Are Burned Houses Worth the Effort to Rehab As a Real Estate Investor?
You should love this true story because we, the little guys, are forced to take on the wrath and fury of a hot shot attorney (or so he thinks) to save a deal.
Let me set the stage - a mentor student finds a burned out property and calls the homeowner and asks about buying the property.
The homeowner says he won't take less than $40,000 under any circumstances but two days later agrees to a counter-offer of $27,500.
We have seen the property by now and it is truly a shell and needs complete rebuilding, not a job for a casual rehabber.
But we are buying the property at $27,500 when the tax assessed land value was five times this amount.
Again, that's not ARV (After Repaired Value), it's just the land value.
As a side note, the student asked how much the seller got from the insurance claim and was rebuked that it wasn't his information.
We knew that but wanted to remind the seller he got money already and our offer was just "gravy on the grits".
I personally write the purchase and sale agreement (FAR/BAR 2004) and send it off by fax and give the seller two days to sign and return.
Seller immediately complained he needs more time to "read every line" and will send it back four days later after the weekend.
I am suspect because previously the seller wanted to get it done "instantly" but balks when the time comes for signing.
Almost at the same time, we see the property on another investor's wholesale list for sale for $66,000.
This is the same property but a different seller and obviously at a much higher price.
As soon as we got a signed contract, we filed a "Notice of Interest" in the public record in case another investor offered the seller more money and we already had it under contract.
All is quiet until the homeowner's brother-in-law (out-of-state realtor) calls and says we can't file a notice of interest and we are crooks.
By this time we had spoken to the new seller who was offering the property at $66,000.
This seller explained he didn't have a contract but had been working with the seller for 2 ½ months to get the property sold for $40,000 because the homeowner wouldn't take any less.
Wouldn't take any less - what does $27,500 sound like - are my math skills gone in my old age? The new seller tried for 2 ½ months to sell the property and couldn't get a bite - this is the best example of the power of your list because we had it sold in under 24 hours.
So the wannabe seller went away since he never bothered to get a contract signed and next we started to deal with the son-in-law who wouldn't listen to why we filed the Notice of Interest.
Remember, we filed because the "new" seller was trying to sell the property for $26,000 over the homeowner's asking price of $40,000 and pocket a tidy profit.
Brother-in-law won't listen and the seller may have a higher offer on the table than our $27,500.
Basically the second seller becomes a sore loser who called the homeowner and complained that he should have had the deal.
First lesson is if you are a serious investor always get a contract on the property! Next, we hear from a local attorney, whining and threatening that we have "breached" the contract and it is no longer valid! I would love to describe this guy and his self-practice but I am only opening myself up to something like telling the truth and getting rebuffed for it.
The attorney noted that the standard contract we use does not allow for a Notice of Interest to be recorded.
OK, I goofed! I wrote the contract and didn't strike the above clause or add an addendum overriding it.
The attorney and I both know that we have time to cure the breach and that the contract is not invalid but he tries a bluff of epic proportions! From here on out for brevity, we will refer to "he" as the attorney.
Whine, cry, threaten, etc.
- all the while we are going to the courthouse to file an Affidavit and Release of Notice of Interest because he could make a case for this breach but not for the invalidating of the contract.
By the time his email is answered a couple of hours later we have cured the issue.
But to earn his fee, he is just beginning the battle - and so are we.
He came back saying his seller was thinking about cancelling the contract.
We respond with the all too real threat of a Breach of Contract ("BOC") lawsuit to be filed as soon as we get a cancellation notice.
He now starts to correspond only with our closing agent and states in a letter to them "The recording of the Affidavit has certainly raised questions regarding the authenticity of your client's intention to purchase the subject property".
The only question in our mind is how much of a better offer did the homeowner get and who is the new buyer? Remember, we have a buyer under contract subject to our delivering clear and marketable title to our buyer.
He next objects to the closing date on the contract that stipulates on or about a certain date, plus I added the phrase pending completed lien search by closing agent.
This last statement becomes critical later because the City where the property is located doesn't supply water to the property and this part of the search takes longer.
The closing agent also discovers liens against the property of over $20,000 which, by contract, are the responsibility of the homeowner.
Luckily for the homeowner, the liens are invalid for various reasons so we once again move forward but not before he whines that we are getting the property for a "song" and we should pay the liens.
He again says seller won't pay any liens - we mention BOC and we move forward once again.
But it doesn't end yet - he gets a copy of the HUD-1 closing statement and finds out that I wrote into the contract that the seller pays for title insurance! What did he expect, and why didn't he see it when he read the contract? He says no and we say BOC, he whines and we relent and take only $150 of the title cost on our side of the HUD.
We are really getting weak in our old age - remember another lesson - Know when to hold them and know when to fold them.
Next he complains that there is an Assignment Fee on the HUD and that we are making a profit and too much at that! He really gets in knots when he sees the POC (Paid Outside of Closing) amount and he can't do anything about it.
A few days later, he realizes that the seller has been charged $500 by our closing agent for usual services.
Whining and moaning he says no closing if the charge is not moved to our side.
As we know when to play and when to close, we move the $500 to our side of the HUD.
Almost immediately he calls back and demands that we add $1,000 to his client's side of the HUD-1 which is his fee.
We comply and wonder what else the homeowner will be paying outside of the closing.
The closing was a mail-away so we closed in escrow with our buyer and waited for the homeowner's documents to come back.
They arrived back a day later and we closed the seller's side.
So the net result was - happy student, happy us, happy closing agent, homeowner (who knows or cares), his attorney - happy because he got paid and looked like a big shot in from of his client, brother-in-law - disgruntled realtor who probably believes he won the battle while in fact it was just a skirmish.
Almost forgot the end-buyer who knew little or nothing about this soap opera.
He got a property for $41,500 that he completely re-built for $63,000 and resold it for $225,000 and netted approximately $93,000.
Some of the lessons here - do the contract right in the first place, don't be intimidated by opposing attorney, know your rights, defend your position, don't sell it before you have it under contract, don't be greedy about how much you want to make, always have another pair of eyes look over your shoulder at what you are doing and be fearless when getting deals - a mistake is not life threatening!
Let me set the stage - a mentor student finds a burned out property and calls the homeowner and asks about buying the property.
The homeowner says he won't take less than $40,000 under any circumstances but two days later agrees to a counter-offer of $27,500.
We have seen the property by now and it is truly a shell and needs complete rebuilding, not a job for a casual rehabber.
But we are buying the property at $27,500 when the tax assessed land value was five times this amount.
Again, that's not ARV (After Repaired Value), it's just the land value.
As a side note, the student asked how much the seller got from the insurance claim and was rebuked that it wasn't his information.
We knew that but wanted to remind the seller he got money already and our offer was just "gravy on the grits".
I personally write the purchase and sale agreement (FAR/BAR 2004) and send it off by fax and give the seller two days to sign and return.
Seller immediately complained he needs more time to "read every line" and will send it back four days later after the weekend.
I am suspect because previously the seller wanted to get it done "instantly" but balks when the time comes for signing.
Almost at the same time, we see the property on another investor's wholesale list for sale for $66,000.
This is the same property but a different seller and obviously at a much higher price.
As soon as we got a signed contract, we filed a "Notice of Interest" in the public record in case another investor offered the seller more money and we already had it under contract.
All is quiet until the homeowner's brother-in-law (out-of-state realtor) calls and says we can't file a notice of interest and we are crooks.
By this time we had spoken to the new seller who was offering the property at $66,000.
This seller explained he didn't have a contract but had been working with the seller for 2 ½ months to get the property sold for $40,000 because the homeowner wouldn't take any less.
Wouldn't take any less - what does $27,500 sound like - are my math skills gone in my old age? The new seller tried for 2 ½ months to sell the property and couldn't get a bite - this is the best example of the power of your list because we had it sold in under 24 hours.
So the wannabe seller went away since he never bothered to get a contract signed and next we started to deal with the son-in-law who wouldn't listen to why we filed the Notice of Interest.
Remember, we filed because the "new" seller was trying to sell the property for $26,000 over the homeowner's asking price of $40,000 and pocket a tidy profit.
Brother-in-law won't listen and the seller may have a higher offer on the table than our $27,500.
Basically the second seller becomes a sore loser who called the homeowner and complained that he should have had the deal.
First lesson is if you are a serious investor always get a contract on the property! Next, we hear from a local attorney, whining and threatening that we have "breached" the contract and it is no longer valid! I would love to describe this guy and his self-practice but I am only opening myself up to something like telling the truth and getting rebuffed for it.
The attorney noted that the standard contract we use does not allow for a Notice of Interest to be recorded.
OK, I goofed! I wrote the contract and didn't strike the above clause or add an addendum overriding it.
The attorney and I both know that we have time to cure the breach and that the contract is not invalid but he tries a bluff of epic proportions! From here on out for brevity, we will refer to "he" as the attorney.
Whine, cry, threaten, etc.
- all the while we are going to the courthouse to file an Affidavit and Release of Notice of Interest because he could make a case for this breach but not for the invalidating of the contract.
By the time his email is answered a couple of hours later we have cured the issue.
But to earn his fee, he is just beginning the battle - and so are we.
He came back saying his seller was thinking about cancelling the contract.
We respond with the all too real threat of a Breach of Contract ("BOC") lawsuit to be filed as soon as we get a cancellation notice.
He now starts to correspond only with our closing agent and states in a letter to them "The recording of the Affidavit has certainly raised questions regarding the authenticity of your client's intention to purchase the subject property".
The only question in our mind is how much of a better offer did the homeowner get and who is the new buyer? Remember, we have a buyer under contract subject to our delivering clear and marketable title to our buyer.
He next objects to the closing date on the contract that stipulates on or about a certain date, plus I added the phrase pending completed lien search by closing agent.
This last statement becomes critical later because the City where the property is located doesn't supply water to the property and this part of the search takes longer.
The closing agent also discovers liens against the property of over $20,000 which, by contract, are the responsibility of the homeowner.
Luckily for the homeowner, the liens are invalid for various reasons so we once again move forward but not before he whines that we are getting the property for a "song" and we should pay the liens.
He again says seller won't pay any liens - we mention BOC and we move forward once again.
But it doesn't end yet - he gets a copy of the HUD-1 closing statement and finds out that I wrote into the contract that the seller pays for title insurance! What did he expect, and why didn't he see it when he read the contract? He says no and we say BOC, he whines and we relent and take only $150 of the title cost on our side of the HUD.
We are really getting weak in our old age - remember another lesson - Know when to hold them and know when to fold them.
Next he complains that there is an Assignment Fee on the HUD and that we are making a profit and too much at that! He really gets in knots when he sees the POC (Paid Outside of Closing) amount and he can't do anything about it.
A few days later, he realizes that the seller has been charged $500 by our closing agent for usual services.
Whining and moaning he says no closing if the charge is not moved to our side.
As we know when to play and when to close, we move the $500 to our side of the HUD.
Almost immediately he calls back and demands that we add $1,000 to his client's side of the HUD-1 which is his fee.
We comply and wonder what else the homeowner will be paying outside of the closing.
The closing was a mail-away so we closed in escrow with our buyer and waited for the homeowner's documents to come back.
They arrived back a day later and we closed the seller's side.
So the net result was - happy student, happy us, happy closing agent, homeowner (who knows or cares), his attorney - happy because he got paid and looked like a big shot in from of his client, brother-in-law - disgruntled realtor who probably believes he won the battle while in fact it was just a skirmish.
Almost forgot the end-buyer who knew little or nothing about this soap opera.
He got a property for $41,500 that he completely re-built for $63,000 and resold it for $225,000 and netted approximately $93,000.
Some of the lessons here - do the contract right in the first place, don't be intimidated by opposing attorney, know your rights, defend your position, don't sell it before you have it under contract, don't be greedy about how much you want to make, always have another pair of eyes look over your shoulder at what you are doing and be fearless when getting deals - a mistake is not life threatening!
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