I think the major difference (for me) between buying equities versus buying real estate is the complexity of the deal. I was very excited about my recent possible real estate deal, it felt perfect! Financing was done, the home had equity built in and I even had a tenant that cared about the home…and then I had an inspection done on the home. Given the title of the post, I am sure it is evident that this particular deal didn’t work out (again).
Not only is real estate local with regard to understanding value, market, etc., the customs when it comes to closing and contracts is also very different from State to State. In New York, when you are buying a residential property from another owner you don’t get any warranties from that owner. I know this sounds completely foreign to people in other States or Countries. It used to be caveat emptor and then in the early 2000s the law changed to make disclosures mandatory, or,
pay a credit of $500 to the buyer at closing. While the PCDA requires you to complete a standardized disclosure statement and deliver it to the buyer before the buyer signs the final purchase contract, in practice, most home sellers in New York opt not to complete the statement and instead pay the credit.
Well, who wouldn’t just credit $500 instead of opening yourself up to litigation? It is the best insurance one could buy! I can tell you one person who didn’t, my mother in law when she sold her mother’s property upon her death. I pleaded with her that a $500 was well worth the price of admission. She didn’t listen.
This little nuance in NY law didn’t really matter much as the home I was going to purchase was a short sale. A short sale is a,
a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A Short Sale is not to be confused with a Short Settlement.
A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) The Lien holder(s) (a.k.a. Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm’s length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property’s Appraised Value.
Basically the bank is trying to avoid the long, costly process of a foreclosure and kicking people out on the street. So, they will take a lower sales price and usually pay the occupant to get the hell out. A short sale never comes with any warranties so the inspection was extremely important, and mine did not go well at all. Just some of the problems the inspector came across:
- Brick work problems that most people could live with, but a tenant or a tenant’s guest may trip on;
- Water damage in almost every single room – one was so bad that I put my finger into the hole and felt dampness;
- An extension not built to code;
- 3 layers of roofing already laid and there is still warping in the 3rd layer;
- Almost every windowsill had rotting from the outside;
- Skylights looked like they were original from the 50’s and did not look like they were great shape; and
- These are the problems that I saw! Who the hell knew what was behind the walls that was already patched up!?
I just imagined the moment ownership was in my possession getting a phone call about all the water problems that the current owner/new tenant has had for the past however many years he has been living there! All of a sudden I open up a wall to fix it correctly and I find a wall of black mold that is now my responsibility to fix.
The Future of this Particular Deal
Given the terrible inspection, at the current asking/bottom line for the bank, the deal didn’t feel like a first time landlord’s rental. To be honest, and a bit frustrating, the deal feels like a pretty good flip for someone who can control costs and fix things pretty cheaply. There is a lot of work to be done on the house, and I just don’t feel like a bring a lot of value when it comes to that area of real estate.
Notwithstanding all these problems, I came back with a counter offer of $50,000 less than what the bank agreed upon already. I figured what the hell, at another $50k less I can deal with some headaches! In the end this will be another dead deal, but I’d rather 22 dead deals than 1 shit deal that gives me headaches for the next 10 years.