Insider Dealing
Posted on April 6, 2007 - Filed Under Business |
Cat: The seller’s agent disclosed that there’s a problem with the roof. The seller has a quote however to get it fixed.
Clifford: A quote from his brother?
We were into day five of negotiations. At that time the agent decided to reveal a problem with the roof. I was annoyed this was not revealed earlier. By law, all known defects with a property are to be disclosed immediately. Not at the leisure of the agent or the seller.
I decided to ask my Real Estate Agent about the roof issue. I know he has dealt with out of state investing before.
Real Estate Agent: You don’t want to buy a property that needs repairs after the fact. Ask the seller to fix the roof prior to close of escrow. That way if more problems are found, it’s on the seller to get them fixed. Not you.
The seller rejected this proposal. He was selling the property "As Is" and refused to do any repair work.
So it’s decision time. The roof repair will be several thousand dollars. But I could easily make back that money with a cashflow of $450/month. Now the question was simple: Where to find the money to fix the roof?
Cat: What we’ll do is ask for some money back at the close of escrow. This will offset the cost of roof repairs. And don’t worry if we have to do the repairs. I’ll manage all of that.
This was working out. Instead of a final selling price of $120,000 we were going to settle on $126,000 with $6,000 returned to me for repairs. The roof repairs would be wrapped up in my mortgage payment.
Pretty slick huh?
The decision was made: proceed with the deal.
Then another problem was revealed.
Cat: I took a bunch of photos. I’ll send them to you.
Clifford: That’s great! Did you get a chance to get inside the units?
Cat: Not yet. That’s scheduled for next week when the housing inspector arrives.
Clifford: OK
Cat:
I did see something odd. The agent told me that all three units were
rented. But one of them is empty and I think a second one is empty too.
Clifford: Ask the agent for copies of all rental contracts.
Another
flag on the field. The overall rent for the property was based on a
"guess" rather than current data. This was a bit unsettling.
Cat: I asked the seller to reduce the price based on the fact that two units aren’t rented.
Clifford: What did he say?
Cat: He said "No". He claims that a new tenant is moving in the first of the month. Also he says the property was appraised in December at $140,000. He refuses to budge.
Clifford: He had the property appraised?
Cat: Yeah it was because he had a buyer for it in December when it was first listed.
Clifford: He had a buyer already?
Cat: Yeah and get this: it was his agent.
Clifford: Why didn’t the agent buy it?
Cat: He claims his wife wanted a new car. So the money was going for that instead of this property.
If this property was such a great deal, why had it been sitting on the market for two months with no potential buyers? Shouldn’t I be in some kind of bidding war right now?
This was not making sense. Something was wrong somewhere.
If you liked that post, then try these...
Advantage of being poor on May 21st, 2008
Thanks to all these wonderful write-offs, the IRS believes I'm poor.
Posting for Investors on February 16th, 2006
Here is an excellent opportunity for an investor.
Comments
9 Responses to “Insider Dealing”
Leave a Reply
Well, you’re talking about this in the past tense, so I am assuming the whole scenario has played out already, but here are my thoughts.. First off, why are you paying for roof repairs? Even though you get $6K back at closing, that’s an extra $6K on *your* mortgage, which will turn out to be a lot more when interest is added on to it over the life of the mortgage. You need to have the seller lower the sales price by the amount it will cost to repair the roof or leave the price as is and credit that amount back to you at closing. Second, get copies of all current leases and the one that he claims is going to start on the first of the month. If he stated all units were rented and they aren’t, that’s a problem and requires another reduction in price. Find out what a property manager would charge to fill those units and ask for that much of a price reduction. Furthermore, try to find out why they aren’t rented now and how long they have been empty. There could be trouble here.. Third, don’t worry about why someone else didn’t buy the property. Make up your own mind about it. The owner sounds inflexible and doesn’t appear to be a motivated seller. If he won’t budge, walk away and check back in a month or two and see if it’s still for sale, then offer an even lower price.
Shaun, maybe you should still install a “real estate hotline” for all us newbies!
Yes, the scenario has played out. I’m recounting the details of what I experienced for those that may want to learn from what I did (or did not) do.
I absolutely agree with Shaun. There are red flags all over this deal. I’m interested to find out how this turned out for you. Hopefully, for the best.
Makes me nervous, you should check the rents in the area to make sure your numbers are correct. I agree with Shaun on the roof deal, worse case make him meet you half way on the repairs.
Shawn, typically what I do is look at both rental contracts and then at rentometer.com This gives me an idea if the rents are below market or above market.
For down the road thinking.
Rule Number 1:
If you haven’t seen it, don’t buy it.
Rule Number 2:
No matter how good the deal, Rule Number 1 applies.
Get on a plane, go look at the property, the neighborhood and the city. You may find that South Texas is a lot different that what you think it is. The internet is a great way to buy stock, not property in unknown areas.
Either the seller is not motivated or he has seen other out of state investors throw too much money at similar properties. Hope you decided to walk on this one and wait for a better deal.
Well, I don’t have a hotline, but I do have a real estate blog: shaunsre.blogspot.com. (I added you to my blogroll, by the way.) Where are you in California? I grew up in Orange County and now live in Phoenix.
Clifford,
Also ask for rent rolls for the past year or two. Use those to determine your price.
What your next step should be is to have Cat send you about 10-15 listings that match your criteria. Then have her set up appointments for 5-10 that look decent. Book a flight out there next Sat and Sunday and go look at them all.
Sometimes red flags are a good thing. Any decent investor will undercover the same things you just did. Many investors will then move on, but some will tackle these problems if the price is right.
Kenric, I’ll be talking about my trip to Corpus Christi in the next few days. Probably one of the more positive experiences I have had this year.