Real estate investors sometimes have to walk away from a bad deal

Real estate investor Justin Pierce writes an occasional column about his experiences buying and selling houses in the Washington area.

I have written before about how persistence is critical to success in real estate investing. But sometimes it’s wise to walk away from a potentially bad deal.

A real estate wholesaler brought a property to my attention. A real estate wholesaler is someone who finds deals for other people. The wholesaler usually doesn’t take possession of the property; instead he gets a finder’s fee from the end buyer.

This property was a very small single-family home in Southeast Washington about a half mile from the Metro and about a mile from Nationals Park. The asking price was $115,000, and the wholesaler valued the property at $240,000 after about $50,000 in fix up costs. Those numbers suggested we had a very solid deal.

However, when I pulled comparable sales I wasn’t comfortable with the $240,000 value, believing it would yield only $200,000 to $220,000.

I told the wholesaler I was in for $105,000 and I’d be willing to pay a bonus if the home sold for more than $220,000. We did the paperwork and I promised a $2,000 earnest money deposit to secure the contract.

Since I had six deals going at the time, I had to reach out to my network of lenders and investors to seek capital. Immediately I ran into roadblocks. One lender had a very bad experience in the area and was not interested. I sent it to two other investors and they also passed on the deal. Yet I persisted.

Still, the lack of backing, a full portfolio and the increased risk forced me to reluctantly relent. I went to the wholesaler and told him that I couldn’t get the deal done. I absolutely hated doing this. In this business you either make a reputation as someone who can get the deal done or you’re a waste of time and people start taking their deals somewhere else.

Upon hearing of my problems, the wholesaler went to the owner and got the deal down to $85,000. Now, I was certain I had a deal. I had two investors ready to provide funding. Because of the neighborhood and other factors, I decided the plan would be to take this property straight to auction rather than rehabbing it myself — a true quick flip. This is not something I do because I pride myself on adding value to the product, but I thought there was probably someone else out there who could handle this neighborhood better than I could.

With less than a week until the closing date, I continued my research and due diligence. I called the best auction company I knew and officials were not interested in the deal. So, now I was left having to allocate precious resources to this deal if I wanted to proceed.

I made several trips through the neighborhood and I found a flaw in my numbers. Normally, I am comfortable with comparable sales within a half mile of the property I’m interested in, but in this area that was not the case. I found that all of the best comps, while located within a quarter mile of the property, were in a different neighborhood. If those comps were removed, my resale value suddenly dropped to around $150,000 to $180,000.

D.C. has a law protecting its residents from foreclosure, which is great for residents but bad for new buyers — especially those in the entry-level market. It’s harder to get a loan in D.C. because the lenders know it will be difficult to get the property back if the buyers stop paying the mortgage. Because of that, lenders are more selective about who they approve.

I did not want to walk away from this deal. I had given my word by signing the purchase agreement. Pride and ego also pushed me forward. I never walk away from deals that I promise I can get done. And, of course, there was a $2,000 earnest money deposit on the line that I didn’t want to lose.

However, the facts were overwhelming. I informed the wholesaler the day before closing that I couldn’t complete the deal and I cut him a check for the earnest money deposit and offered many apologies. There may have been some money in the deal but the risks and unknowns were too great.

On the upside, I got a $2,000 education in humility.

Read more about Pierce’s experiences as a real estate investor.

Justin Pierce is a real estate investor in Northern Virginia. Follow him on Twitter at @justinpierce1.

 

 

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