How I failed my first deal !!

Scott Weaner

Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes

9y

@Rohan Attravanam I am a bit confused, what exactly was that clause?

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Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

Seller wanted Rent + Deposit for the unit which I asked them to keep vacant, and not lease out. I wanted to increase the rents on the unit and not be stuck with a low rent for 1 year

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Khaled Helmi

Flipper/Rehabber · Clarksville, MD · Member since 2014 · 85 posts · 66 votes

9y

Hey Rohan I first have to commend you for sharing a negative experience as these are the ones we learn the most from and it takes some courage to show that "you arent perfect". So thanks!

So in terms of the deal, I am a bit confused too. You gave ONE months rent and a deposit, and lost it when the deal failed? Is that accurate? Was the deposit significant?

The second thing is, what do you mean when you say that the contingency clause "doesn’t explicitly state the ability to back away from the clause" - you had a contingency but couldn't use it? I'm not sure i'm following because the whole point of a contingency is that the deal is going to go through UNLESS xyz fails.

Thanks again!

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Michelle B.

Investor · Lebanon, OH · Member since 2016 · 144 posts · 87 votes

9y

Sounds like the seller was in process of renting the unit and wasn't comfortable leaving it vacant for the buyer. So he said sure - I'll leave it vacant if you pay me 1 months rent and security deposit. Buyer agreed and thought he would get this money back if he backed out of the purchase. But that wasn't the case. Is that right?

2 Reply

Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

Michelle Briotta ... thats exactly what happened. Sorry the post was confusing :)

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Jeff Sprunger

Lockport , NY · Member since 2014 · 265 posts · 124 votes

9y

so, you got the property with the one unit vacant? just like you wanted?

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Saran Mandhadapu

Devon, PA · Member since 2016 · 93 posts · 23 votes

9y

Originally posted by @Rohan Attravanam:

Learning: NEVER sign a contract if you are not comfortable with the contents, no matter how bad you want the property.

I was a typical BP newbie. Searching for financial freedom, I stumbled upon rental properties as investments and soon I was at the doors of Bigger Pockets. I signed up for Brandon’s webinars and got hooked to the passion in the BP community. I read up the Ultimate Beginners Guide, and read up starter books recommended. I listen to podcasts like crazy, made my car my learning university. I have some savings and so I decided to start investing in multi family units.

I live in Bay Area in California, and it’s nearly impossible for me to start of investing in my area. So I decided to look outside. I have family in Tampa area and it is one of the growing places in the country. I research on the geography and find a decent 4-plex to invest in. Numbers made sense on paper, based on certain criteria I had set for myself. I quickly realized the property was not managed well and they did not care about raising rents. There was significant room to improve rents ($150-$200 per unit). I had built a good relationship with my agent over couple of months. He helped me walkthrough the property, took videos for me and gave me a good visual. We made an offer and decided to go into the contract.

One of the units needed some minor repairs (new flooring and some paint, about $2k worth of work). I decided to do the repairs and increase the rents once I buy the property. Seller had other ideas. This unit was at end of the lease and they decided to fill in the unit “as is”. There were a lot of applications already to fill the vacant unit, so the seller wanted Rent + Deposit in case the deal falls through. I was confident of making the purchase so I agreed to the clause. Mistake #1.

We put contingency in our contract that if inspection reveals something of not my liking I back out. What we did not explicitly put was backing out from the clause too. My agent said the contingency covers the clause as well even when it is not explicitly. I agreed. Mistake #2.

We got an inspector, he gave us the list of things needed fixing and seller wouldn’t fix the items I needed fixed at the minimum. Contract fell through and we learn contingency doesn’t explicitly state the ability to back away from the clause. I felt a punch me in my stomach and I couldn’t even fight back! I failed my first deal, because I lost money even before I acquired the property.

Learning: NEVER sign a contract if you are not comfortable with the contents, no matter how bad you want the property.

Thanks for sharing your experience. I will keep this in mind before signing any contracts for my next property. Saran

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Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

Jeff Sprunger : Yes Jeff. Thats right.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

9y

you had poor advice.. you can't blame seller.. and you need to be very specific in your contracts. this should have been spelled out IE..Never give over money before you own it.. that's a recipe for disaster you could have just said go ahead and rent it but rent it for this amount other wise I am not buying it. also I think you were being cheap and greedy.. LOL.... usually if you have a deal that is under valued you shut up and close.. not do what you did

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4 Reply

Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

I'm here to learn Jay Hinrichs ... what I did was definitely not the wisest. But I dont have even a single property yet. So long way to go. I'll get there :)

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

9y

yes its all a learning curve and a journey you should though have a very good real estate agent or broker assisting you.. he or she would keep these things from happening.

good luck with it..... might consider staying closer to home so you can be more involved in the process... I know Bay area is expensive but there are areas that are affordable.. look at Richmond for instance

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Jimmy Kennedy

Lake Worth, FL · Member since 2017 · 23 posts · 1 vote

9y

I am new to this as well and needed to read this. I have invested so much time researching and taking notes, that I just want to get my feet wet. congratulations to your strength to step out there and try. Thank you for sharing

1 Reply

Rodney Marcantel

Coppell, TX · Member since 2014 · 188 posts · 125 votes

9y

I would never recommend purchasing RE outside of driving distance within 8 hours for any new investor. Two many variables at risk. Only if you're a seasoned investor and have good relationships with agents, management companies, and contractors would I recommend long distance investing. If it's too expensive to invest where you are, you have 3 options...

1. Move to a more desirable area.

2. Use your funds to wholesale deals.

3. Become an RE Lender (need an LLC) and let your money work for you in Real Estate until you can either do item 1 or 2 above or afford to invest where you live.

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Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

Rodney Marcantel ... thanks for your inputs. Im investing in a area where my family is. 1 is in plans. 2 wouldnt fit my goals right now. Whats 3 ? Can you tell me more about it please ?

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Rodney Marcantel

Coppell, TX · Member since 2014 · 188 posts · 125 votes

9y

So, @Rohan Attravanam, you're asking what an RE Lender is? If so, look at my website. Buy Dallas Investments . com. Investing our funds in properties purchased by others allows us to put our funds to work. We converted our IRA to a Self-Directed IRA and consulted our CPA on options with regard to real estate investing and flipping/buy-and-hold.

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Jim KennedyPro Member

Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes

9y

Rohan,

You humble approach is a very commendable one which reinforces the need for me to not be the center of the universe, because sometimes I make mistakes.

As a result of my mistakes made (which are less frequent today) my approach is "Sometimes you win, sometimes you learn". You never lose and you never fail. You fail when you quit. You have nothing to be ashamed of and your willingness to share gives you high integrity in the eyes of readers. No need to beat yourself up endlessly over it, either. You are human and you were doing your best. You learned and next time you'll do much better!

I understand real estate is off the charts expensive where you live so I get the need to look elsewhere. That puts you between a rock and a hard place. The idea of family i Tampa is good. The question is can they help you manage? I live in a small town outside of Philladelphia in NJ. We invested successfully in a few buy-and-hold SFH's in Houston, and had family help us manage. They want to be in real estate too so this was good training for them too. If your family is willing then good for you. However, I should say we already owned a half dozen units before we went out of state. Nevertheless, you need to blaze your own trail, so just take what you want and leave the rest.

I learned in my first property too. It was a SFH and we had to rehab it since everything was new for 1973 - painted living room fake wood paneling, etc. What I learned was in NJ you can;t stop payment on a contractor's check. You can get arrested for it. I didn't though, because my attorney explained to me why the contractors was unhappy and we re-issued the check. We were unhappy that he got the last check and we learned he didn't finish the last punch list. We (stupidly) trusted him and looked at the big items. Now for the last 11 years, we check everything.

Like you, we want to get as close to turn key as possible - maybe $3500 for paint paper and patch. We (my wife and I) use the home inspection to beat up the Seller and get a credit at the closing table.Besides being a CPA who specializes in real estate tax and accounting, my wife and I have been investing for 12-13 years, and I lecture frequently at several REIAs in my area. On Jan 7th I presented my 21 year plan to retire with a million dollars in the bank an a $64-$73K annual income from interest, and I spent about 10-15 minutes discussing just the home inspection and how to use it to your advantage. You are headed in the right direction.

I (and I assume all BP readers) am looking forward to your next post, where you tell us of the big win you pulled off!

5 Reply

Bob Norris

Randallstown, MD · Member since 2016 · 12 posts · 8 votes

9y

Hello Rohan,

I found your post and the replies quite interesting. I want to address the advise you received using the inspection report to " beat up " on the seller. As an Inspector, we are often called upon to call out every little thing so the buyer can use it as a bargaining tool. While the strategy is ok on a basic level, I want to advise you not show up to the table with the " beat up" attitude. I have seen so many deals go bad because of this attitude. No home is perfect, and there are reasonable items and deficiencies, to address, but remember, the seller has zero obligation to do anything. It is all, your desire for the property verses his ability to sell it on the market. You must look at he big picture, and unless your speaking of a major roof , plumbing , or electrical deficiency ie. costing well into the thousands, don't blow the deal. Add it to the over cost, and ask yourself if you if the property is worth it now with the repairs. If not, walk away. Remember, the inspection report is a tool , not weapon. Use it wisely.

Hope this helps and good luck to you!!

3 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

@Rohan Attravanam - Sorry man.. Your post is riddled with tons of mistakes, but I think your number 1 mistake is not realizing what is your number 1 mistake. You have family in Tampa, FL, so you thought, just based on that and the fact that Tampa is a growing market, its a wise thing for a newbie to invest across the country? I know Bay area market is terrible for newbie and cost prohibitive, but you seriously couldn't find anything closer than Tampa, FL? In my case, I would run away from family, but that's just me. LOL.

Since you opened this can of worms, your second mistake, in my opinion, would be making offer based on videos? Thank God your contract fell through, and all you lost was rent + deposit (if you ask me). Who knows what else could have been wrong with property? And when exactly were you going to do your OWN due diligence? After closing? Unless you have a really good trusting relationship with the realtor, you should never even dream of that. And who is this genius realtor anyway who wrote a contract for you with that kind of contingency (1 month Deposit + Rent... seriously?) It never struck you to let the seller rent the place as is and fix it up later on. You would have inherited a tenant, and by extension cash flow.

I think the real mistake # 1 is that excitement got the best of you, and you made some really hasty decisions. I blame @Brandon Turner Just kidding Brandon...lol

I wouldn't even go through other mistakes. Good luck on next deal. Hopefully, you will look for something closer to home. How does Boston, MA sound?

0 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

Originally posted by @Bob Norris:

Hello Rohan,

I found your post and the replies quite interesting. I want to address the advise you received using the inspection report to " beat up " on the seller. As an Inspector, we are often called upon to call out every little thing so the buyer can use it as a bargaining tool. While the strategy is ok on a basic level, I want to advise you not show up to the table with the " beat up" attitude. I have seen so many deals go bad because of this attitude. No home is perfect, and there are reasonable items and deficiencies, to address, but remember, the seller has zero obligation to do anything. It is all, your desire for the property verses his ability to sell it on the market. You must look at he big picture, and unless your speaking of a major roof , plumbing , or electrical deficiency ie. costing well into the thousands, don't blow the deal. Add it to the over cost, and ask yourself if you if the property is worth it now with the repairs. If not, walk away. Remember, the inspection report is a tool , not weapon. Use it wisely.

Hope this helps and good luck to you!!

Great point. Never make GOOD enemy of PERFECT, because there is no such thing as PERFECT.

0 Reply

Shawn Devoid

Real Estate Agent · Tucson, AZ · Member since 2016 · 168 posts · 106 votes

9y

Hi @Rohan Attravanam. I know you've received a lot of feedback, but I don't think you made a mistake by accepting the owner's clause or not putting in your own new clause in the contingency. I believe your only mistakes was not fully understanding:

-the motivation behind the clause

-the ramifications of the clause

-the seller's viewpoint

-the inspection period clause

I hope I can explain it in a way you'll understand. The owner didn't want to lose rent if the deal went south (as it did), so he requested a clause to protect his interests (rent and deposit). If you added a clause to the contingency stating you'd get the rent money back if the deal fell through, for whatever reason, it would essentially nullify the original clause. In my humble opinion, the seller was reasonable asking for lost rent, but the deposit is never really "his" to begin with, so I wouldn't have agreed to pay the deposit, should the deal fall through.

I'm not familiar with Florida real estate purchase agreements, but some states require sellers to disclose known deficiencies with the major systems of the property. This does not relieve you of doing your due-diligence, but should give you an idea of the cost of the needed repairs. If this disclosure is not furnished, you should ask the seller about plumbing, roof, HVAC, etc. I'm assuming the repairs needed were big ticket items such as these, not nickel and dime minor repairs. You might have saved yourself (and the owner) a lot of time and money by asking these questions.

Finally, I appreciate your courage putting your experience up here for us. I don't see it as a failure, I see it as a lesson. As far as financial lessons go, I think you got off pretty cheap! I hope you won't let this one lesson keep you from continuing in your real estate endeavors. My advice is, if you know you're going to invest in Tampa real estate, get ahold of all the forms they use locally. Your agent (maybe a new one) should be able to furnish these for you. The big title companies in town are also a good resource. They usually have a lot of free educational information on their website and can answer pretty much any contract question you may have. Best of luck!

2 Reply

Michael Haynes

Investor · Tampa, FL · Member since 2016 · 679 posts · 288 votes

9y

@Rohan Attravanam, Hello from Tampa. This is a long thread with lots of observations and advice for you. The thing that I don't understand with BP is why no one talks about the one Tax-Free Investment that you actually need to live in...your Home. Before you get all excited about trying to make some Money with Real Estate Investing, do you own your Home? I know some people warn you that your Home is not to be used or considered as an Investment, but, you need a place to live. You live in the high tax State with all the restrictive regulations. Your in Sunnyvale. I grew up in Palo Alto in the 1960's. My brother owns a Town Home in Cupertino. My mother lives in a Town Home in Rio del Mar. The basic plan for a Newbie to start off with in Real Estate Investing is to find a Motivated Seller with the Worst House in the Best Neighborhood and make a Written Offer to Buy that property to Fix up and live in or Flip. Forget the Long Term Equity Appreciation that you Hope to capture with an Ascending Real Estate Market Value and getting tied up with Rentals and Tenants. The Government in any Country tells you where they want you to Invest, if you ask the right questions to the right Accountant. In the USA the Government has the Residential Tax Rule which states that if you live in your Residence for 2 years out of the last 5, you can Sell it, Tax-Free up to $250K per person or $500K if you are married. Do you hear this? Apparently, this is Secret Information because I have had Rentals and a Home in Tampa for 30 years and I signed up to see what all the other guys have done and are doing on BP and no one talks about Tax-Free or Tax-Deferred Real Estate Investment Plans. Don't get caught up with the Agents and the Pros and all the big ideas about being a Real Estate mogul or company, when really all you need is a Home. I am Selling off the rest of my Rentals and going to Retire with Less, not More. It's simple. You use the Sale of your Residence Tax rule to benefit with a Tax-Free Investment. Then, you acquire one Rental in the same way...Motivated Seller with a Fixer Upper in a good enough neighborhood so that you can move into that one when you Sell you Home and you have the Basic, Real Estate Investment Machine. You want to do your due diligence so that you don't Buy in a War Zone. You want to try to be in the Path of Progress. Make sure that every property you Buy is suitable as your next Home and has the possibility for Appreciation in land value. Then, you could look for One House at a Time to Flip. You can make that Rental Tax-Deferred by using the 1031 Exchange rule and do another Flip. The problem I have seen with this Plan is that most people are married and some have children and this Plan requires you to Sell your Home and move when there is enough Value to make this rule useful. I am single and I have other properties in Brazil where I want to live more, so, this fits my personality. This way you will have a minimum of Tenant problems and Repairs and if you add on a Flipper House, you will learn how it is to work with the Contractors. At this time with the low interest rates on 15 year Loans, you can look towards a quicker pay off period and growing your Value in the property as long as this Real Estate Market does not completely collapse again. There are many ways to make Money and Real Property does not always go up in Value. Just like the Stock Market, all things go in Cycles.

1 Reply

Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

@Jim Kennedy - Thanks for your words. It's true, I need to blaze my own trail :). I'd love to hear your 21-year plan. Let me know if we can connect sometime. I'm working hard every day to learn from my mistakes and finding my next property. I'll keep you posted :)

@Bob Norris - Thanks for your input. Because I don't own a property yet, I don't know how sellers feel about inspection reports. I read an analogy somewhere, it's like having an inspection report run on your car. You know your car has some miles on it and it runs super well, but the inspection report could say a million things about the car and you wouldn't even know the issues reported existed. So I try not to "beat up", but I ensure that the math makes sense going into the deal. I wouldn't want to spend $20k on a $200k property for repairs upfront.

@Chinmay J. - Thanks for your feedback. Will keep them in mind.

@Shawn Devoid - Ton of useful information in your reply. I'm educating myself on the forms and yes, Florida does require disclosing know deficiencies. Unfortunately, in my case, the property was managed poorly and the responses to questions like "Is the roof structurally sound and free of leaks" was "Yes", but there were issues with the roofs. So there wasn't much I could do there in spite of my due diligence. I can only get better at my due diligence with time and experience. Thanks for your note.

@Michael Haynes - Great perspective! I'll explore more on the tax-deferred investing. I want to buy a home for myself but I might not stay in the bay area over the next 5-7 years. So that changes plans of owning a home here.

0 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

@Rohan Attravanam - If you don't even own a property yet, your first step really should be buying a property. What kind of property you purchase, what you do with it after you purchase, is entirely up to you. But at least, you should, in my opinion go through process of buying a house, before you venture out and try to buy a place in 3000 some miles away.

I believe that you are in way over your own head. Try and take baby steps first. Good luck.

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Rohan Attravanam

OP

Sunnyvale, CA · Member since 2016 · 20 posts · 7 votes

9y

@Chinmay J. Ok!

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Jason Ong

Investor · Belmont, CA · Member since 2016 · 44 posts · 40 votes

9y

@Rohan Attravanam I wouldn't worry about making mistakes and losing money on your first deal. The first car that I've purchased was a $4k BMW that I put in $12k worth of repairs over a year. OUCH! But through that experience I've learnt so much about the marque that now I'm driving TWO BMWs that looks and runs like $40k cars when I bought them for only a fraction of that. I'm set to drive nice cars on the cheap for the foreseeable future (coz I love driving) till all cars become autonomous and I'll have to settle for renting self driving limousines. ;)

And oh, I just bought my first US RE deal with tons of noob mistakes too! :P

- Paid almost retail price for a short sale. Mistake #1: didn't negotiate with banks hard enough.

- Took longer than expected to purchase. Mistake #2: didn't research enough on how bank internal efficiencies can prolong short sales.

- Very short closing period. Mistake #3: Didn't dare to negotiate or walk out of the deal and rush inspections.

- Rushed subpar inspections: Mistake #4: Relied on agent to arrange for inspectors. Rushing them to meet closing dateline.

- Over budget renovation costs. Mistake #5: Reno budget ballooned from $5k to $13k and counting. All because of unforeseen stuff overlooked during inspections.

But you know what, I'm ok with these mistakes. Through them I've learnt so much about houses and their rehab work. Also, now I know how to get good contractors and can spot one who's a potential problem which should come in useful when I start doing flips. :)

All the best!

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How I failed my first deal !!

How I failed my first deal !!

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