Well, today something bad happened that — no matter how hard I try — I can’t figure out how I could have mitigated it…

The Fourfecta House was scheduled to close yesterday, and while we already had underwriting approval from the lender, we were just waiting for underwriter approval from the downpayment assistance program the buyer is using (which normally only takes 2-3 days). So, we wrote a one-week extension to the contract, with the assumption that we should close in the next couple days.

But, today we got news that the primary lender has gone out of business!!! To be completely accurate, they lost their warehouse line of credit with Bank of America (this is the money small direct lenders borrow from larger banks to fund loans). Apparently, BoA shut down a whole bunch of warehouse lines in the southeast this week.

For the first time, I’m not sure there was any way to predict or mitigate this circumstance, and at this point we just need to make the best decision possible to ensure that we either can close the loan with this buyer or find another buyer. The lender is telling us that their entire staff (including their underwriters) is going to a new company, and that the loan should be easily approved with the new company within the next 2 weeks without having to deal with additional underwriting or new appraisals. This is good news…assuming it’s true.

With all the moving parts (new lender, FHA requirements, the downpayment assistance program, etc), I’m not sure how likely it is that everything can be moved to another lender and closed out in a short period of time. But, the alternatives aren’t very pretty: finding another lender who works with this downpayment assistance program, relisting the property and finding another buyers, etc. Each of these avenues could require drawing out the process many weeks or more.

Anyway, we haven’t made a final decision on what we plan to do; the lender has promised to contact us on Friday with more details about the switch-over and the process we face over the next couple weeks. If she does contact us and it sounds like things should be able to be moved over to the new lender quickly and easily, we may give them a chance and wait it out a couple weeks. If not, we’ll have to figure out a Plan B.

Stay tuned…and I’m going to keep trying to figure out how this is my fault and how I could have avoided this situation…

Timelines

Despite the fact that it took over six months to get the purchase of this property closed, the rehab and resale of the property went extremely quickly and smoothly. In fact, between purchase closing and sales closing, only 15 days elapsed. We spent about a week doing minor rehab (would have been faster if we didn’t have bad weather), spent about 3 days marketing it, and then closed within 5 days of having a signed contract.

Here are the key timeline milestones:

• Purchase Offer Date: 3/2/2009
• Purchase Closing Date: 9/3/2009
• Rehab Completion Date:9/10/2009
• Sale Listing Date: 9/11/2009
• Sale Contract Date: 9/13/2009
• Sale Closing Date: 9/18/2009

Financials

We bought the property for $39,000. We spent about $4450 in rehab costs (painting and repairing siding and drywall). We sold the property for $55,000. Pretty typical for what I refer to as a “prehab” deal (basically doing just enough rehab to get a lot of investors interested).

Here is the breakdown of financials for this project:

In terms of our profit, I’m pretty happy with the $8600, especially given the little work we had to put into the renovations and marketing. As someone commented on in a previous post, we could have made more money had we fully rehabbed it ourselves and then resold to an owner occupant.

Had we done one of our full rehabs, our rehab costs would have been closer to $15K, and we likely would have made between $20-25K in profit, depending on how aggressively we priced it. It only would have been an extra 2 weeks worth of rehab effort for our contractors, but we wouldn’t have been able to sell it to an FHA buyer (most of the buyers around here) until mid-December; and with the holidays, we realistically wouldn’t have it sold and off the books until February.

In terms of ROI, my total investment into this property was right around $44K (we paid cash). This puts our ROI at only about 20%, but if you adjust it for the fact that we only owned the property for two weeks, our annualized ROI is right about 480%. I’m certainly happy with that…

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 185 Days
• Rehab Time: 6 Days
• Selling Days on Market: 2 Days
• Selling Close Time: 5 Days
• Total Hold Time (Close to Close): 15 Days
• Total Profit: $8666.67
• Return on Investment (ROI): 19.73%
• Annualized ROI: 479.99%

The lender had already done two appraisals and the underwriter was in the process of verifying the source of the down-payment funds when he realized that the buyer’s fiancee (my project manager) worked for the company selling the house (he noticed the direct deposits of his paycheck from my company into their joint savings account). The underwriter determined that this violated their rule of an “arm’s length transaction,” and essentially told them that they wouldn’t finance the purchase!

While the underwriter can do whatever he wants, it’s unfortunate that he made this decision. First, the buyer is technically my project manager’s fiancee, who has absolutely no relationship to the company. Second, even if the buyer were my project manager, the fact that he has no ownership in the company should mean that this would be an “arms length transaction.” In fact, there are specific FHA rules that state that an employee of a home builder can purchase a house from the company assuming he has no ownership in the company. While we’re not technically a home builder, the relationship is exactly the same.

Anyway, like I said, you can’t argue with the underwriter — at least not successfully. So, my project manager and his fiancee are now scrambling to restart their financing with another lender who hopefully will interpret the rules a bit accurately and not have issue with this relationship. Unfortunately, this is turning what should have been a great week — we have four properties under contract — into a bit of a frustration for everyone involved. These guys have worked hard on getting this house customized to their liking and are ready to move in, and now poor interpretation of the financing rules is getting in the way of their moving in and enjoying what will hopefully soon be their new home.

Hopefully my next update on this new saga will have a happy ending…

So as not to extend this deal too long (baby is coming any day now), we decided to try to negotiate the best offer to where we wanted it, and get the paperwork signed as quickly as possible.

The offer we liked best was about $1K below asking, with $900 back in closing costs. It was a cash offer, with a 7-day inspection period and closing on September 25. We countered at full-price (with $900 back in closing costs), a 2-day inspection period, and closing this Friday (September 18). The buyers quickly accepted our counter-offer, and we got the signed contracts back this morning. They have until Tuesday night to do their inspections and back out of the deal; otherwise, we’ll hopefully head to closing by the end of this week.

Assuming the deal goes through at these numbers, we’ll make about $8K in profit. While that sounds like a great deal for a property we’ll have only held for 2 weeks, we’ve had earnest money tied up in this one since March, had to deal with vandalism before closing, and then did a decent amount of rehab prior to reselling it.

So, while I’m certainly not complaining, this deal has been a pain in the butt for 6 months now, so the $8K profit can’t really be considered “free money”…

Today we received our second offer (the first offer since many months ago), which is nice considering how many times we’ve gotten positive feedback from buyers on this house. The offer was solid, and we were planning to counter it immediately, but then my wife talked to another agent this evening who says she will be putting in an offer in the next 24 hours on this same house.

So, it now seems that we’ll have competing offers on this house, which will be even nicer. One way or the other, we expect to have this house under contract in the next 48 hours, which means that every one of our remaining houses will now be under contract to sell!

I’ll have more to say about this once we get an official contract with one of these buyers…

The offer was for about 95% of asking, with us paying about 5% in closing costs for the buyer, plus a home warranty. Overall, the offer isn’t too bad, and would easily allow us to make over our minimum profit target. That said, we’ve decided to counter-offer for closer to full-price, with the rest of the financial conditions staying the same.

The buyer wanted to close at the end of this month, but she is an FHA buyer, which means that the deal wouldn’t be able to close until at least September 29 (FHA 90-Day Rule). So, in addition to our counter-offer on the price, we’ll have to see if she is okay with pushing out the closing date an extra month or more, and we’ll also have to talk to her lender to determine if they’re comfortable moving forward with an FHA loan this early in the seasoning period.

Given that the earliest closing date for this buyer is over 7 weeks away, a lot can go wrong between now and then. So, even if we get a signed contract in the next couple days (which I suspect we will), there’s no guarantee that this deal will go through.

Anyway, a quick update on The Hat Trick House…

We are scheduled to close on Tuesday afternoon, and have already received the final HUD statement. Unbelievable considering we generally don’t see the HUD until an hour before closings these days.

Our profit on this one is likely be about $25K; I’ll post the final numbers and quick project recap after the closing next week…

The offer came from our project manager (my brother) and his fiancee, who have been looking for a new home for themselves for several months now. In fact, they’ve put in about a dozen offers on various REOs in the area, and haven’t been able to get anything that they really like under contract. They were the ones who originally looked at The Sunglasses House for themselves a couple months ago, but when they decided they weren’t interested in it, I jumped on it as a company project.

Now, after seeing the awesome rehab plans this house, they’ve come to their senses, and have decided that they want to make it their home (this was my plan all along)…

I’m glad that they decided to move forward on this one now, as opposed to waiting until after the rehab is complete. This way, they can customize the rehab to their liking without having to go back and make any expensive changes later. A couple of the upgrades they’re considering are a large tiled shower in the main bathroom (to replace the small fiberglass one and to accompany the existing jacuzzi tub), major landscaping and a privacy fence in the backyard (for their dog), upgraded appliances, and perhaps some upgraded fixtures.

They can’t close on the house until September (they’re purchasing with an FHA loan, and have to wait until 90 days after we bought the property), but hopefully they’ll get the rehab done more quickly, and can move in before they officially close.

Hopefully I’ll get some video posted of the rehab sometime in the next week or so…

My wife received a call this morning to check the duplex out, and — after taking a look — the person called back with an offer of $26,000. Not wanting to drag out the negotiations (I’m going away this weekend), I decided to just name my very lowest acceptable all-cash price — $28,500. He balked and said he would only come up to $26,500. So, my wife wished him well, and let him know that if he changed his mind, he was welcome to give her a call back.

About two hours later, he called back, and said he wanted to look at it again, this time with his wife. Again, after taking a look, he called my wife an offer. This time $27,000. Again, we said that we’d go no lower than $28,500, and again, he balked. Apparently, at one point in the conversation, he said to my wife, “I know what’s going on here…you really need to sell this place so you can get the cash to buy another place. So I’m not offering any higher.”

Had I known at the time that he had said that to my wife, the asking price would have gone up a WHOLE LOT, but she didn’t mention that part until later. Anyway, I finally got on the phone with him directly, and after several minutes of him negotiating with himself, he still wouldn’t come up to my asking price. I said goodbye, and let him know that he could call back when he changed his mind.

About an hour later, he called back, and accepted our $28,500 counter-offer. We’re meeting tomorrow to get the contract signed and collect the earnest money check. Assuming that goes smoothly, we’re scheduled to close in 6 days (next Wednesday). We won’t be making a lot of money on this one, but other than changing the locks, putting up a sign and a lockbox, and answering phone calls, we done practically no work on this property; in fact, I’ve only been there once since I’ve owned it.

Btw, I was reminded of an important lesson during my negotiation today:

If you want to keep your buyers happy (and you do!), always leave yourself enough negotiating room to allow a reasonable back-and-forth negotiation. While I know this lesson very well, I didn’t follow it today because I was trying to rush the process.

Specifically, had I made my first counter-offer several thousand dollars above my minimum acceptable price (instead of at my minimum acceptable price), not only would it have been easier for the buyer and me to negotiate up to my desired price point (over several rounds of negotiation), but it also wouldn’t have made the buyer feel like I was being inflexible.

Basically, instead of telling the buyer, “Here’s my price – take it or leave it,” I easily could have gotten the buyer to the same price, but made him feel like he was getting a great deal. Instead, he probably feels like he’s being taken advantage of, despite the fact that he DID get a great deal.

Good lesson for all sellers out there (including myself)…

This entire project has been insightful, fun, and rewarding — both financially and just from the perspective of renovating a relatively big house. This is the first major rehab we’ve done without a General Contractor, and we’ve quickly realized that managing the projects ourselves not only allows us to get things done cheaper and more quickly, but the added level of control is a great feeling.

At times, we had six or seven different contractors working along-side one-another, which provided some challenges (for both them and us); ultimately, it allowed me to create some scheduling processes and spreadsheets, which will make contractor scheduling much easier in the future.

Here is the run-down of the project results, with the final set of statistics at the bottom…

Timelines

The total holding time on this house was only 86 days! I’m always surprised when a project takes less than 90 days from purchase closing to sales closing, especially considering most of our buyers are FHA, and the rules that go along with FHA waiting periods. But, we got lucky that we found a non-FHA buyer within two weeks of listing, and other than some stress waiting for the appraisal to come back, the closing process went extremely smoothly.

In fact, from a schedule perspective, this project was about as textbook as I can imagine.

Here are the key timeline milestones:

• Purchase Offer Date: 12/7/2008
• Purchase Closing Date: 1/28/2009
• Rehab Completion Date: 3/13/2009
• Sale Listing Date: 3/13/2009
• Sale Contract Date: 3/26/2009
• Sale Closing Date: 4/24/2009

I think we can honestly say that we took many lessons from previous rehabs and applied them here, and everything came together very nicely with a 7 week rehab, a 2 week listing, and then 4 weeks to close…

Financials

We were able to sell this property for $127,500, just $7,000 less than asking, and about $7,000 more than I had forecast in my original analysis. Our total profit after all fees, commissions, rehab costs and other expenses was just under $30,000, also a good bit over my original forecast.

We had originally planned on spending about $40K on the rehab, but had the goal of trying to bring that down to $35K. In the end, our final rehab costs were just a few dollars less than $36K — not bad given our original estimate. The buyer decided not to have an inspection, so there were no requests for repairs or concessions after the contract was submitted, which likely saved us a few dollars these past couple weeks.

Here is the breakdown of financials for this project:

While these numbers don’t reflect the final holding costs — the final utility bills and insurance refunds have not been received — the final results should be within about $200 one way or the other.

In terms of ROI, my total investment into this property (Purchase Costs, Rehab Costs, Holding Costs) was $25,950.35; this puts my ROI at over 110%, and adjusted for the time this project took, my annualized ROI is over 480%.

This makes four sales in a row (all four that we’ve done) where are total profit was over $20,000 and our annualized ROI was over 300%. I’m very happy with our financial results so far.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 52 Days
• Rehab Time: 43 Days
• Selling Days on Market: 13 Days
• Selling Close Time: 29 Days
• Total Hold Time (Close to Close): 86 Days
• Total Profit: $29,551.71
• Return on Investment (ROI): 113.88%
• Annualized ROI: 483.32%