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.
Yep, understanding the lending process isn't just for borrowers. It happens, keep at it and good luck!
There is lots of good news in this post.
1. You learned tons by doing, even though it didn't close.
2. You now understand why people accept lower offers if they are backed by actual cash in the bank, not just hard money.
3. You didn't pay a guru to learn all this.
4. You aren't still reading books and sitting on the sidelines.
Don't give up, there is a huge need for good wholesalers here in MA. If you have a good deal, you can sell it in 10 minutes. I have buyers who I lend to even if I can't see good comps, because I know they can follow through. This is not how regular hard money works, but it happens every day. I can refer you to some very active buyers in my network. I've sent you a colleague request, please accept.
Thanks, Ann! I think I actually got your business card at one of the BostonAREIA meetings I went to. Always good to network with a good lender.
Sounds like a good learning experience. did you put any earnest money down or did you have an opportunity to have the "cash" buyer put earnest money up? Good luck next time.
Thankfully the offer was contingent on financing. I put up $500, but the only thing I lost was a few weeks of my time.
@Chris Wight , thanks for sharing your pain so it can be a lesson for everyone else. As someone who is actively mailing absentee owners (still waiting on deal #1), your experience is invaluable to me. Best of luck closing your first deal shortly!
@Chris Wight Thanks for posting and congrats for getting in the mix. Hope to be joining you soon!
@Chris Wight sorry if this is a stupid question; but, you only did the formal written offer because it was through a realtor, right?
If you were dealing directly with a motivated seller, wouldn't you want to go straight to P&S?
Not an expert, but wouldn't it have helped if you had gotten an appraisal on the property?
Thanks, Sean. Although not everyone does them (I certainly didn't when I bought my own house) written offers are technically required in Massachusetts. Being my first deal, I wanted everything to be by the book. It also only serves to protect me as the buyer, so there's no real downside.
Hi David, since the problem wasn't with the purchase price, but rather the project ARV, an appraisal wouldn't have helped. You can't appraise work that hasn't been done yet.
A note on appraising work that hasn't been done.
The bank we use to fund our rehab deals, we give them a list of the planned upgrades, they always sends out an appraiser to every property to do an after repaired value, appraisal.
They lend us for purchase and repair money up to 80% of after repair value.
Dell, that's really surprising. Do you have to provide construction plans too, or just a list? You must have a very good relationship with your lender!
Chris, I'm sorry to read about your deal that fell apart. Sounds like that "cash buyer" was only pretending. Definitely good to know right away where his cash is coming from. I don't understand why you don't undertake the rehab yourself? I would much rather do that and take the full profit on the resale than a comparatively small assignment fee right now. Maybe you could work an arrangement with the seller, so that you would get the rehab completed now, and then sell it. That would eliminate the need to raise cash now to buy it. Also, I don't understand the thing about how your written offers are binding and prevent the seller from accepting other offers? How is that unique to Mass? Isn't it like that nationwide? Once a seller accepts, he cannot accept another offer without exposing himself to lots of liability? I just lost out on a deal because the seller chose to delay accepting mine in hopes of getting a better one, which he did. By the was, was this your first deal you worked on or the first one that failed? I hate the word. Maybe i should say "went up in smoke" or "failed to materialize?" Regardless, I'm sure it left a pit in your stomach. Sorry about that.
I type up a very basic list, no drawings.
New kitchen 8,000
New bath 3,500
New roof 5,000u
I total the list and email it to him.
The other thing I have done when I needed to convince a hml or myself, when going into an area I wasn't comfortable comping myself. I would contact the two top realtors in the area and offer to pay them for their opinion of value.
Typically they will do it free.
A realtor who sells a lot of homes and is familiar with an area is a better predictor of what a house will sell for than an appraiser , in my experience.
Dell, the realtor is how I came up with the $600k estimate. He lives in the same town and knows the area well. My buyer seems to have had a rather conservative hml.
Thanks for the support Ed. I didn't take on the rehab myself because I don't have the experience, money or time to do so. Otherwise I totally would have. The written offers here in MA are actually required,where as in some other parts of the country you can just have a verbal agreement which isn't worth the paper it's written on. This was my very first deal, and I like your attitude towards using the F word!
@Chris Wight I am an commercial appraiser and we do "as complete" appraisals often; but, yes, we do need plans and specs. And these appraisals are not cheap ($3500 and up for commercial property, not sure for residential).
Hi Chris- great sharing, its the same in the commercial real estate industry. I have borrowers looking for 100% financing NOT going to happen first of all at our company. However borrowers tell me that they have buyers lined up and contracts signed. You know what? It doesn't mean (). " you can fill in the blanks there. "
Anyone can back out of a contract. When people say I have a buyer lined up and need 100% financing its all talk. We all have to be aware of that.
Always think like a borrower and lender my manager says. If your borrower is not taking a risk; Why should I (lender) take all the risk then.
thanks for sharing and its a new year, Stay Motivated.
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