I just closed on my fifth property the day before Thanksgiving. I sold my primary residence I lived in Denver and rented out before I moved out to California. So this leaves me with four properties total. Each one is getting a little bit easier and I’m feeling a lot more confident in the process. However, it has been very slow going. I want to share the three biggest lessons that I’ve learned in acquiring this property. You don’t have to make the same mistakes and hopefully, your journey will be a lot faster than mine.
1. Set clear expectations up front with sellers to avoid heartache on both ends
This property came across my desk from my caller. If you don’t know, one of the main ways that I get property leads is I have a cold caller working for me out of Pakistan. He calls for about 20 hours a week which is sufficient generally to get between 5 to 10 leads per week.
I knew that this property was probably going to be a good deal as the cold caller notes had indicated there was some distress on the seller’s part. She was looking to sell very quickly and was highly motivated to make a deal happen. Everything started off great and I was able to quickly develop a strong rapport with the seller.
Where I fell a little short on the sales process is that I was not able to lock her down into a contract. Therefore, she spoke to other investors after we had agreed on a price and had driven up her offer by playing my offer off of others. This was the first part where I didn’t set clear expectations. I should have used some sales strategy such as scarcity, telling her that I can only offer her this much money today and needed her to sign quickly. I want to avoid conflict with the seller and am not as persistent in getting the contract signed as I should be.
We had agreed on a price of 135k. After speaking to other parties, she had an offer for 145k. Because I had done a good job of developing rapport, she decided to move forward with me as the buyer. I sent over the contract via DocuSign and assumed that if she had any questions she would reach out. Here’s where things really started to go off the rails.
First, the seller assumed that once she signed the contract that money would appear in her account immediately. She did not understand that we would have to use a title company and that it may take some time for that to occur. The closing was scheduled for 30 days from the contract signing. She needed the money in order to move out of the house ASAP. This led to many frustrated calls from her to me. She asked why the money wasn’t available when it would be there, what the exact timeline was etc.
I always try to do the right thing. And on this property I’m proud to say that I was able to move closing up 2 weeks.
The next problem was that I didn’t have 145k. My plan with this property was to wholesale it but I didn’t find any interested parties on the buy side. Because I needed to put some money to work, I decided to just keep this one for myself anyway. But this meant that I need to get a hard money loan and that’s what I did. The hard money lender that I ended up working with was fantastic, however, it did take the lender about 2 weeks in order to close the property.
I feel that if I had thoroughly explained the timelines and set expectations with the seller that it would have given me a lot of grace on her end and led to a lot less stressful situation. At any point in the contract, I could have just canceled and would have lost my $100 earnest money. But I didn’t feel right about doing that as this lady really needed my help. It was extremely stressful though dealing with her calls and trying to reassure her that I am not ripping her off and that this was all a normal part of the process. We eventually did get the deal done but that emotional stress was not something that I really want to be adding to my life to a large degree. I take full responsibility for this though.
If you’re working direct to seller, the best advice I can give you here is to explain things in such a way that a child could understand them. Also, be very clear on timelines. You may not always know what the exact timeline is and that’s okay, but give the seller a range of time. For instance, we have up to 30 days to close the property but most of our closings happen within two weeks. Once the property closes the money will be dispersed to you via check or wire from the title company and that may take up to 24 hours. Do you foresee any issues with this or do you have any other questions that I can address about the next steps, who’s involved, and how the process normally goes? That may have saved both the seller and myself a lot of heartache on this property.
2. Relationships get the deal done
While I was trying to find financing for this property, I ran into some problems. For those that don’t know, my strategy is BRRRR. This means that I buy properties with either cash or hard money or private money. I then fix up the properties and either sell them for a profit. Or I refinance the property in order to pull out my initial investment. The refinance money goes to pay off the initial hard money lender and I can usually get my cash back as well.
There were 30 days to close on the home but I need to find a lender. I shopped around for a few hard money lenders that I like to use, but most of them were acquiring too much money and had too many fees. I then remembered the first hard money lender that I used, hard money Mike. Hard money Mike was very personal and work with me on my unique needs to get that deal done. I had moved away from Mike because I was trying to work with a lender who was able to do the hard money loan and the back-end financing. But I needed some other options so I gave Mike a call. He ended up being the cheapest and most flexible option!
I’m going to bring my deals to Mike going forward. He and his team have been so easy to work with and this will be a much better fit for my business. I don’t know about you but I often do things as a lone wolf and greatly discount the value of relationships. I’m going to try to learn from this mistake and really focus on developing and strengthening relationships with key partners. And in real estate? Unless you’re already very wealthy, your lender is going to be a major partner.
3. Stick to your numbers and don’t buy properties for emotional reasons
As of right now, I’ve owned this property for about 1 week. As I said before the purchase price was 145k. I was able to purchase it with about 4k and fees. This is pretty standard for Missouri where I invest, and the type of loans that I use. The issue here is that we are in a declining market. Recently the Fed greatly increased its rates and general uncertainty in the financial markets. The property will be worth 185k when it’s all said and done depending on the level of rehab that I do.
That’s a nice bit of equity gain. According to my general contractor, it’s going to cost about 15k to get it up to speed for a rental. Therefore, I’ll be all into the property for 145k plus 4k + 15k for the rehab so I will be into the home for a total of 164k. Now, that doesn’t really sound too bad, right?!? You buy a property for $164, 000 is worth $185,000. The issue here is that I only know of lenders that will do 75% LTV financing. LTV stands for loan to value this just basically means that a lender will give me 75% of whatever the appraised value of the home is.
75% of $185,000 is equal to $138,750. Therefore, I will be leaving $25,250 in the property after the refinance. It’s not a bad wealth builder as you’re gaining 21,000 in equity for 25,250 in costs. There are a couple of issues with this though. The first is that you need to have 25 thousand dollars to leave into the property and now I’m not able to get more homes because I sunk all that money into this one property. How many deals can most people do? If they have to leave 25k into each house? It’s cheaper than buying them straight out, but still, it’s slow progress at that rate. The other issue is that the 21,000 and equity would not be realized if I saw the home because I do have to pay agent commissions and title work. So I probably only have 10,000 in true equity.
So how could this problem have been avoided? Well from the beginning my number was a little high. I knew that the homeowner was motivated. When she said that the home would sell for $135k I thought the spread would be high enough to justify either a wholesale or straight-up doing the work myself. Even at those numbers though, they were too high.
To be at a comfortable wholesale I really needed to get the home closer to 110. And if I was going to keep the property for myself, a better number would have been 120k. I got so caught up on having a deal on my hands initially. I offered more than I should have. Then when the seller countered with the other buyer it made me feel like if they’re willing to pay then there’s something I’m not seeing here. So I should be willing to pay as well. My ego just wanted to win the deal.
I can see that this would be a very slippery slope in which you could get yourself into trouble. By running away with your emotions and not sticking to the numbers you end up trapping money or worse losing money altogether. My advice on this to my future self and to you is to run your numbers before offering. Then go into your negotiations with that number in mind. In this instance, I should have started with an offer of 115k. When she inevitably countered I could have come up to the 120 or maybe 125k.
I am proud of getting this deal across the finish line. While it wasn’t perfect and it wasn’t always smooth, I feel that it is a step in the right direction. I’ve been sitting on cash for the majority of the year and needed to put that money to work. Also, I’m learning and growing in my experience as a real estate investor. So I would encourage you to do the same. All the reading and the books in the world are no substitute for taking action and learning on the job.
If there’s anything that I can do to help you on your journey or you have any questions please reach out!
To your success,
Tim
