Knowing When to Walk Away from a Real Estate Investment Deal

We’ve been struggling to put a real estate investment deal together lately. When we returned from Mexico we hit the market hard – looking at 20 or so properties in just a few weeks. We made quite a few offers but didn’t get very far with very many of them at all.

running away

In fact, we’ve actually found ourselves faced with some downright stubborn sellers and ridiculously bad real estate agents. Here are just a few examples of the road blocks we’ve hit recently:

  • The sellers agent who had his Mom call our agent about our low ball offer,
  • The seller where we’re $5,000 apart from doing a deal. The $5,000 makes a difference to us but we wanted to do the deal so we offered to split it with them. The seller refused and has recently informed his agent that he expects to get a much better price in the spring market,
  • The sellers who have moved out of their home and refused to even counter our offer – which was within 5% of their ask price.

We really like the home where the agents Mommy called our agent so we actually sent our agent back in with a new offer that was nearly $10k higher but required them to finish most of the incomplete work in the home. They want full price. Period. Everyone was more civil about it this time around but we still didn’t get anywhere.

We’re going to pull up some stats to verify this, but there are a lot of people out there looking but not buying. Right after Christmas the market picked up big time – and homes were getting shown several times a day. I will be interested to see what the January stats show but my feeling is that there haven’t been that many sales. Most listings we’ve been watching are either on the market still or went off market – they didn’t sell. Despite a lack of sales, the pick up in activity with more people viewing homes seems to have sellers holding on to the belief that their home is going to fetch a bigger price.
So – we finally get a seller to come to an agreement on a house that is in one of our target areas. It’s not our top choice area but it’s one that works for us and would be a good one to put into our rent to own program. Yeah!! An accepted offer …
As much as I liked the home and felt it would show fairly well with minimal amount of work on our part, the home did have one red flag for me right from the start and that was a lot of evidence of DO IT YOURSELF work. That’s a red flag for us because you never know how many different things someone tried to do themselves. Laminate flooring poorly installed is one thing – electrical and plumbing work badly done is another.
So we sat down with the inspector fully expecting some issues requiring a little work here and there. Instead of little issues here and there though – he found the home to be in pretty good condition – with one big exception.
Inside the attic he found mold and mildew on the north-facing side of the roof. It wasn’t horrible but it was definitely there. Additionally he found a major leak in the garage – which we had expected because it was disclosed to us by the sellers – but the extent of the leak was worse than we had expected.
We asked for our subject removal period to be extended and requested access so we can have the issue assessed by a restoration company and our roofer.
Long story short, the sellers took immediate action and got a restoration company in there the next day to begin repairs. The issue was immediately addressed. We were impressed at their swift action.  And we were pleased when we spoke with the restoration company because they felt they had identified the likely cause of the issue and had fixed it (insulation in the soffits). All was going well until we asked for a piece of paper/guarantee/warranty on the work they’d done. The work had been done “off the books” because the seller was a buddy. In other words – the seller saved some money but now we had nothing to show the work had been done (nor could the company “guarantee” the work because it was off the books). The risks we’d be taking on with this property were starting to pile up but we wanted to make the deal work so we:
  • asked if the seller would pay the extra few thousand dollars to put the work on the books so we could get our warranty – they refused,
  • asked if there was ANYTHING the restoration could give us besides their word that would verify the work had been done properly but there was nothing they could offer,
  • researched the reputation of the restoration company – they were highly respected,
  • asked our inspector to go back in and look at the work that was done (he used to be an insurance adjuster so he has some expertise) and give us something to say the work appeared to be done as stated.

It wasn’t an ideal situation by any means but after doing the above we assessed our risks. There was no mention of the “m” word any where the bank would see it, our insurance doesn’t cover mold anyway so they don’t care about preexisting conditions, which left our main risk with the tenant buyers (when we would do the rent to own) asking to see an inspection and getting freaked out over the initial report.  We figured that issue could be mitigated by getting a new inspection report completed by a different inspector if required.

We checked with our joint venture partner to make sure he was comfortable with the situation and with what we’d done and we carried on to address the issue of the leaky roof.
Our roofer took forever to get to the house and when he did he had nothing good to say. He made comments like “In my 40 years I’ve never seen a chimney like that” and “You can fix this but then you’ll have to put new siding on the house” and “I could put my fist through the hole”.
None of these things were good, and just like in baseball this house had three strikes and was now out. 
By this point we’d invested 20 or so hours into this property, and we’d invested over $500 in the due diligence but there’s a good chance that house is a lemon so we walked.
It wasn’t easy to walk from the deal but we have owned lemons before and we know how quickly you can lose money on a bad house. So today we wanted to share the story with you and give you a little list of red flags we watch for. As you learned in this story, one or even two red flags if the issues are minor or understandable are not enough to make us walk but as soon as a third red flag comes up – no matter what it is – we’re out.
Red Flags to Watch For:
  • Signs of do it yourself work (poorly installed flooring, disorganized wiring in panel boxes, faucets that don’t work right, leaks under sinks, finishings are just not quite right),
  • Evidence that the owners cut costs wherever they could (the sellers in this case would rather save a few thousand dollars on the restoration work than get it done properly with the right documentation),
  • Sellers that are anxious to sell but the reason is not clear to you,
  • Evidence thatthe owners are hiding issues with the home:
    • New paint in odd areas … it’s often used to cover up rotting wood. It’s also used to cover up water damage.
    • Shelves and rugs placed over top of holes or other issues. Be curious – look under rugs and behind shelf units and pictures.
  • Work done without a permit– we don’t get hung up on people that finish off a basement without a permit unless they put in a bathroom or add a kitchen. Work that is done without a permit can cause you issues if you ever want to do work with a permit but otherwise there’s no need for that to be a deal breaker. But the real red flag is the fact that anything involving electrical or plumbing work has either been done by the owners, a handyman or someone willing to do work without the right permits. We have a team of exceptional guys and they don’t do work without a permit. So if someone has done work on their home that would have required electrical or plumbing work then you have to wonder who did it because the good ones aren’t likely to do the work without a permit.

There are lots of things to look for in a home but these are just a few of the issues we’ve learned the hard way over the years. And since we painfully had to decide to walk from this home recently we thought we’d share the store and our lessons with you.

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If you have questions about points raised in this post, or if you’d like to learn more, then send us a message and we’ll get back to you as soon as we can.

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