pass.

Is my agent trying to deceive me?

Brian Ploszay

Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes

9y

I see no evidence that your agent is taking advantage of you. You do need to remember the motivation of agents is to make a sale. It's not evil, but their motivation does not sync with yours all the time. But on the whole, they can be helpful and provide you with good information.

If a house does not appraise, you should have the seller discount their price. Or at least try to.

I generally do not recommend a buyer to do work on a property before they close. That was not the best advice, but I see her point. If the property does not pass FHA inspection, make the seller make the required repairs.

0 Reply

Wil Reichard

Rental Property Investor · Greenville, SC · Member since 2017 · 185 posts · 178 votes

9y

If you're using FHA because of the 3.5%... Check out the conventional loan. I know a lot of people believe its only as low as requiring 5% down... but I am currently closing on a house using the conventional loan with 3% down. Lower down payment then the FHA AND... it holds up as a stronger offer. FHA's fall through a little easier than a conventional loan would.

1 Reply

Rod HanksBusiness Member

Insurance Agent · Dallas, TX · Member since 2013 · 743 posts · 462 votes

9y

FHA has strict guidelines...the property has to be in move in condition unless its a FHA 203k loan where funds are set aside for repairs. I rarely accept FHA buyers on my rehabs for the very fact they are too picky. Go conventional and you won't have these problems.

Rod Hanks Insurance4.9156 Reviews

Website View Page

0 Reply

Brian Garlington

Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes

9y

@Ryan Davis

Don't "fall in love" with an investment property my man.

Yes you have "sunk money" into this with an appraisal and inspection and your 3.5% down. At the end of the day, the property did not appraise for what it needed to. Keep it simple and let the seller know (through your agent) that you are prepared to walk away from the deal if they don't also cover your closing costs. You have to be prepared to walk away from investment property deals.

However......if the seller comes back and says they will cover part of your closing costs, isn't that still a win-win?

0 Reply

Ryan Davis

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

@Roan LaPlante I appreciate the advise but my financial situation isn't as bad as you make it seem. I have the cash allocated for the 3.5% down and the renovation cost but not 100% of closing, that's why its vital that the seller pays these if the deal is going to happen. @Matthew Olszak You make a good point. Although I am not in a terrible spot, I am also not in the best spot financially with $20k sitting in the bank waiting to invest. But I would rather take the risk with what I do have and try to make my first deal, rather than wait. Worse case scenario, I cant get a tenant in there and have to pay the full mortgage amount for a couple of months which is no problem, So its not like I am completely reliant on having a tenant in there as soon as it closes.

0 Reply

Ryan Davis

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

@Joel Owens thats a great idea to let it sink in for a while. On your questions of my local market, it is very fast paced around here right now. I live in Spartanburg, SC where there are A LOT of manufacturing companies. Also, being right beside Greenville, SC makes it more of a hot spot. There are people moving here by the hundreds and theirs not enough housing. There are construction sites on every street corner. I see a lot of growth happening. Before this house I was interested in a few more and if you didn't put an offer in the same week they were listed, you lose. With that being said, I have no doubt that if this deal were to fall through, it wouldn't sit on the market very long. Unfortunately there are not a lot of small multi families on the market. I make decent money at my current job and have no problem with expenses as I maintain very low expenses.

@Melissa Kirchhoff I am very motivated to close the deal, I think its a great investment in an awesome area. Where the house is located, I will have no problem at all finding good tenants. I am not blaming anyone at all, at first, I was just confused as to why my seller wanted me to pay for floors before the deal closed, but I understand completely now.

@Rod Hanks @Wil Reichard I will definitely talk to my lender about going conventional, thanks!

As far as now, I have offered a proposal for my realtor to present. Here it is; opinions are welcome;

Selling Price: $135k

Seller pays all of closing cost

Seller does not have to do any of the previously agreed upon work. (No new refrigerator, no new stove, no paint, and nothing to meet the FHA regulations.) I will take care of all the required fixes before closing including, replacing floors, replacing a broken window. ONLY with a signed contract that states, if the deal falls through due to something on his end, he will reimburse me for all of my expenses and labor. There will be an agreed upon cap for this work.

If he doesn't pay me for the expenses and labor if everything falls through, I will file a mechanics lien just as @Wayne Brooks stated.

0 Reply

Sung Park

Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes

9y

Ryan Davis i think if you need the seller to pay for closing costs because you don't have the funds to do it, that's not a good negotiation position to be in. I'd say you wait, increase your cash reserves, and look for a another deal where you have more flexibility to go through with the deal on more favorable terms. I find that good deals happen when you have more leverage than the opposing party.

1 Reply

Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

9y

Originally posted by @Roan LaPlante:

@Irina Belkofer if he doesn't have a good enough cash position, it would be irresponsible of me to suggest anything other that that he can't afford it.

Affordability is a vague thing :)

Let's say, he bought it for $135K, improved and new appraisal came with new MV=$155K.

Then, he's renting one side of the duplex for $1K so it's $12K/year paying his mortgage

He lives for free in another side and after he moves out, it's rented for $12/year, too.

How's that about affordability?

0 Reply

Wil Reichard

Rental Property Investor · Greenville, SC · Member since 2017 · 185 posts · 178 votes

9y

I want to agree with @Sung Park , but I cannot agree fully. Yes it is very wise, and probably the better thing to do financially. But I am in the same boat as you are. Making the monthly payment may be not that bad, especially if you plan on sharing the costs with a roommate like I am. But saving up another 4k+ is going to take some time for some people. Be confident in your purchase, have a fall back plan if sh*t hits the fan. And make sure to cover your butt!

For example, I used to work as a server. My old boss told me I could come back anytime if I need to. So I work a 8-5 job and I could serve in the afternoons if I needed it. I also garage sale and resell to make some extra $$$.

0 Reply

Odie Ayaga

Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes

9y

Just throwing this out there...if the seller can afford it would they be able to redo the floors in a manner of your choosing and you escrow an amount that would cover the repair that they would get upon closing?

0 Reply

Ryan Davis

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

@Odie Ayaga how would this work exactly? Could you explain further?

0 Reply

Odie Ayaga

Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes

9y

You'll want to discuss with whoever is drawing up your purchase docs but the idea would essentially just be to tell them you're willing to put funds in escrow to cover the work that would be transferred at closing. The sellers would have to come out of pocket for the work but be refunded provided the deal closes or you fail to perform on your end to close the deal. The obvious risk to the sellers is that if the deal doesn't close then they don't get the money back though hopefully it adds to the value of the house that they could recover it in whatever future deal they pull off.

0 Reply

Ryan Davis

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

8y

Update*

We have finally came to an agreement with the seller! We have agreed upon the $135,000 and him replacing the floors and him meeting all FHA requirements... I had to agree to pay more closing cost. $2650 in closing to be exact. This was not planned, but I believe it is worth it. So with the down payment of 3.5% and the $2650 in closing, I will be initially out of pocket about $7,000 excluding renovation cost (budgeted about $4,000 for renovations, doing all the work myself).

So all in all, its a lot of money up front, but I see it as paying about $11,000 up front for a place to live for the next couple of years. Rather than paying around $1,000 monthly for a place to live for the next 11 months.

Thanks for your advice everyone, glad to finally have negotiations over!

0 Reply

Is my agent trying to deceive me?

Is my agent trying to deceive me?

Most Popular Reply

38 Replies