Need Input to close this CA deal. Where can I have done better?

16 Replies

Just recently, I received a call from one of my yellow letter mailers.  The property is located here in Southern California in a very demanding part of Orange County block away from Roosmore.  High overview, the mother passed away in March of 2014 and the property was left in a trust to three heirs.  All three of them are in their late 60's and above. I went out to check out the property and spoke to the brother.  Here is the breakdown:

Single Family Residence

3 Beds, 2.75 Baths
1,733 Sqft
Year Built: 1961
Lot Size: 7620 Sqft

3 Bedrooms? 2.75 Bathrooms? ** 1,325 to 1,909 Square Feet ** $401 to $573 per Sq. Foot
Built between 1959 and 1963 ** 51 to 55 years old ** Market reports average homes in this area are in the $800,000.00 low to med.

GoPro video of the house walk thru of the property
www.youtube.com/watch?v=OXBporme8Es&list=UUattjUJJitzsizoGUl2aLZQ&index=3

Rather than assuming the value in the low to mid $800k I approached it on a conservative level and assumed that the ARV would be $770K - 88K of repair cost.

After walking thru the property and talking to one of the owners.  I was able to find out that the property is free and clear with no liens.  The heirs would consider owner financing if the deal makes sense.  But it would require an agreement with all three siblings involved.  Which made it very difficult since only one of them was there and the other two where in different parts of Southern California. Also, they are not in the hurry for money, but would like to let go of the property since nobody can maintain it.

So, when negotiating with the seller, their first initial offer was 750K and they felt that the market value of the house was in the 800K.  Using @Michael Q.  approach from the podcast, I repeated their suggested amount and asked if they can go lower.  The response was then 725K to 680K. The amount was way to far for me to accept, so we started talking some more and nothing was accomplished since the owner indicated he would need to discuss more with his sisters.  So he asked me to send him a proposal.  With that being said, I provided him with the following offer:

OFFER OPTIONS

OFFER 1.

$497,000.00 (All CASH offer)

OFFER 2.

$558,800.00 (5% down – Balance Paid off in 6 MONTHS)

OFFER 3.

$625,000.00 OWNER FINANCING (5% at close – balance paid at 4% - 30 years amortization – 10 years payoff)

So below is the response from the seller:

Dear Nixon,

Thank you for taking the time to visit and evaluate our property at XXXX Los Alamitos, CA.

I have met with my two sisters, Gay and Joy. We have evaluated your proposals, and sorry to say they do not meet our goal in the sale of this property. We truly believe the area is and will continue to grow in value as everything is in Orange County.

Due to this, we are declining your offers, and have settled on lowering our price to NO LESS than $630,000. This would be a “cash only” sale, with the house and property “AS IS.” In this sale, buyer will pay for any and all expenses associated with the sale of this house and property. All taxes are current, there is nothing owed on the property, and there are no liens.

Thank You,
Jim, Gay & Joy

So, to my fellow BP's can any of you provide me any suggestions how I may improve this deal, future tips or better yet salvage it.  Any suggestions is deeply appreciated.

Best,

Nixon

@Nixon Vayupak welcome to wholesaling in Orange County. Everyone thinks they're selling gold (and in some ways they're right).

The only 2 things I can offer before you move on is:

1. Look at the comps and look at the lowest comps in that area and see if they're being reasonable. When looking at comps use Redfin and see how the property was paid for and if in cash that could be your buyer/investor. Contact that person and explain the deal and see if there is interest. Sometimes in OC ARV formulas go out the window and investors will pay way more than you think. I have found buyers willing to buy with little margins because the spreads are higher.

2. If they plan on listing the house at 630k then explain how much they will net which is usually 10% less than the selling price after realtor fees, taxes, closing costs, etc. and sell them on the price which would be $570k with a quick close. Quick close is the key, create insecurity of them going the retail route.

Once again, in orange county it is tough because everyone feels they can sell the retail route which is not always the case.

@Keith Agnello thank you very much for your input. I will keep on pushing to see what I can make of this deal.

@Keith Agnello  Los Alimtos is kind of hot right now.  As of last week only 15 active properties and 10 went into escrow in the last 30 days.  That is a fairly good current absorption rate.  However, for most of the year average market time has been 2.5-3 months.  So work that calculation into your figures with holding cost.  Average sale price of 768k.  With comps in the nicer areas of the city like you said in the high 700- low 800k. That home looks like a complete remodel and i would also bring down as much wall as possible in the common areas.  That can add up quick especially with an older home exposing yourself to unseen issues that will need to be fixed.  

Rt now you either have retail buyers wanting turn key or Investor buyers like yourself looking to flip a property.  Not many end buyers who want to buy a project like that.  They cant expect much more then a net of then 575k and that is after months on the market.  @Keith Agnello looks spot on. Good luck sounds like the negotiation will be quite difficult.  

Move on!  These people know the value of the property.  Also their holding costs are probably under $2,000 a year shared between the three of them.  Modestly they're gaining $50,000 a year in appreciation sitting empty.  You didn't mention any major deferred maintenance so I'd say at $630,000 you could paint and carpet and modest upgrade for $30-50,000 to get $800,000 quick.  I'd jump on it.  Seller financing?  Ha!  They have no value in this unless you're willing to go 8%+.  They have no capital gains so it's cash or a high interest rate.  They obviously prefer the cash. 

How sure of your ARV are you? I only see 4 MLS properties that sold in Los Alamitos in the last 90 days that were >= $770k. 3 of the 4 were, four bedrooms with a price per square foot range of $384-463. The highest sold was $825k and it was a 2 story. I'm not trying to poo-poo your deal, just want to verify your numbers.

If ARV is what you say, I wouldn't walk away yet. Seems like they have some motivation if their initial offer was $750k and they are now saying $630k. What is your exit strategy on the property?

@Scott Williams   the 770K was my first initial thought when I researched the property and that is why I used that number when considering my offer.  But from what I found using propertyradar, there where 4 recent homes near by which sold at market for much higher and one below.

Be careful with your comps, I looked them up on the MLS and the first one on Martha is the only one that looks like a good comp based on what you have shared.

Comp 2 Lassen - Property Radar shows as 3/2 with 1536 square feet, MLS shows 4/2 with 2200 square feet.

Comp 3 Orlando - Property Radar shows as 3/2 with 1603 square feet, MLS shows 4/3 with 2900 square feet.

Comp 4 Wembley - Property Radar shows as 3/2 with 1735 square feet, MLS shows 4/2 with 2555 square feet.

I still wouldn't walk away, but you might need to sharpen your pencil and show the sellers what the property is worth as-is. 

What is your exit strategy?  I have buyers for that area if you are looking to wholesale.

@Scott Williams thanks for your feedback. Didn't realize the difference using Property Radar, nevertheless I am glad i stuck with my 770 ARV. As for exit strategy, my goal is wholesale.

@Bob Bowling  Thanks for your input on this.  I have to agree with you on this cash is king, but hopefully I can still get on base with this deal and as for the maintenance I indicated on the high side 80K, but if you look at the video it may be even lower.  Nevertheless, this is something that will take a while to work on. =)

@Nixon Vayupak worse case scenario, if you can't get a wholesale or any deal done with them, let me know. I'm a realtor and would gladly help them sell it and give you a cut of my commission/referral fee.

@Nixon,

When you dealing with 3 siblings that changed the price. You have the problem of if they grew up in the home, they have a attachment and it's emotional. Since, their not living their they say there not in a rush but you know they want to sell it. Most likely, they either saw that houses are not staying on the market long, so they know you'll be able to sell it rather fast. 

By offering this, your telling them the property is worth a lot. Always make one offer and let the person counter. You showed all your cards. 

OFFER 1.

$497,000.00 (All CASH offer)

OFFER 2.

$558,800.00 (5% down – Balance Paid off in 6 MONTHS)

OFFER 3.

$625,000.00 OWNER FINANCING (5% at close – balance paid at 4% - 30 years amortization – 10 years payoff)

The house needs updates, carpet, get rid of the pop-corn ceiling, paint, maybe update the bath and kitchen yes. Comps don't mean so much to a seller, they always feel the property is worth more, 

Their also thinking about the split.

@Scott Williams You are absolutely right regarding being careful with your comps! Note that PropertyRadar shows what is in the public record, while the MLS shows whatever the Realtor entered. ;-) Pretty surprising to find three examples in one list of comps, but note that there are two likely possibilities behind the discrepancies - a) that those comps with higher values in the MLS have un-permitted work, or b) the local assessor is doing a lousy job of updating the assessment rolls based on permitted work. Either way, they can definitely impact value in a variety of ways. If this is common in that area, then my guess is that valuations overall are a mess - likely with appraisal review problems since they typically rely on public records, and if anything use discrepancies between public records and MLS values as a red flag.

Personally, I don't see this a wholesale candidate. Pretty much every house I look at I want to look MUCH worse than this. The interior is clearly dated but fairly well kept.

Yes, it needs upgrading to appeal to a retail buyer. I guess you can try selling that notion to the siblings but they seem mostly aware of it since they already dropped their asking price some.

@Sean Brooks  Thanks for providing your input. As you can see from my earlier approach it was more a verbal negotiation.  Then the proposal with just my way to hopefully see if they would bite on my three options.  Unfortunately, they didn't bite.  But the interesting part is that they did drop the price down.

Nixon,

Just wait. If a life changes occurs one of the siblings will want to sell or it might be 2 or all 3. They will then want to sell. What you do now is let them know you can't offer their price. Thank them for taking the time out to consider your offer and let them know if something changes please contact me first. 

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