Act Now or Wait? IF Under Contract - Close, or Back Out?
A lot of investors are reaching out to me right now, often those who are currently under contract on a first or second property. Luckily, almost all of the folks I've talked to are in strong financial positions overall - spend less than they earn, have a reserve, good credit, etc. Go BP!
Their question usually stems around one of the two problems:
1) This was it! This was the moment I'd been preparing for, and it's been a YEAR of self-education. I've listened to tons of podcasts, know my market, and am finally mentally ready to pull the trigger. Should I still continue to submit offers and roll on?
2) I'm under contract and weeks away from closing! I'm a newbie and I think this is a "good" deal, or in the top X% of investment purchases I could make, and I'm unlikely to get a much better one. This is what my research has told me works well, but it's not WAY better than the next possible deal. Should I back out?
I'm sure that many folks are wondering along the lines of these two questions. Experts of the BP community - what do you have to say on the subject here? Assuming again that the folks asking these questions are in fact well-capitalized, capable of purchasing property. Should they act now, or wait and watch?
Unless you are going to a closing with cash your lender still could back out or maybe you thought you where going to use that helock and your lender froze it.None of us know whats going to happen over the next six months just be ready for anything. PS KEEP SOME CASH IF YOUR BANK DECIDES ITS GOING TO CLOSE!!
I see lots of comparisons to Italy. I have family there so I can speak from experience. Italy has a sub par health care system which could barely provide quality care before the covid-19. It is all government ran hospitals funded by extremely high income tax. The hospitals have always been inefficient and understaffed. Italy has the oldest living demographic in the oldest continent on the planet. The masses of death are all occurring in the northern region near Bergamo. Loads of pollution and have you ever been to Italy? I do not ask this to be crass I ask it because they live completely differently than here in the US. Cities have homes that are all attached like super long apartment buildings and most have been originally built over 1000 years ago. I imagine they are not as sterile as US homes. My family who live near Rome has not experienced any symptoms and all of them are calm. I am not trying to make light of this but we cannot shut our country down because a much lesser equipped country failed. Italy is smaller than California but has 20 million residents. All cities are compacted and people live right on top each other. We do need to be mindful and I believe that the elderly and immune compromised need to be isolated but not the young and healthy who respond in a similar fashion to the common flu. Proper nutrition, hygiene, and exercise can keep the healthy prepared to overcome the virus. A 103 year old in China just overcame the Covid-19 and 82902 others have also overcome it. Currently there are 117,246 global active cases. 117,246 are considered mild and 6439 are consider serious or critical. These stats do not justify a global shut down. Looking back at the world ending H1N1 there were 1 million reported cases in the US within the 1st two months. In 2003 SARS was thought to have come from a "never before seen by humans type of coronavirus" Does this sound familiar. It did not make it very far however. Anyway, this New Virus is obviously nasty but nasty viruses will always exist. Feeding the panic and buying into the media hype will do nothing to help us overcome this. We, as a nation of free spirited forward thinkers, need to remain strong and not curl up in a ball. With all of that being said, am I a little nervous about closing on the 30th of March. Sure! But I am optimistic that my exit strategies I have now will still work in the near future. Worst case, I rent it very cheaply to help with cash flow until the market corrects, which it will! God Bless you all!
I am so glad someone brought this up. We are under contract for two duplexes next week and I do have concerns about the immediate rents. But, we are long term investors and I know we will come out of this historic market event this year. We are staying the course and closing next week. Its a good deal then and it will be a good deal now.
Thanks for posting this @ScottTrench.
In the event of backing out - Is there something along the lines of "act of God" that a buyer can claim to safely remove themselves from a deal?
This issue is substantially more complex than what happened in 2008. The impact will be very different depending on the state and down to specific regions of each state. I cannot speak to what is happening to most of the country, but if the SF Bay Area is a leading indicator this is definitely a SHTF event. Although large tech companies here have people working from home or even giving money away to employees, the fact is that small mom & pop shops, restaurants and businesses are drying up on the vine every day. Restaurants owners cannot keep doors open just for delivery service when Ubereats and Grubhub are slammed for delivery services. There is no need for busboys or waiters/waitresses. Hair salons are shut down so what do those people do? Local governments are already placing a moratorium on evictions and even if you could do an "unlawful detainer" the courts are closed for at least 3 weeks. Just imagine the backlog when they do open up. A landlord could be looking at 6 months of no rental income.
If most Americans cannot handle a $400 emergency, imagine going 3 weeks or longer without working/paycheck. There will be delayed rent payments and no way to collect, which will lead to missed mortgage payments for landlords who are not sitting on cash to ride this one out. Hopefully, the government will suspend mortgage payments like in other countries, but I don't see that happening very quickly.
Again, this is really dependent on the specific investment market. Personally, I am in contract for a seven-figure building, but we are pushing out the close by at least 2 months. This is an industrial building, not residential, with a guaranteed tenant so I am confident in the acquisition. 100% the storm is coming, hold your cash as long as you can or convert to cash and wait for the buying opportunities on the backend.
Hope for the best and plan for the worst...
Good luck to us all.
If you care about your investors, you should be telling them to buy nothing right now. It will certainly be cheaper in 6 months. Real Estate lags the stock market. Many among the biggest stock losses were real estate, builders etc. This is the big one, will be the once every ten or twenty years buying opportunity. For stocks, it will be sooner, maybe when has gone down maybe 50% and shows signs it is turning (GR was 57% top to bottom). Real estate will probably take 2 years+ to bottom out, but even if you buy before then you won' t be buying at the worst time since you wouldn't have bought at the top. Basically, everyone was predicting an early 2020 recession as it was, and now we get this.
@Alex Olson Precisely, the first sectors to be impacted are retail and hotel. MF will undoubtedly be the last. If people would remain contrarian we should be able to avoid a trickle down. It is always a good day in real estate, stay focused and be smart.
For class B/C/D properties collecting rent is going to be the biggest risk coming up as income dries up. Even if there is a stimulus check of $1000, that money is going to food before it goes to a landlord. With eviction put on hold it is landlords that are going to feel the brunt of constrained dollars in the market. I have not heard of any deferral for mortgage payments so banks/note holders are still going to want their money.
I am scheduled to close on a SFH in ATL next week. I went back to the seller and dropped my price by 8%. This was calculated at the time to be about half of what the stock market had dropped (after today we are in the 25% or greater range). I was prepared to walk away from the deal and lose my EM. The seller at first said no, so we terminated the contract. The next day they came back and accepted the offer.
So before you back out of a deal (and it was a good deal right? you weren't on the fence...) try going back to offer a new price and see if that sweetens the deal for you enough to weather the rental market storm.
If you loved a deal a month ago and you dont still love it you need to reconsider your underwriting. Its probably not a deal
Maybe your expectations were too high, hoping for appreciation, and already swimming in brrrrrrrrrr or sale money from a deal you havent yet closed.
I put in a backup offer this week that was basically identical to same offer, same property, I made contact with 6 months ago. Then it was basically laughed at. I am now back at bat with the same number from 6 months ago because the offer in front of me backed out.
Im also closing a refi thats 45 days in. Long before the storm. I liked the offer as quoted 45 days ago and im still signing that exact loan within the next week.
If 0.25% makes or breaks your deal you dont have a deal.
Yes things have changed in the short term but the sky isnt falling.
@Scott Trench this is going to get much much worse before it gets better at all. At this point unless I’m staring at 20 plus percent return I would say it’s not worth it.
Lots of industries and employees will get bailed out but landlords aren’t one of them.
No one's talking about the FUNDING part.
I just had a private lender tell me he's not lending any money now. (talked with him 10 days ago when he was asking me about a deal to fund).
Wouldn't be surprised if banks are about to tighten up. HMLs, I don't know what their plan is if their investors pull out.
I'm holding up on any offers...unless it's a really good BRRRR deal...because we are in uncharted waters.
Looking at the stock market:
These drops played out over years.
We've seen a 30% drop in 3 WEEKS.
Investors are going to tighten up. Buyers will tighten up.
This morning, I saw over a dozen Opendoor listings cut their on-market prices by 5...even 10%. They know demand and prices will sink.
One listing they put on the market 2 days ago for $255k...they lowered it to $234k today. A $21k drop in 2-3 days. Normally, they lower in $1k increments every week.
***
A lot of folks are talking about rentals.
Flippers will likely get hurt too.
I just passed on a flip opportunity because I expect demand to dry up even in the summer. Labor may be cheaper, but there are too many unknowns.
Even if this virus goes away by June...the ripple effects will last for another 12 months.
#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Rental Property Investor
- Boulder, CO
It doesn't cost you anything but time to keep looking. I'm telling the investors I work with to do the following:
1. Ensure your emergency reserves are in cash and you have 6-9 months at this point. If you don't have this.... start here.
2. If you are going to buy, ensure you can float the property for 6-9 months at this point as well in case you can't tenant it OR your tenant stops paying.
3. Continue to build your networks and deal flow funnels. Study what is happening at the local level with evictions and rents and be prepared for it to change at a moment's notice.
4. If you can check steps 1&2, and you have a plan to mitigate what's happening at the local level, you are in a much smarter position to close now. If you can't check the boxes on 1-3, you are putting yourself in a very hard position in the next few months no matter how good the deal is.
The real opportunities to help solve BIG problems will start coming middle/end of April into the summer. Don't overleverage and don't go into a deal if you aren't well-capitalized.
And the silver-lining... if a deal is GREAT... you can always find a partner!
I suggest waiting for clarity on the Saudi oil price war before taking further action. Covid alone creates enough uncertainty, but doubling down macro events of covid and oil wars should concern any rational and informed investor.
@Tracy Munger @Sameer Bhalesha I've seen investors lock down inventory in my market because the purchase price is so approachable and they're taking a lot of comfort in section 8. Two I looked at today have $600 of their $800/month rent rate paid by section 8. Even if an entire household happens to be in the hospitality biz, the likelihood of them not being able to figure out how to pay $200/month in order to keep their home is low, at least lower than tenants trying to figure out how to find $800. Worst case tenants can't pay.. but the government can! Even further than that, mortgages are at around $350/month on average for the price point that's typically targeted here. I can handle that for a while. Regardless I hear your concern and it's valid! I'm just giving some investors looking at my market's POV.
@Jimmy Epolito have family in Italy as well. If you move outside main tourist towns, hospitals look like they are American hospitals stuck in the 1960s. Couldn’t agree with you more. We SHOULD see a different and better result. We shall see though.
I was lucky enough to spend 30 days in Italy in Nov'19. I traveled to Naples, Florence, Rome and some adjoining towns/cities. I came back completely impressed with rich cultural heritage, and at the same time came away very shocked at the condition of residential buildings and dirty streets (I found Rome & Florence pretty clean), but other parts of Italy, dog poops every where...ugh.
I also have 100 family members living in S. Korea 1.5 hr away from epicenter where 6,000 people are infected in one city. Fortunately, none of my family members contracted the virus. S. Korea has high infection rate due to not blocking initial Chinese entries but they seem to be doing well keeping Death Number Low (94 dead with 8,652 infected). I see that Germany is managing well, despite high infection (15,000 infected), only 44 dead.
As of this writing, US already has 14,000 infected with over 150 dead, and they haven't even encountered True Ventilator Shortages yet. I expect US numbers to be skewed toward Italy than toward Germany/S. Korea. US gov't didn't prepare before the virus spread and it's doing a terrible job even now.
Look at the Death Rate in each country and drill down to see what percentage of young people are dying from it. While it was circulating in Asia, it was primarily Older people (in their 70's & 80's with underlying health conditions) dying. Now that the virus has moved around the world to Europe and US, way more younger people are getting infected & dying. I find this trend very disturbing.
Below email arrived in my inbox from one of my Property Mgmt's companies (WA state), and I know that I will get the identical emails from other states. It's just matter of weeks.
Hope you all are well prepared for this true uncertainty and crazy ride ''for the coming months''!
"I hope that this email finds you all well and in good health. We are sending this notice out in preparation of the coming months and the possibility of direct impact to our owners and tenants. Lots of folks in our community are going to be strained financially as business's are forced to close to stop the spread of the COVID19 virus. While I do not have direct knowledge currently of who or how many tenants will be affected, I expect that information to start coming in as early as the beginning of April 2020 possibly sooner.
I wanted to make everyone aware that we will not be pursuing evictions for unpaid rent. This declaration was made by Governor Inslee yesterday. That is not to say that your tenants will not owe the money or pay it once they are able to get back to work, but for now our policy towards evictions will be on hold. The moment we hear from anyone who rents from us that they are not able to pay, we will let the owners of that property know what the situation is."