Continued from Part 11: Her next step was to call Stu D. and ask him to arrange three days next week and another three days two weeks later so she could have different contractors inspect the property for repairs. Mr. Chicken flew right to the ceiling at that request.
“No! Not a chance! The tenants wouldn’t agree for more than one – if that! – inspection”.
Emily argued that if she made an offer, it would be net of repair costs. Didn’t he need a minimum of five or six bids just to show the sellers? Stu D. didn’t give an inch: “Don’t worry about me! One inspection! Only one and that’s it!”
She smiled at her outrageous request for six inspections spread over three weeks as she put her phone back in her purse, well satisfied with herself. First, she will be inspecting the property before making an acceptable offer. That was unheard of. Secondly, the sellers would not have several bids to cross-compare. There would only be one, and she resolved to make it as high as she could.
Emily drove through the most expensive residential area in town, hitting all the side streets, looking for those signs contractors put up when they’re remodeling homes. She found four different signs and made a note of the names and phone numbers. Her intention wasn’t to get four bids, Stu D. had already shut that door. Her hope was that at least one of those four would be interested in quoting on the fourplex. Thanks to Stu D., a single general contractor was all she needed. She wanted the initial repair bid to be high. There would be time to whittle it down afterwards.
Only one contractor agreed to look at the units, and wanted to do it on the following Wednesday. Emily made appropriate arrangements with Stu D. When the time came, Stu D. accompanied Emily and the contractor during their inspection, mostly just to unlock the various doors. He didn’t seem much interested and kept looking at his watch. Emily stuck closely to the contractor and smiled and nodded a lot. She wanted to encourage him when he talked about the need to totally remodel kitchens and baths (“But then I’d probably need new electrical and plumbing as well, wouldn’t I?”) for entirely new HVAC, roof and windows, replaced flooring, and grading to slope the ground away from the foundation.
Emily got the official bid a week later. It was a touch over $190,000. She opened the calculator in her phone and tapped in the numbers. If the one bedroom units were in marketable condition, the bank would loan $460,000 and repairs came to $190,000. That meant the current value of the property as it stood was $270,000. Emily somehow neglected to add her down payment to the mix. If anybody caught it she would say something, she didn’t know quite what. If they didn’t, then it probably wasn’t important to them.
She called Stu D. Chicken. Stu D. shared a desk with an elderly woman with a short “boyfriend” haircut and spotless white nurse’s oxfords. She seemed sweet, but reeked of a musky perfume and had the sort of hoarse voice Emily associated with unfiltered tobacco. After a moment or two, Emily and Stu D. were left alone. Emily reached into her purse and withdrew four sheets of paper. At the top of the first sheet was the math for a maximum loan based on a $4,000 monthly income. Somehow – maybe she overstated expenses or something – the maximum loan came in at $395,000.
Next, Emily itemized every little thing wrong with the property. She used figures rounded well up, just to be safe, from both the housing inspector’s report and the contractors estimated cost to cure, but did not offer to show the original estimates. This consumed pages two and three.
Then, on page four, Emily deducted repairs, she unofficially called them “Health and Safety Items”, which totaled $240,000. She subtracted repair costs from what she claimed was the maximum bank loan on the (repaired) building and came in with an offer of $155,000. Even as she wrote it, Emily thought that figure might be a little aspirational.
Stu D. responded as though the offer was not just aspirational but frivolous. “They want $550,000! If I could get it for that price, I’d buy it!” He couldn’t, of course. His Visa had a $4,000 limit.
Emily agreed that if the property was pristine it might – might – be worth more than $395,000. But it was almost a tear-down. “We’re pretty much talking land value here, Stu. Don’t you agree?” She found that asking for agreement during negotiation improved the tone of the discussion. Anyway, it usually worked when she shopped the estate sales.
She revisited the listed price of $550,000 and began a classic 2-Step “Inquire and Support” program:
Step 1: Inquire
Place doubt into the seller’s (or agent’s) mind. “Stu, how did the sellers come up with over half a million dollars for that property? Did they get a written appraisal? Can you show it to me? How old is the appraisal? Did the appraiser make the same Condition adjustments as you just saw from the licensed and bonded contractor that I introduced you to? Then how did the appraiser arrive at repair estimates? Did he even get official estimates, like I did? How long has it been on the market? How many offers have there been? You’re an expert, Stu. If the market was willing to pay that price, wouldn’t the property have sold by now?”
Step 2: Support
Show that your offer is supported by market data. “Well, the bank won’t lend anything on the property in its current condition. If somebody could get a loan, it would probably have sold by now. You now that, because it’s been on the market a l-o-n-g time and nobody’s bought it.”
“Why don’t you get in my car and let me show you some recent comparable sales so you can show your clients what a $550,000 property looks like.”
Negotiations went through four offer / counter-offer exchanges. Emily sort of dragged her feet during this period. She sensed that the five heirs had grown weary of the property and really wanted to sell. The longer (within reason) she could drag the process out, the more hungry she hoped they’d become.
The final purchase price was closer to Stu D.’s listed price rather than Emily’s aggressive initial offer. In exchange for Emily’s flexibility, all parties agreed that the property would be vacant and broom clean on the final inspection one day before escrow was scheduled to close. They agreed on a purchase price of $400,000. Repair costs would be Emily’s responsibility, so she had to buy it “as is”. To protect herself, she made the purchase contingent on getting a loan for no less than $590,000 (including repair bids).
Emily’s loan officer was adamant about being forthright with the bank. She inquired about the possibility of adding into the loan the cost of remodeling the four units to 3 bedrooms each, and was denied. FHA loans could include repair costs, but not money to add rooms. The broker did, however, negotiate permission for Emily to use her own money to add the rooms. The bank stipulated that this could not be done at the same time the rest of the property. The bank was clear: “whatever you do with your own money after the loan closes is up to you”. On the day of funding, however, the property has to have no more (and no fewer) bedrooms than are legally permitted.
The incentives broke out thusly: If another agent had sold this property at full asking price, Stu D. Chicken’s office’s share of the commission would be half of 5% of the original $550,000 price, or $13,750. Instead, his office got all of 5% of $400,000 ($20,000). In either case, Stu D. would get a part of what the office received.
The five heirs would each have had $110,000 (minus commissions and costs) at a sales price of $550,000. Under the final agreement, they got $80,000. They accepted this because . . . bird in hand.
In exchange for a 5% down payment (in this case) and normal fees and expenses, Emily got a 30- year fully amortized fixed rate loan for $560,500 on the four one-bedroom units (purchase price of $400,000 plus actual repair costs of $190,000 minus the down payment). If she was careful, that would leave her enough money to add the bedrooms with her own money.
The first half of her plan was successful.
This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional.
Klarise Yahya is a Commercial Mortgage Broker. If you are thinking of refinancing or purchasing real estate, Klarise Yahya can probably help. Find out how much you can borrow. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected]
If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at www.LuLu.com