Are you tired of chasing properties on the MLS and not getting your offers accepted? We were too and finally our first off-market opportunity showed up on our laps. It showed up in the form of a pre-foreclosure from a divorced couple that were desperate to save their credit. My broker approached us after two other offers we placed on houses fell through due to being outbid in a highly competitive market.
The broker represented the seller and of course represents me. He walked the property and already knew how I analyze properties due to the countless hours we spent looking for good deals. He undersold the property as requiring simple cosmetic improvements, a new roof, garage door, and some other improvements. As with anything, I valued his opinion, but knew my experience in construction is more vast than his. Ideally, I wanted to conduct a property inspection first, but we were racing the clock…in this case…the foreclosure date.
Banks and Foreclosures. The bank told the listing broker that the property must be under contract by 1 July or it would be sold at auction on the Courthouse steps. We later learned the seller didn’t communicate clear enough with their broker, because the bank never received the purchase agreement, loan payoff amount request, or communicated the closing date to the bank. This mishap almost proved costly in closing the deal because it forced us to close on 1 July.
The Loan That Never Was. Originally, we tried to get conventional agency financing with a 20% down payment which requires an appraisal and significant amount in closing costs that includes: lawyer fees, title searches, appraisal costs, loan origination fees, penalties for low finance amounts, etc. For the agreed upon purchase amount of $78K, this amount would equal about $6K with a total cost of $84K. We knew this amount with the CAPEX (Capital Expenditures or initial repairs) would force us to leave money in the property after a cash-out refinance, but we were confident with the ability of renting the property at our target amount of $1K for the 3 bedroom/2 bathroom house. We had to pay for the appraisal in advance and the report was to be completed by 21 June with a 1 July closing. The lender didn’t receive the report until the morning of 28 June…exactly 3 calendar days prior to closing. As we waited, the lender and broker grew worried and reached out for an extension with the bank. This is when we learned the bank DIDN’T know the property was under contract and required 72 hours to produce the loan payoff amount. Additionally, NC law requires a 72 hour period for the lender to show the seller the Closing Disclosures (CD) prior to closing. At this point we busted these time windows and we began scrambling for an all cash deal as part of the back-up plan…in the event the bank didn’t agree to the extension. Shortly after I would learn none of that mattered. The LATE appraisal report came back with a low appraisal value and conditions that I was well aware of with a rating of C5 that my lender would affectionately refer to as the equivalent of being hit by a hurricane. Basically, the lender could NOT finance the property. Instantly, we switched gears to an all-cash deal.
Show Me the Money. While we waited for conventional financing to be approved, we were forced to leave money in separate accounts since we were looking at personal financing due to the loan amount being less than $75K, but more than $50K (Commercial Loan minimums are $75K). So now we had money in personal accounts as well as in the business account. On closing day, the sellers signed their documents with no issues and provided the little they could afford. Now it’s our turn, payment options include certified check(s) or wire transfers. Due to the previously stated issues, we went with the wire transfer. While all of this transpired, my broker and I were nervous, because the bank communicated the money had to transfer and deed had to be registered with the county or they would place the property under foreclosure. We successfully transferred the money, but with only an hour for registering the deed. Thankfully, the Real Estate Attorney communicated with the bank attorney that all funds are present, documents are signed, and submitted for writing at the courthouse. As of the next morning, we were listed as the new owners of our very first rental property.
Summary. We learned so much during this period and here it is.
- Plan for Contingencies (Financing, Inspections, Timelines)
- Constant Communication with Your Team – Broker, Lender, Contractor
- Get Construction Estimates Early and Often
- Be Prepared for the Worst
- Be Prepared to Walk Away
We knew this property would be a challenge especially after the initial inspection and the list of items that needed fixed. We established a hard cutoff for maintenance at $40K. We knew anything over this amount would require too long to pull our money out. Remember, we plan to Buy, Rehab, Rent, and Hold for 10 years. This is concrete for us and has proven to be our backbone in all of our decision making. Additionally, through tons of prep work and communication with others we placed ourselves in a situation that allowed us to use all cash as a contingency. IF this is not available to you, just get more creative, be proactive because hard money and other lending is available.