Last week I referenced some “hard times” we came across when a deal we had been working on, for a month, fell through at the closing table. This deal was going to be A HUGE BREAK for us, with the highest potential return we had ever personally seen! To say we were excited was an understatement. This deal went under contract with my trusty TinyHome partners and it sat just three blocks away from our current Project Philadelphia. This property is a ~2,000 sq ft home that we were planning to convert into a triplex. We signed the purchase agreement on this bad boy on July 31,2018 and were set to ultimately close (well on a few different dates) but finally on August 29, 2018. The days leading up to August 29,2018 were NOT easy and just about everything that could go wrong did, so let’s talk about that.
So, as we do, let’s talk Real Estate, let’s talk THE DEAL THAT WAS NOT MEANT TO BE …
Let’s start from the beginning;
July 30 2018
On July 30th we received a phone call from a wholesaler we work with about this property coming on the market. We knew the purchase price, an idea of the renovation budget they had anticipated, and a rough ARV, but we had no pictures or any idea of the work that needed to be done. No one could get in the property to see it that day so we had a bit of time to call the contractor we work with and set up a meeting for him to tour it the next day.
July 31, 2018
The next day our contractor, and the wholesaler toured the property and gave us a rough idea of what work needed to be done. Once we got the confirmation from the contactor that the projected renovation budget was in line with what we were originally told, we pulled the trigger and signed a purchase agreement for the property sight unseen. Before anyone says anything, yes, I know I advised against this in a prior LTRE post, but we did it anyways – and hey technically the contractor had seen it! It’s hard for us New Yorkers (can I call myself that yet?!) to compete in the Philly market if we don’t live down there full time. So, you gotta do what you gotta do.
August 1, 2018
We start rapidly applying for funding. The original contract had a close date of August 19, 2018 so we had just about three weeks to find a lender and close the deal. We knew we were going to have to use hard money for this deal but we didn’t know who to work with. All of the reviews online revealed one horror story after another from working with HMLs (hard money lenders). After much research, we ended up applying to one we thought we really liked through a broker. Simultaneously, I also reached out to our insurance contact and asked him for a quote on this project – we would need a Builder’s Risk Policy for this specific property, and a General Liability Policy for this LLC.
August 4th – 8th , 2018
We feel relieved because we are told that funding is “under control” a full ten business days PRIOR to closing. Legitimately, I called the broker and the lender multiple times a day, every day, post August 1, 2018 to make sure that the funding was handled. Long story short – it turns out it was not. We were dragged through a whole list of shenanigans and ultimately we found out, through our own due diligence, that we were never going to be funded by this lender. Want to know why? Because of the zoning of the property. It was currently zoned for mixed-use / commercial space despite being set up as a single-family residence. We would tell lenders that we were converting it into a triplex but were many times immediately denied JUST BECAUSE OF THAT CURRENT ZONING. To us, it seemed crazy, because honestly the zoning was one of the things we loved about the property! We were obsessed with the idea of putting in a coffee shop or bakery or bar or something cute on the first floor – but no one we talked to wanted to fund that. Truthfully that part may have been a blessing in disguise because after more thought I feel like this neighborhood may still be a year or two out from being the “ideal” place for a little corner café.
Oh, I should also mention, during this time period I took a little trip down to Philadelphia so I could tour the place myself, and I am SO GLAD I did (you will find out why a little later on in this story). I took videos and brainstormed some design ideas as we walked through the property. I am sure my partners hate my property tour videos because I essentially talk to myself throughout the entire thing, but it’s just so I can remember what ideas I have while I am in the moment!
August 9, 2018
Now it is August 9th, six business day before the agreed upon closing date, and we DON’T HAVE A LENDER. Unfortunately this was not really a deal where we could just easily come up with the cash for the purchase and pull the money out later. We had six days to come up with AT LEAST the purchase price. So, we ended up working with a lender, referred by the wholesaler, to help facilitate the process – this part actually proved to be helpful! We got all of the documentation submitted later that morning and I thought we were good to go! So naïve of me…
Around 5 p.m. I receive a phone call from the new lender stating we must submit drawings for the project. I semi-freaked out – I am NOT an architect! Thankfully I had just seen the property and took lots of video footage. So, I quickly hopped on my laptop, checked out some local apartment layouts for ideas, and drew up some floorplans in PowerPoint. Upon completion, I sent these over to the TinyHome team and our contractor for review.
August 10, 2018
We make a few edits to the drawing and submit them to the lender! Now, I am off to my vacation – woo!
August 15, 2018
It’s appraisal day! All goes well, and we were told we would find out the results on August 18 (just one day before the original close date-talk about a close call). We end up pushing out closing one more day, because August 19, 2018 is a Sunday which doesn’t work for any parties. Closing is now scheduled for Monday August 20, 2018.
August 18, 2018
Appraisal results are in and the ARV comes in HIGHER than we had anticipated! This is GREAT news! BUT a higher appraisal came with a recommended increase in the renovation budget. We needed to increase our rehab budget outlined in the scope of work (SOW) by 26% more than we had originally budgeted for…We mull this over and decide we are okay with it because, hey the ARV was WAY higher than we had thought (as in 44% higher than we had thought – talk about A GOOD DEAL). Tomorrow, we would put all of the updates in writing.
August 19, 2018
We update the SOW and review it with our contractor first to make sure he agrees with the increased work items and the associated pricing we had estimated.
August 20, 2018
We are still working on finalizing the new SOW with our contractor and today is SUPPOSED to be closing day. Luckily for us, the title was not clear yet so we sign an extension pushing out settlement to August 23, 2018.
Later that day, we submit the updated SOW to the lender. Because we have increased the SOW and budget, we will also need to increase our Builder’s Risk Policy coverage – I reach out to our insurance contact again and he quickly updates it.
August 21, 2018
That morning, we are once again asked to increase our renovation budget… This time it was only by a very small amount, but immediately we start to wonder – is this lender just trying to nickel and dime us at this point?! I check in with the contractor to see whether or not he thinks we need to increase the budget based on the outlined scope of work (I know that’s probably not best practice but we did it)- and guess what he says… we don’t need to further increase the budget!
August 22, 2018
We spend way too much time “arguing” back and forth with the lender over this small increase in budget, however we realize if the lender had just come to us with this number originally, we would not have bat an eyelash. Their point was to make sure the job is done in line with the comps used for the appraisal, which in fairness I understand. SO, we add the 2nd small budget increase to the scope of work and re-submit it to the lender. Luckily, we DO NOT have to update our insurance again this time because we had left a little room for error and requested extra coverage to avoid having to be re-underwritten for the 3rd time.
Oh, and in case you forgot as I ran you through all of this craziness, we are supposed to close tomorrow… but the title is still not clear, so we sign another extension pushing this out until August 29, 2018!
August 23, 2018
Remember, how I JUST told you we pushed closing out until the 29th? Well, we find out this morning that the title IS actually clear, and we can actually close tomorrow under one condition – we need to show the lender proof of payment in full for a Builder’s Risk Insurance Policy. I quickly run to the bank, re-allocate some prior equity injections to our new LLC business checking account, and pay the insurance company over the phone. The insurance company immediately sends proof of payment to the lender who has now 100% confirmed that we can close tomorrow – woo! You may be wondering why I put off paying for the insurance until the very last second? Our Builder’s Risk Policy is NON REFUNDABLE so I wanted to be 100% sure the deal was actually going through.
Later that day we receive the HUD from the title company, and we can now see exactly what we need to bring (dollars wise) to the closing table. I quickly run to the bank (again!), and again re-allocate more of our prior equity injections into the new LLC bank account so that I can wire the money for the close to the title company. I wire over a bit more than is stated in the HUD, just in case there are any last minute changes to the HUD. At closing the title company will just reimburse you for any excess funds you may have sent.
The title company arranges for us to meet with a mobile notary in NYC so we can close remotely. By the way, for those of you who have never used a mobile notary, you can expect to pay a few hundred dollars extra to close remotely. Make sure you ask the title company, or your attorney, to outline any of these fees for you ahead of time!
August 24, 2018
CLOSINGGGG TIMMEEE. We meet with the mobile notary at 8:30 a.m. and sign all ~130 pages of the documentation. The HUD we are asked to sign this morning is NOT the same version I had seen the day before, and requires us to bring ~$200 more to the closing table. It takes us about an hour to finish all of the paperwork before it is sent off to the title company. We are so pumped and spend the rest of the day waiting to hear back from the title company for confirmation that the place is ours!
Fast forward 5 hours…
I receive a call around 2:30 p.m. and find out the seller is refusing to come in to close. This means that all of the rush from the day before and paperwork we signed this morning is now irrelevant and we will have to schedule another close at a later date.
August 25, 2018
We touch base with the agent and title company to try and figure out exactly what happened and when we can reschedule closing. Apparently, the seller had reviewed the HUD and did not realize how many judgments he would have to pay off in order to sell the property. The seller hired a lawyer to review this situation (hence last week’s post on understanding a HUD). We are told that we may not be able to close until Tuesday but NOW guess what?! WE can’t close Tuesday on our end as one of our partners is heading abroad for a couple of weeks and we need him at close to sign the majority of the documentation (FYI just to clarify, it is absolutely NOT his fault that he happened to be abandoning us for Europe during this crazy experience. His trip was planned way in advance and we had no clue this mess would happen. KF you deserve a vacation, especially after all of this, so absolutely go on with your bad self.). We inform everyone that the new close date HAS TO BE MONDAY. I want to note, that both the agent and title company were very accommodating with this “request”!
August 27, 2018
Today is Monday. We were supposed to close Friday. We either have to close today or not at all. I am going to break this day down by the hour because it required so much coordination and the events that took place this day were semi-unreal…
8:30 a.m. : We receive an updated HUD from the title company. They have waived the mobile notary fee we initially paid, and since our loan did not fund Friday, we now owe less interest at closing (small perk!).
10: 15 (ish) a.m. : I am asked to print out all of the documentation for us to sign (~130 pages). Since we had to schedule the mobile notary last minute he would not be able to print it out himself. I rush to Fedex, buy a new printer ink cartridge, and a pack of paper, and print this from my home.
11:00 a.m. : We are confirmed to meet with a mobile notary at 1 p.m. at a local coffee shop to sign all of the paper work. After all of the docs were signed, I would need to scan all of the pages, one by one, on my phone and quickly email them to the title company.
12:00 p.m.: Everyone agrees that scanning in the documents one page at a time, post signing, is super inefficient and the agent / title company move the meeting with the mobile notary to a Fedex location so we can use one of their scanners. I text my partners, to confirm that this works for them, finish reading through all of the documentation we were about to sign, quickly summarize it for my partners on post-it notes, mark every page that each of us has to sign, and run to the subway so I can be downtown in time to meet with everyone.
1:00 p.m.: Its go time (again)! We are all at Fedex but the notary decides this is not an ideal place to sign all of the paperwork… We spend 15 minutes walking around a hotel lobby looking for a place to sign everything. We ending up filling out all of the paperwork on the floor of a hotel lobby – I swear you cannot make this stuff up! It takes us about 45 minutes this time.
1:45 p.m.: The mobile notary, and myself, head BACK to Fedex and scan all 130 pages on to a USB drive. BTW this cost about ~$125- luckily the acquisition agent picked up this expense for us! I upload the docs to my personal computer, and email it over to the agent and title company in Philadelphia just in time for the seller to show up and sign his part of the paperwork at 2:00 p.m.! THANK THE LORD THIS IS NOW BEHIND US – so we think…
3:30 p.m.: I get a call from the agent on the deal and I am hoping he has good news! BUT, turns out, the seller did not show up at 2 p.m. and has texted to say he will not be coming to close at all… He will not return anyone’s phone calls. He technically could change his mind and show up by EOD but it’s not likely.
SO, what happens next? I immediately burst into tears IN PUBLIC; yes, I am openly admitting that. WE WERE SO CLOSE TO FINALLY CLOSING THIS DEAL. After my mini meltdown, I go straight into crisis mode to see what we can do on our end to get back any money we had already invested in this property (i.e. insurance costs, funding costs, mobile notary fees, etc.) Luckily, we have a prior business relationship with our insurance contact and he agreed to refund us the full Builder’s Risk Policy (~$4,000 salvaged-woo!). The title company agrees that the mobile notary should not be paid on our end and we are reimbursed for that (~$300 saved there). The next step is getting our money back from the lender- we had put up a $1,000 deposit for the loan. This is to cover the underwriting and appraisal fees in case the deal did not go through for any reason. Unfortunately, we were not able to get this lender “deposit” back, however they have agreed to let us use it as a credit towards a deal in the future.
SO, WHAT DID WE LEARN FROM THIS CRAZY MESS OF AN EXPEREINCE?
A LOT – but my three biggest takeaways are…
(1) Do not put all of your eggs in one basket. We had focused SO MUCH of our time and energy into this ONE deal, so when we lost it at the last second, it was essentially a month’s worth of work wasted. This lesson learned is not only true for this deal, I have been guilty of this all along. We are always either focusing on ONE city, or ONE deal, or ONE type of deal and today (seriously today as I am typing this) that changes. We are expanding into new investment methods – wholesaling here we come – stay tuned!
(2) Relationships are important – because we had worked with our contractor, our acquisition agent and our insurance agent before, we were able to act swiftly and financially “recover” that much quicker when the deal fell apart. THANK YOU to all parties who were involved in trying to make this deal happen, AND all who were there to help clean up the mess.
(3) LEARN from the experience and MOVE ON. As a “business owner” you spend a lot of time reflecting on what you could have done personally to prevent anything “bad” from happening (which is truly humbling). You can try and be on top of EVERYTHING (trust me, I am OCD and sometimes get myself over-involved to the point that it might actually be counterproductive) but at the end of the day, some things, are unfortunately out of your control. THIS STUFF HAPPENS in real estate (& life) so just learn from these experiences and move on!
I know this week’s LTRE was LONG, and if you made it to this point in the post – THANK YOU! My point of ALL OF THIS was not to complain, or throw a pity party… Rather my intent was purely to KEEP IT REAL – even if that means sharing some of the bad that comes along with real estate investing.
Alright sob story is now officially OVER. If you have ANY questions or suggestions on this deal, OR have been through a similar experience – let us know!
Feel free to comment on the blog post HERE and let us know what YOU think!
We are now on INSTAGRAM, FACEBOOK and PINTEREST!
Follow us on Instagram : @letstalkRE
Join our FB community on our LETSTALKRE page : https://www.facebook.com/LetsTalkREbyEO
Check out our PINTEREST inspirations here: https://www.pinterest.com/erinhomeandrealestate/
All data and information provided in this email is for informational purposes only. This email makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.
Data Sources for Today’s Content:
ME – this week’s post is based on my personal experience and findings