Real Estate Investing – Stop Thinking about Doing It, Go Out and Do It
Dave: Hi, I’m Dave Dinkel. I’m here today with Lucas Machado. Lucas happens to be rookie of the year for our mentoring program last year. But he had a very interesting deal and there are a number of things that are brought up. One of which is persistence to get the deals done. What was interesting to begin with is this property had been listed for two years, originally, started out almost $300,000. And you came along and what was your first offer?
Lucas: My first offer I believe was around $60,000, $63,000. I think it was $60,000 and then we negotiated a little bit and settled on $63,000.
Dave: OK. Now, the property was actually designated as a commercial property. It was 609 square feet. So it’s not palatial estate or anything but it was in a very good location and it had the potential to be a nice little restaurant. It was for years. Closed for whatever reason. So you have it under contract. And when I originally spoke to you, I said, “How much was it?” And I said to you, “If you don’t find a buyer right away just go ahead and close on it because it just looks like a steal.”
Dave: It was a 10,000 square foot long or something.
Dave: So it was a big lot. It had a lot of parking but very small – it’s like a fast food place but a homegrown fast food place. So you put it under contract but we advertised it and we found a buyer for it at roughly at $25,000 more.
Dave: And that was the good. news.
Dave: Now, what happened after all that easy stuff?
Lucas: First thing we did was once we had a buyer, we brought GAIA in to do an inspection.
Dave: That’s GAIA construction.
Lucas: Yup, GAIA construction. And they gave a report saying that the thing basically needed to be demolished. I would pay more to fix it up than I was buying it for. So I asked the seller for a reduction, a credit or repair credit on HUD. Then we agreed on a $5,000 credit. Now we’re getting there for 58.
Dave: So you paid a couple hundred bucks for the contractor’s estimate on repairs and they cut you back 5 grand.
Lucas: So then we started doing the lien and title search. We knew there were a couple of small things that we’re going to come up. There were a few overdue utilities bills that the seller knew about and they were going to take care of. There were a couple of open permits which no one thought was a big deal. It was a minor electrical permit for like valued at 250 bucks and then a minor fence permit. And then there turned out to be over $30,000 lien for a loan that was taken out with the city.
Dave: And these are typically called CRA loans or small business loans although they are not through the small business association, typically through the city. And what they are is they just give them money with the expectation they’re going to get paid back. But oftentimes, they don’t have expiration dates. They don’t have interest on them. That’s what this was.
Lucas: Yeah. This one had no expiration date, no due date, no interest was accumulating. So it’s just sitting there.
Dave: And they never made a payment.
Lucas: Yeah. And in theory, my buyer could have bought it with it on there and then sold it years later to someone else with it still on there and you could just live and live and live.
Dave: Yeah. We just saw a 15-unit building that had a similar problem with it. And the end buyer wouldn’t take it with it on even though he knew he didn’t have to pay it off he wanted to pay it all.
Dave: So they can be headaches. But in the interim, what’s interesting is for two years, it couldn’t be sold with all the price reductions. And there was nobody really looking at it. Otherwise, they wouldn’t have entertained your offer. But once you we started advertising it, we had like a firestorm of people.
Lucas: I got a ton of interest, a ton, even just through Craigslist and through our email. Probably showed it at least 10 times. In the end, we actually had 2 buyers vying for it at the last minute. And one buyer’s deposit and contract came in first so that’s the one we went with.
Dave: So it sounds like that’s the end of it. But that’s not the end of the story, is it?
Lucas: No. So, the issue with the CRA loan is that the paperwork that we got from the city was incomplete. The note was signed by people who didn’t own the property and there was no other document corroborating that the owner of the property at the time had approved for the loan to be taken out and the lien to be placed on the property. So basically, the seller didn’t know anything about this. They had inherited the property so the people who might have known about it in the past. And so, they didn’t want to pay it. Basically, went back and forth for a while, asking the city if they would just either produce the document that proves that it was taken out properly, the loan, or just make the loan go away.
Dave: And they weren’t cooperative. They finally came back and said, “Pay it.”
Lucas: Yeah. It was like December 10th or 15th or so when we got the lien search back and started going through all this. And then with the holidays, the attorney at the CRA office of Hallandale is out of town for a couple of weeks and didn’t hear back until January 9th on their answer.
Dave: So now, you’re faced with, uh-oh, the original seller has to pay if off or you do, which wasn’t an option. And you went back to him and you got him to agree to paying it off. However, that was still not the end of it.
Lucas: Yeah. I was actually pretty concerned that we weren’t able to convince him to pay it off just because if you think about listing this thing for over two years starting at $300,000 then come to the realization, “Maybe I’m just going to walk away with 50 or 55 or so.” And then the CRA loan pops up and you’re like, “OK, maybe I’ll walk away with 20.” It’s just very different than what you initially set out to buy it.
But they agreed to pay it off. The problem was is when all this was going on, the end buyer got pretty impatient and was like, “I want to get in there and start doing my rehab and all that.” And I kept holding him off. And eventually while we were still waiting for the attorney to get back to us, he said, “You know what? I want to buy the property with the lien on there. Just give me the reduction. As far as you’re concerned and as far as the seller’s concerned, it’s a wash financially so I want to buy it with a lien on there.”
The problem was is that once we got an answer back from the city that they weren’t going to make it go away, all parties except for the end buyer, really wanted to close the lien out as part of the closing to just get it out of the way and get that thing wrapped up. Their underwriter didn’t want to insure it as it was, it must be closed out, et cetera.
So I had gotten the seller to agree to dealing with it and I knew it was a deal so I didn’t want to waste any time and have them change their minds. So I just went ahead and closed myself while I continued to work with my end buyer to just close on the property as we agreed. He had agreed to take it in December with the open permits.
Dave: Yeah, well the open permits were easy.
Lucas: And that’s what we had achieved. And now, he was saying that he wasn’t going to close.
Dave: Did the end buyer have an attorney?
Lucas: He did have an attorney. I actually – for the majority of the whole ordeal, I mostly spoke to the buyer just because we had built a relationship and I didn’t know who his attorney was. That introduction was never made. But once we got to the point where the buyer was kind of being crazy about buying this thing with the lien on there, I thought to myself, no one can seem to make him understand that it’s way better this way. He says that his attorney is signing off on him wanting to do it this way and that seems crazy to us.
Dave: Oh, it doesn’t seem crazy to me. I’ll tell you why. The attorney is really rather shrewd. He understands that if the end buyer got a reduction of let’s say $30,000 to make it easy, he would never have to pay the $30,000 back. He could go for a quiet title action because it’s been on the property for more than 5 years with no anything happening, no pre-foreclosure, no foreclosure and then it would get wiped off. So the attorney wasn’t stupid. He knew what he was doing.
But in the traditional role of things, the title company wanted to give a clear and marketable title with the exception of the liens. So their attitude was to pay if off so no one comes back. But I would have tried to do the same thing frankly and just stayed in the place forever.
Lucas: Well, I eventually talked to the attorney and tried to see if she and I could get on the same page and then she could talk to her client into doing it. But she couldn’t. She was pretty much on the same page as him. If I they had explained as eloquently as you did, I would have understood. I don’t know that they were savvy enough to – but that was their ploy because it never came up.
Dave: Yeah. But it’s a good viable ploy. It really is. I mean sometimes you see these and don’t be afraid of them. Always get legal advice on them but they are a real opportunity. So any rate, at that point, somewhere along the line, the end buyer said, “No more. I’m not doing it.” Right?
Lucas: Yeah. I mean he just kept insisting that he wasn’t going to do it and I just was like, “How long are we going to wait? How long are you going to sit on it?”
Dave: OK. So now, we start looking at, well, he has defaulted, breached the contract. So we’re going to get his escrow deposit which was $10,000.
Dave: Who held that escrow deposit?
Lucas: Independent Title
Dave: OK. So the reason I mentioned that is this thing was getting the escrow deposits, rears its ugly head every once in a while and the conclusion we’ve come to lately especially if we don’t have the escrow deposit, in this case, we being Independent Title who is doing the closing. It’s held by somebody else, when they default, we immediately ask for them to put the deposit into the court registry because we’re going to go ahead and go to trial or mediation, whichever your contract calls for. That typically will motivate them more.
However in this case, you went back and attempted to get them, first of all, to cancel the contract and pay the $10,000 because they have to sign off on it. The closing agent just doesn’t give it to you.
Now, I’m going to go into this because it’s kind of important. We have a clause in your contract that says, “If he defaults, you give me the deposit.” And the closing agent involved had agreed to use that clause and we’ve used it before, in this case, he decided you have to both sign off which means nobody is going to sign off so we don’t get anything.
Lucas: Yeah. And I think just because it was kind of a tricky situation through the process taking so long, at one point, I tried to get my buyer to extend the contract and he didn’t but at the same time, there’s the other clause in there that says, “The closing agent can extend the closing date…”
Dave: Until such time that he can get marketable title.
Lucas: Yeah, marketable title. So he was saying we weren’t in contract anymore because the closing date had passed but we were arguing that it kind of didn’t because that clause was in there and the title company was just waiting for an answer from the city so that we can deal with the title issues.
And the guy had signed the hold harmless before saying he would take it with the permits. But then we never amended the contract to say that he was going to take it with the permits so I don’t know. So I think the question of whether or not he was in breach, it just wasn’t that …
Dave: Wasn’t black and white. But you did counter to him. You went back and said, “Alright here’s the deal. I’ll take 5 and you keep 5.”
Lucas: Yeah. I went back and asked for half of the deposit and he said no. And we waited for a few days again. And then I said I don’t want to have to go fight this guy for the deposit in court. I want to just sell the property especially since I had another buyer.
Dave: Sort of had another buyer.
Lucas: I didn’t want to hang this sell up to fight him for the deposit when I had another buyer that could potentially still be interested since it was only a month and a half or so ago.
So then I sent him another one, “Just give me a thousand bucks for my trouble and let’s go from there.” And he signed it. So then I called the other buyer who had been trying to buy the property in the first place. He said they were still interested and we ended up getting the contract. And then for the same price that I was selling it to the first buyer.
Dave: Now if you’re wondering why does he have to sign? The end buyer, why does he have to sign a release of the contract? It’s very simple. If he doesn’t sign a release, he still has a contract on the property. He can make a claim later after it’s closed and transferred to a new buyer. He can come back and say, “I have a valid contract and it can cost you attorney’s fees to prove that you’re right.” So it’s a very valid situation.
A lot of closing agents won’t close unless they had a cancellation of contract. Sometimes what we’ve done is we can’t get the cancellation contract so we’ve moved to another closing agent to kind of start the process over and close it. But that specter is always out there that something could happen and he could come back.
Now, you found a new buyer. Now, this guy had offered you originally $5,000 more than the first guy.
Lucas: Yeah. When he learned that he wasn’t going to get it because the other guy had submitted a contract and deposit first, he offered to give me $5,000 more than the buyer that I had for it. And I just …
Dave: You couldn’t do it.
Lucas: Yeah, I just didn’t feel right doing it. The initial buyer had gone through a lot of work to put the money together.
Dave: He was moving from another state to open the family business.
Lucas: Yeah, and he was the one of the first people to look at the property. I really never believed that he was going to buy. I just didn’t think that he could make all the moving parts happen to get the money he needed to close it because he didn’t have even enough $10,000 to put a deposit on it when I first spoke to him.
Dave: How did he do it?
Lucas: So, in a matter of a month or so, he put together 80,000 bucks to buy the thing. And so I felt like I needed to give it to him.
Dave: OK, great. So the new buyer came in and he was well-aware of the city lien was.
Lucas: Yeah. I mean at this point, this closing was much easier because I had all the title work back from the other title company. I sent them the title work that I had done previously. I explained to him what was still valid and what was closed out, showed him the title company proof that it was all closed out because it had all propagated through the county records and stuff yet.
He went to the property once with his contractor to take a second look at the property. They went to the city just to confirm what I was saying about the permits. And then – so it was like a day or two days, then he signed the contract, submitted the deposit and then we moved to close.
Dave: OK. And then the purchase price that you got it for and the sale price was slightly less than $20,000 but you got another discount from the seller. So it actually turned out to be $23,000 or so in profit.
Lucas: Yeah. And then plus a thousand bucks deposit, which really a thousand dollar deposit only covered the taxes and insurance that I had to pay for the month and a half that I held it.
Dave: Yeah. So, one of the reasons I’m interviewing you, Lucas for this, I called him Luis one time, forgive me, is because a lot of people think, “Well, why didn’t they just assign the contract? Mike Uber from Salt Lake City said “Just have him assign the contract and we never have to go through this.”
Well, not everything can be assigned. A lot of stuff can’t be. And when you have things like this with attachments to judgments and liens, code violations, so on and so forth, you can assign it but the end buyer really has to know about these things beforehand. And whenever you assign something, both the original seller and the end buyer are going to know exactly what you paid. So in a case like this where it’s over $20,000 in profits, the end buyer will think you’ve gotten paid too much for it. And the seller is going to say, “You took advantage of me.” And likely won’t close.
So in this case, you did a double closing but extended.
Lucas: Yeah. I mean it was over like 30% of what I was paying for, so too much of a spread to assign it.
Dave: In closing, would you like to say something to possible new students or people thinking about real estate investing?
Lucas: Don’t think, just do. Thinking about it isn’t going to give you many results. Before I came on, I think I probably spent a lot of time thinking. A lot of time doing too but I spent way too much time thinking about the best way to do. And really, the best way to do is to just do like Dave says all the time, “It doesn’t really matter what your offer price is. It doesn’t matter if you don’t understand the contract templates. You just make the offers. You will learn by going through the motions.”
Dave: And it’s an interesting learning curve, isn’t it?
Lucas: Yeah, it is. And it really depends on the person and the situation and how steep it is. Smart people can have a really, really, really hard time. And people who are less so or just less analytical can have a much easier time. You’ve got to do it and find your own way of looking at it.
Dave: Yeah and a lot of it comes down to just talking to people ultimately. Listening to the sellers and buyers.
Lucas: Yeah. I mean really all that you have to do is talk to agents about their listings and make offers on them.
Dave: And what other listings they may have, if they don’t show you that that they can’t sell.
Dave: OK. All right, Lucas.
Lucas: Thank you.
Dave: a.k.a. Luis.
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