How we lost $3,300 and 6 Units in one day!!!
Today we signed the cancellation of contract for a 6 unit deal that was supposed to be a "GREAT DEAL". Thinking back we'd call this deal something different.
We went under contract in late September 2016 for under 100K. The deal consisted of a Triplex, Duplex and SFR totaling 6 units. This deal was a cash deal no doubt however we attempted to purchase the deal using conventional financing(first mistake). Since the crash conventional lenders who do not keep their originated loans on the books have tightened their regulations and leave no stone un-turned before issuing a borrower a penny. The days of the wild west lending are long gone..........
First, the appraisal of each property($600 per property) was upfront and was required by the lender to determine value, safety and health concerns of the properties. This is not uncommon however after the appraisals were said and done all properties needed re-inspection.....One needed a roof inspection for a small 6x8 section of the roof covering basement staircase(unable to complete because of the snow. One property needed re inspection of bathroom ceiling and attic and one property needed re inspection of dilapidated garage).
The seller began to become increasingly anxious after two months past without a solid closing date scheduled. Finally the seller extended the contract and at that point we guaranteed EM(Earnest money) in the amount of $1,500 through December 31st, 2016. Well around 12/21 we learned from the seller that he would not extend the contracts past 12/31 as he is frustrated with the process(completely understandable) thus we lost our EM deposit as all properties needed to be reinspected which would have taken the contracts past 12/31.
Thinking back over this deal I realized that guaranteeing contract, although noble of the buyer can end up in a total loss. Especially when relying on a lender who needs to complete 3rd party appraisals which may require re-inspections which further delay closing. Today we walked away with a $3,300 education but could have been stuck with upwards of 30K of our own cash in the deal after closing if you include things like closing costs, down payment for lender, eminent eviction of two of the units and the fact that the properties were being sold at market. Not having an equity when purchasing real estate is certain death for any investor. All in all this experience was a Lesson learned. you should always understand the following before getting into a deal.
1. The Value - you need to know the value of a property before putting in an offer. You MUST purchase the property at 65-75% of value in order to leverage the equity into future purchases.
2. See the property inside/out - Never trust someone to tell you what a property condition is. If your at a distance request an uninterrupted video of the property, Facetime/SKYPE and an excessive amount of photos of each bedroom/common area, basement and exterior.
3. Choose the correct financing - You cannot fit a square peg into a round hole. If the deal is a cash deal buy it with cash!!! - If it's a seller financing deal, use seller financing. If the deal calls for a portfolio/commercial lender, do it that way. Just make sure that you choose the correct tool for the job.
4. DON'T GUARANTEE THE EM IN THE CONTRACT - As the buyer, unless you are purchasing in cash, never guarantee a contract. When lenders are involved there are way too many variable to account for so don't put yourself in a helpless situation.