House #26: The Fourfecta House

As I mentioned a couple weeks ago, the lender for The Fourfecta House went out of business the day before we were to close on the house. As we hoped, the entire loan team (including underwriters) was able to move over to a new direct lending company, and has been working to get approval to work with the downpayment assistance program the buyer is using for part of his financing.

We were originally told that we should be able to close by the end of November (today), which obviously didn’t happen. We’re now being told that we should be able to close by the end of next week. Considering we’re leaving for vacation at the beginning of next week, it doesn’t leave us much of a window, but we’re hoping to close before we leave.

House #27: The Waffle House

The buyers for The Waffle House completed their inspections over the weekend, and sent us their list of requested repairs. Luckily, the list is short and the repairs are minor — replacing a few window screens, fixing a loose hinge on the fence gate, fixing the weatherstripping on the garage door, supplying a fireplace grate, and fixing reversed hot/cold water lines on two of the faucets.

The lender ordered the first appraisal today, and hopefully that will take place before we leave for our trip next week. Currently, we’re still on track to close before the end of the year.

Offers & Contracts

We’ve made lots of offers over the past month or two, and have actually gotten several properties under contract, but nothing that’s panned out. Here is a quick run-down:

• I mentioned the potential House #28 a couple weeks ago. Ultimately, the bank agreed to a $3000 price reduction and a short due diligence period. During that due diligence period, we found several issues with both the foundation and the house’s brick facade that would have increased the renovation costs by a good bit more than that $3000 reduction. So, we choose to terminate the contract
• We received word from HUD that a property we had bid on several weeks ago had come available again and that they had awarded us the contract based on our old bid. We had two days to submit the finalized contract if we were interested in the property. During that two days, we discovered that the county tax records were incorrect in their flood zone classification for the property, and that the house was in a 100 year flood plain. While we were trying to decide if we still wanted to go through with the deal, we received another email from HUD telling us that they had made a mistake, and that we hadn’t actually gotten the property.
• We’ve been working on a short sale deal for about two months now. The house is scheduled to go to the foreclosure auction next Tuesday, so that was the deadline for getting the deal done. The first mortgage holder approved the deal about 6 weeks ago, but the second mortgage holder has been holding out for more money. They apparently decided today that getting a little bit of money through the short sale was better than getting nothing through the foreclosure, and it sounds like they’re going to sign off on the deal tomorrow. Hopefully they will…and hopefully we can get title pulled and closing scheduled before the foreclosure.
• We currently have about a half-dozen other offers in on properties, waiting for responses from various sellers. Hopefully we’ll get at least one or two of these, as things are pretty slow around here these days and we’re looking forward to our next projects.

We currently have offers in on 6 properties that we believe we have at least a reasonable chance of getting under contract (we don’t submit a whole lot of offers, but have about 35% success rate in getting properties under contract when we do). Unfortunately, the sellers/banks have been very slow to respond to our offers, so we’re in a holding pattern waiting to find out if we’re about to have a lot of properties, no properties, or somewhere in-between.

Normally, we get responses to our REO offers within a day or two (and if not a response, at least a status update); these days though, it appears responses are taking up to a week, if not longer. Perhaps it’s the time of year, but asset managers don’t appear to be too eager to sell their inventory.

Hopefully we’ll have a couple houses to talk about in the next week or so…

I’m at the property this morning, and the first thing I notice when I open the basement door is a strong mold odor. I hadn’t noticed this the other day when I first saw the property, but at that time, there was an employee of the listing broker at the house taking pictures, and he had all the exterior doors open; my thought was that there was enough fresh air coming into the house that I had missed the musty smell (I don’t believe the employee was trying to hid the smell, I think it was just bad timing). Given the smell, my project manager, one of my trusted contractors and I decided to do some investigating.

We quickly realized that many of the baseboards around the basement had been recently painted over, so we removed one, and sure enough, there was a good bit of mold behind it. Likewise with other baseboard we searched behind and also some mold on the walls in the closet. Without taking down a bunch of sheetrock, there was no way to know how extensive the mold was, or where it was coming from. But we were able to take off an access panel on the ceiling and found some mold there as well.

While I absolutely hate doing it, we had to tell the listing agent that we couldn’t sign the contract under the current terms. We offered to go through with the offer if the seller would agree to give us 3 days to investigate further (an inspection period) and also knock $5000 off the purchase price to cover demo, remediation, fixing the water issue and sheetrock repair. Now, I don’t know if $5000 will cover those costs, but I’m willing to take the chance if the seller will agree.

We’re still waiting to hear back from the agent/seller with their decision. Given that there were multiple offers on this property (not sure if any of the other buyers knew about the mold issue), the bank may decide to take their chances with another buyer; but there’s also a chance they’ll accept our proposal.

Hopefully we’ll find out tomorrow…

The last update I posted was back on August 12, and at the time, the bank rejected our $43K cash offer on the property priced at $55,000. At the time, we actually let the agent know that we’d be willing to go as high as $44K — and give her our side of the commission — if she could push the offer through. We never heard back from her after that, and we suspected that she had given up trying to get our offer accepted.

But, as I suspected might happen, we received a call from the listing agent today letting us know that the bank had just lowered the price to $46,900. She wanted to know if we were still willing to offer $44K? After some consideration, we decided to stick with our last official offer of $43K, and again offered the agent our side of the commission (about $1200). She said she’d take it to the seller…

A few minutes later, the agent called us back and said the seller was countering at $44K. While we were willing to pay that amount, we weren’t willing to pay that amount and also give the agent our commission (at least not without the bank giving us some other concession); so we countered with an offer of $44K, but with the seller paying closing costs (probably around $600-700, so they’d still net at least $43,300). She said she’d take it to the seller…

A few minutes later, the agent called us back and said the seller was willing to pay for the title insurance but that we’d have to pay the rest of the closing fees, and we’d have to use their closing attorney. Well, their closing attorney is one we know well — they charge exorbitant closing fees (about $400 more than our preferred closing attorney), and in reality, it would be cheaper to use our own closing attorney and pay for the title insurance ourselves.

For much of the afternoon, we were at a stalemate. The bank wasn’t willing to budge off $44K and we weren’t willing to budge off $43K plus giving away our commission.

Finally, we called the agent back and told her we were willing to compromise — we offered $43,500, with us paying closing costs and using our closing attorney, but instead of giving her our entire half of the commission, we’d instead just give her $500 of it as a bonus. She wasn’t thrilled about losing the extra commission, but said she’d submit the offer and get back to us…

A few minutes later, the agent called us back and said the seller was willing to accept our offer, but in the process, screwed her over by substantially reducing the amount of commission they were willing to pay her (technically, I imagine she could have refused to accept these new terms, but then she risked not having the sale go through at all). Ultimately, even with what we were offering her as a bonus, she will make less in commission than if we hadn’t offered her a bonus and just agreed to the $44K.

It really pisses me off that the bank chose to screw over the listing agent in retaliation for our hard-nosed negotiation, but unfortunately, there’s not much we can do without risking the relationship the agent has with the seller. I would even have been willing to refuse the deal unless the agent got her promised commission, but I have a feeling that would reflect badly on the agent, and I didn’t want to risk that. In the end, it looks like the deal will get done at $43,500, and we’ll throw in a few hundred dollars extra to the agent as a bonus to make up for what she is losing from the bank.

Hopefully the contract will be finalized by Thursday, and my closing attorney said he should be able to close by the end of next week. Now, I just need a name for this house…

But, unfortunately, still no word. We called the listing agent yesterday to ask the status, she said she’d look into it and get right back to us, and then no return phone call. It’s not too surprising that the bank is stalling — they’re hoping to get a higher offer in the meantime — but I normally expect better communication from the listing agent. Even if it’s only a phone to say, “I haven’t heard anything…”

Anyway, we’ll follow-up with her tomorrow and see if there is any new news…

UPDATE: We just found out that our offer was rejected by the bank. At this point, we’ll wait to see if there is a price drop in the near future, and if so, we’ll likely resubmit our offer.

As I mentioned in my last post, the listing agent asked for our best offer last week, and we still haven’t heard anything from the bank. Assuming this were a true “highest and best” situation where there were multiple bidders, I would have expected the bank to make a decision by now. But, given that I believe we are the only bidders, I’m guessing that the bank is stalling in hopes that they’ll get another offer before they respond to us.

We’ll give them until tomorrow, at which point we’ll call and follow-up with the listing agent…

We’re currently in a “highest-and-best” situation on a few different properties right now, so hopefully we’ll have 1 or 2 under contract by the end of the week…

This morning, the bank responded by requesting our “highest and best” offer. This essentially means that the bank doesn’t particularly want to go back-and-forth any longer, and they now want us to come forward with our best offer, so that they may accept or reject it. This is a common tactic these days for REO sellers; it’s generally used when there are multiple buyers offering on the same property (this allows the bank to see everyone’s best offer at the same time), but we occasionally get asked for highest and best even when we’re the only potential buyer.

My strategy for highest and best usually depends on whether I think I’m bidding against other buyers or whether I think I’m the only bidder. If I think there are other bidders, I’ll put in my absolute best offer, as I know there is unlikely to be another negotiating round. But, when I believe I’m the only bidder, I’ll often keep my highest and best a bit lower than my real best offer. I do this for two reasons:

1. If the bank accepts the offer, I just received a discount;
2. If the bank doesn’t accept the offer, there is still an opportunity to continue negotiations (since there are no other potential buyers).

As I mentioned yesterday, our last counter-offer was $42K, 3 days of due diligence and $2K in earnest money.

When she asked for our highest and best, the listing agent let us know that the bank was looking for an offer near $50K. We let her know that that was unlikely (we reiterated the flood area as well as the long time on the market), but that we’d get back to her with our best offer.

My highest purchase price is probably around $44-45K, and I really don’t care about due diligence (I’m happy with none) or earnest money (I’ll put down as much as the seller wants). Since I’m happy to concede anything around due diligence and earnest money, the only variable I’m now concerned with is purchase price.

So, to leave myself a little room to negotiate later (if the bank rejects my highest and best), I submitted an offer of $43K today. I asked for no due diligence period and offered $5K in earnest money.

I guess we’ll see if they accept it, reject it, or counter-offer on it…

This is a house we saw for the first time yesterday. It’s a 3/2, about 1500 square feet and built in 2004. Yup, practically brand new. The downside is that it borders neighborhoods that got hit very hard during last year’s flooding in my area. While the house didn’t get touched by the flood — and is not currently listed in a flood zone — we are concerned that the proximity to the flood damage could turn off potential buyers.

The house originally sold in 2004 for $130K and the tax assessment on the house is $123K, but given the sparse comps in the area, I wouldn’t want to have to resell for more than $85K after rehab. And I anticipate about $10K in rehab to get it ready to resell and I’d want to make at least $15K.

Using my Flip Formula, that puts my maximum purchase price at:

MPP = Sale Price – Fixed Costs – Desired Profit – Rehab Costs

MPP = $85K – $15K – $15K -$10K

MPP = $45K

So, I’m willing to pay $45K for this house.

It’s currently listed at $55K, and I had a feeling if I made my first offer below about $40K, it would get rejected. Given that I’d rather get into a negotiating situation instead of having a rejected offer, I decided to make my first offer $40K cash, with 3 days due diligence and $5K earnest money. I’d be happy to get rid of the due diligence period and would be happy to increase the earnest money, but setting those where I did leaves me room for negotiation if they come back with a counter-offer.

I put that offer in this morning, and this afternoon we received our first counter-offer. They countered with $52K purchase price, no due diligence and $5K earnest money.

A good rule of negotiating is that every time you give something up, you should take something away as well. This lets the other side know that they’ll never get anything for free.

So, we agreed to up the offer price to $42K. We rejected their “no due diligence” and countered with our original 3 days of due diligence. And what we took away was some of the earnest money. We dropped our earnest money offer from $5K to $2K.

We’ll see what they come back with…

It was a pleasant surprise to find that there were a lot of good properties on the market, including some that don’t seem to be in high demand. My wife and I spent the day writing up offers, and it looks like we’ll be making six offers over the next 24 hours.

With the tax credit getting ready to expire (it will probably be renewed but hasn’t been yet), and with winter coming up (a slow real estate season), we’re being pretty conservative with our offers and keeping them low. Hopefully we’ll get one or two counter-offers that we can work with, and perhaps get at least one of these properties under contract this week.

With The Poor House getting close to completion, we’re going to need some more work to do in the coming weeks…

On the phone, the closing attorney mentioned that he and his wife had walked to a local garage sale, and upon speaking with the woman running it, he learned that the owner (the woman’s mother) had recently passed-away. They were selling whatever items they could, and then planned to eventually sell the house. The attorney asked how much they’d be asking, and when he found out that it was a very reasonable price, he called me.

To date, every investment property that we’ve purchased has been an REO property (bank-owned foreclosure), but I’m certainly not opposed to dealing with sellers directly, especially in a situation where I can help them as much as they can help us. So, if this woman really needed to sell the house, it had the potential to be a win/win for both of us.

My wife and I (with baby in tow) did the 30 minute drive up to the house. It’s in an upscale part of town, where houses typically sell for a good bit more than what we are accustomed to buying and selling for. The house was a very nice, 50’s style ranch with a big lot, and the first thing we noticed was a whole bunch of torn-out carpet on the front lawn.

We spoke with the woman running the garage sale for about an hour. Apparently, her mother had lived in the house for many years, and had passed away over the summer. The recent floods in Atlanta had caused a good bit of water damage to the house, and the woman and her daughter had spent many hours tearing out the wet carpet, cutting out some wet drywall, and doing their best to prevent any further damage to the property. That explained the carpet on the front lawn.

We let her know that we were investors and that we had heard she was considering selling the house. She said that she wasn’t ready to sell just yet, but seemed interested in having a potential cash buyer; she mentioned that she had had a couple bids from contractors to remodel the house, and that they had all come in above $50K, much more than she wanted to spend. She let us look around the property, and gave us a bit more information regarding its history and condition.

In the end, we let her know that we were very interested in the property if and when she was ready to sell (we got the feeling she was ready to “let go” of the property just yet). I gave her my card, and she said that she’d definitely give us a call when she was ready to sell, probably in the next month or two.

We’ll see what happens…