Welcome to Chez Cliff!

After today, I will be saying "farewell" to Texas for the time being.  There are other activities going on that need to be shared.

The last question to be addressed:  Can’t you still get your earnest money back due to financing?  In your original contract didn’t you have interest rate parameters in the financing contigency[sic]?

After announcing my intention to withdraw from the contract, I re-read the agreement that the Seller and I had signed.

The first paragraph that caught my eye.

Financing Approval:  This contract is subject to Buyer being approved for the financing described in the attached Third Party Financing Condition Addendum.

And when referring to the Third Party Financing Condition Addendum:

A first mortgage loan in the principle amount of $133,200.00 (excluding any financed PMI premium), due in full in 30 year(s) with interest not to exceed 7.000% per annum for the first 30 year(s) of the loan with Loan Fees (loan origination, discount, buy-down, and commitment fees) not to exceed 1.000% of the loan.

At this point, my inclination was to ask for the earnest money back.  Until I read this paragraph:

Default:  If Buyer fails to comply with this contract, Buyer will be in default, and Seller may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the earnest money as liquidated damages, thereby releasing both parties from this contract.

This last paragraph gave me pause.  The contract had already expired by the time notification was given specifying my withdraw.

Could a request for additional time to find different financing work?

Yes.

The problem was the model.  Accepting that my interest rate on a loan would probably be between 7.5% and 8%, the model still did not work.  This property was based on the 6.25% financing LenderLady promised.

In the state of Texas, once earnest money has been put into an Escrow Account, it cannot be released to anyone unless both the Buyer and the Seller agree in writing.  If the Seller did not agree with my request for funds to be released, the funds would stay indefinitely in the Escrow Account.  Only though mediation could the funds be released, requiring my presence in Texas. 

The question was posed:  What was the right thing to do?

Cat called, asking what we should do with the earnest money.  She was fully prepared to get the money refunded.

"No," I said.  "The fault is clearly on this side of the table.  Let’s release the earnest money to the Seller and move on."

Good Day to you all.

I’m taking a small vacation and will return on Monday.

Have a great weekend!

Over the past several weeks, a series of questions have been posted and I stated "I’ll address those soon."

As promised (some today, finish tomorrow):

Question:  How much money did you put into this deal?
Clifford:  Of the two deals, only one had money put down.  After putting the earnest money into escrow, from there it was paying money for the housing inspection and the appraisal.  Proceeding that, quotes were obtained from plumbers and electricians.  They charged a small fee upfront, typically $80, which would be credited towards the work bill when they were employed.  I was, at that time, 100% certain the property would be mine so I didn’t think twice.  In total, I estimate my losses at $2100.

Question:  How much time did you put into this deal?
Clifford:  The last three weeks spanned a period of four months.  Some days were more exciting than others, with lots of phone calls between Cat and myself.  Other days, nothing transpired.  It was a lot of fun, which was the very reason I started investing.

Question:  Do you think that it is worth asking the lender to cover more costs than just the appraisal for their mistakes and misrepresentations?
Clifford:  When BossMan called me, he said they were going to refund the cost of the appraisal to me.  However he also stated he could not reimburse me for the earnest money I had already put down.  He said that would be illegal.  I consulted with Lord Google and he was just as confused as I.  Maybe if there are some loan officers out there, they can shed some light on this (hint hint).

Question:  What would you have done differently?
Clifford:  With hindsight being 20/20?  I probably would have went with my local loan officer instead of trying to find a lender in Texas.  Also, the next time I encounter an out-of-state property requiring $10,000 plus in repairs, I may stay away.  Putting some money in initially I can understand.  But this was a bit much.

Another Investor left this comment: Consider the $2,500 (less the appraisal rebate) tuition in real estate investing school.  Bravo!
Clifford:  I laughed because this statement is true.  At the time, I was more upset because the deal fell apart versus losing $2100.  The money wasn’t important.  What is important is my skill-set is markedly sharper than before.  And since I believe nothing is for free, the money was well worth it.

I do have to admit: these past four months were exciting.  I had an opportunity to do all those things I have been dying to do.  I was in the command chair, calling the shots.

Wonderful.  Exciting.  Challenging.

Greg asked this question the other day:  What signs were there along the way that the lender would change it’s terms?

I truly wish there was some "smoking gun", some clear sign that the lender was going to balk at the last minute, not delivering what they promised.  From what I know, the lender "locks" the borrower into a program, at a specified rate.  How long this lasts is unknown to me but for some reason 30 days comes to mind.

This leaves the company itself: it’s reputation, it’s business practices.  But how can one tell if a company is leading them on?

In my case, a midnight caller named "Vinnie" did not ask to meet with me, in some dark alley to sign loan documents.  The lending institution was not called "Gotti Lending Services" or "Capone Mortgage Company".  No one ever asked me to kiss a ring of the "mortgage broker" nor did anyone suggest that I would owe them "a favor" for getting me a great rate.

I believe, dear reader, some logic can be applied to this situation.  Donning our "Mr Spock" ears, we can logically assume that it is not in the best interest of lending institutions to stiff their clients on items that can’t be delivered.  If indeed Gotti Lending Services continually promised prime rate for their customers, yet never delivered, then word would spread quickly and the institution would quickly find itself out of business.

Certainly, LenderLady doesn’t read my blog.  It is with a strong degree of doubt that she read my entry regarding shady loan officers.  She didn’t plot revenge, while twirling her mustache and giving a maniacal laugh.  If she had, any woman with a mustache big enough to twirl would have been cause for me to immediately find and utilize all emergency exits.

This two-pipe problem was perplexing.  In the end, I was forced to remember two adages.

First, Arkham’s razor:  Oftentimes, the simplest explanation is the best explanation.

This lead directly to the second:  If it’s too good to be true, it usually is.

Just as a contractor or plumber can disappoint, so can a lender.  The trick is to find one you can work with.

EDIT:  Merde.  Yes, thanks for the correction.  It is Occam’s razor, not Arkham’s.

Every time one of my projects meets with failure, I dissect it in order to learn something constructive from the situation.  Just because I don’t succeed the first time doesn’t mean I can’t a second time.

This venture cost me around $2,100.  A very expensive lesson.

Scalpel

My model.  I missed the obvious: first and second mortgages.  My mortgage calculation is based on a 90% first, which isn’t realistic.  If I am going to do 80/10/10 financing I’ll need to have a calculation that reflects an 80% first mortgage and a 10% second mortgage along with my 10% down payment.

The "Unexpected".  How do you expect the unexpected?  My mentor mentioned figuring in 10 to 15% for unforeseen expenses.  I’ll add this to my calculations, which may make it tougher to find cash flowing properties.  The "other" category should house this figure.

Rib Shears

Insurance.  The approximation of 0.8% of the asking price grossly underestimated the real value of the insurance.  It is closer to 1.4%.  There are several factors that can influence this percentage.

(1)  Wood structure versus cement.  Insurance providers seem to favor multi-units which are made out of brick versus wood.

(2)  Hurricane Insurance.  This is purely a location issue.  I picked Corpus Christi, which encourages having this insurance.  This is $800/year or $65/month hit to the monthly cashflow.  Over a 5 year period, this is $4,000 which I could have had in my pocket.  I may have to rethink the location of my next investment.

Forceps

Financing.  Obviously I’m going to have to find a lender that works with investors instead of trying to screw them.  It is borderline ridiculous to believe that investors are being charged 10% for financing.  I know investors who are paying 1 point or 1.5 points above prime.  An idea I thought about pursuing a few months back involved becoming a loan broker for some lending firms.  I may have to revisit that.

This may take some time, some experimenting.  But it needs to be done if I’m going to continue down this path.

Close it up.