Expert Investors Can Still Experience Catastrophe

Recently, I was involved in a deal that appeared pretty straight forward. That is, until one unforeseen issue threw the whole thing into chaos.

I hope by writing this post, I can help others realize that real estate investing requires creativity, perseverance, and the ability to pivot regardless of experience level or how foolproof the plan is.

The Fateful Story of Bob

Through a mutual connection, I met a person. Let’s call him Bob. Bob had heard I did real estate investing, so he told me about his first property purchase, which he was still working on. Bob explained to me that he had been living in a condo for 2-3 years as a tenant. His landlord came into hard times and was getting foreclosed on. Bob decided he did not want to move, so he went down to the foreclosure auction and bid on the condo he lived in. He won. I chatted with Bob about his plans for the property after he purchased it and didn’t think much of it. I left that evening telling Bob, “If you ever need advice on the property, feel free to reach out to me.”

Roughly a month later, Bob called told me he made a big mistake with this condo he was buying. Bob had bid and won at the sheriff’s sale, which requires 10% of the funds upon winning the bid and the remaining 90% within 30 days. What Bob did not understand was that most lenders would not be willing to lend on the remaining 90% due to the sheriff. He had procrastinated so long that it was now 120 days since he had won the bid, and the sheriff had given Bob 48 hours. Then they were going to keep his deposit, selling off the property and holding Bob in contempt. Bob asked me, “What can I do?”

Our Solution

I thought about it for a couple hours and offered him a solution. Our company would assume Bob’s winning bid at the sheriff’s auction and pay off the remaining 90% balance, at which time our company would own the property. We would then parlay Bob’s initial 10% to the sheriff directly into a purchase and sale agreement between our company (seller) and Bob (buyer).

We would then rent the condo to Bob for 45 days while he secured conventional financing to purchase the property back from us at a sizable mark up for our risk in the transaction. I informed Bob before entering into any of this that we would need to run a credit and background check on him to ensure he could, in fact, qualify for financing, I would need to inspect the property, and would need to confirm the HOA would not prohibit this transaction in any way. He agreed and passed our checks just fine.

The deal seemed like a no brainer for us. Here are some of the numbers:

The condo was worth $130k
The winning bid we assumed was $87k
Bob initial deposit was $8k
Our company’s cash outlay to purchase was $79k ($87k – $8k)
Our sale price to Bob was $101k

This left Bob with plenty of equity, left us with a great return, and kept Bob out of being held in contempt. If Bob did not fulfill his part in our contract, we would keep his $8k and sell off the property.

We all agreed to move forward, and we had our attorney draft up all the documents needed to execute.

All Seemed Well Until…

The first 25 days after our company purchased the property, all seemed well. That is, until I received a call from Bob’s loan officer. He informed us that the underwriting was very confused because the deed was already in Bob’s name. I jumped on the county auditor’s website to check, and just as he stated, the property was in Bob’s name.

After some quick phone calls, we determined that the attorney who had filed the foreclosure missed the assumption of bid paperwork in the file. This meant she thought Bob had paid the $79k, so she put the property in his name.

Our solution was to just have Bob sign the deed over to our company, and we would get it all cleared up. Unfortunately, because the lender Bob was working with required the property to be owned by the seller for 90 or more days before it could be bought, this idea did not work. We determined with the help of our attorney that we needed to get the attorney who filed the foreclosure to submit paperwork to have a judge correct the deed.

Related: Dirt, Dead Mice & Cobwebs, Oh My: What I Learned From My Latest Tenant Horror Story

Here is where it all went south. The attorney who filed the foreclosure went MIA on us. Our company and our attorney tried everything to track her down to get her to complete the paperwork. She was out of the country, then not available. After 4 weeks, she signed the needed paperwork to correct the deed but forgot to send in a $30 processing fee with the paperwork to the county. The county requires that the $30 fee be paid directly from the filling attorney. So we waited another week to get that taken care of.

Relationships Became Strained

During all of this title craziness, Bob became frustrated and confused. He didn’t understand the process and began to think we were trying to take advantage of him. The more we tried to explain, the more he thought we were conning him in some way he could not understand.

What we did not realize was that during the period in which we were attempting to get the attorney to correct the foreclosure paperwork, Bob had decided to switch his loan from a purchase to a cash out refinance. Bob did this because someone at the bank saw that according to the county recorder’s office, Bob owned the property free and clear and advised him to do a cash out refi to get the money out. In his ignorance of the process, he agreed.

So at this point, our company had paid $79k cash for a property that Bob, the guy who has zero trust for us at this point, was now about to pull all the equity out of.

To prevent the cash out refi from going through, we actually had to record a document to the condo’s title that claimed our company as the owner, which would cloud the title and slow down the title search while we cleared everything up. This only made Bob more skeptical of our intentions.

The Resolution

Finally, the deed was corrected and the property was in our company’s name. Unfortunately, by this time much damage had been done. Bob didn’t understand what the heck had happened and was certain we were trying to steal his money.

Bob began threatening of legal action. Our attorney assured us we did nothing wrong, so we would never lose — BUT it could take up to 9 months and $15k in legal costs just to move past it if Bob persisted.

At that point, we decided to have a “do over.” We gave Bob 45 more days from that point to secure financing and stick to our agreement. After several conversations with our attorney, Bob agreed. After several extensions and almost a half a year, we recently closed this transaction with Bob.

This story only goes to show you real estate can be unpredictable. No matter how much you prepare, you have to be ready to problem solve and persevere.

Investors: When’s the last time catastrophe happened to you? How did you resolve it?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.