It’s been a long and winding road. Hahaha. That’s one of my favorite songs from the Beatles. 馃槈
I went from knowing nothing about real estate, to finding a mentor, to buying several places, to running them (through a property manager), to (very recently) selling them all.
It was a nine-year saga from end to end.
And it was quite successful. My real estate efforts probably singlehandedly generated somewhere between 20% and 30% of my net worth.
Not a bad run at all.
That said, it wasn’t all smooth sailing.
In fact, it was all almost over before it had barely begun.
What follows is a piece I wrote many years ago telling how my real estate ventures got off to a rocky start. It was published on my first site and many current readers haven’t heard this story.
I cringed when I re-read it as the writing seems so poor. Hopefully I’ve gotten better since then. LOL.
But I wanted to run this just to share that things aren’t always peachy with real estate investing and to show that even if they aren’t, you still can be successful in the long run.
So with that said, here’s the story of my very first (attempted) property purchase — a deal that went wrong and almost kept me from becoming a real estate investor.
Enjoy…
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One of the things I often hear from potential real estate investors is how daunting the finding/buying process seems.
They say things like “I’m not sure I could get up the nerve to do that” and so forth.
I must admit, it is nerve-wracking. You are investing a TON of money into a place that you’re going to let others live in. This is a very foreign experience for most people and hence a reason why it’s nerve wracking.
It may look like all went well for me on the road to buying three properties with five buildings and 14 units, but it actually got off to a very rocky start.
Today I’m going to give you specifics on my first rental property purchase — or at least potential purchase. After which, I’m surprised I went ahead.
Off to Purchase
After several meetings with my mentor, Eric, we started looking at place after place.
He would send me the MLS options, I’d go through and pick ones I was interested in, I’d ask him questions about locations, rents, etc. From there we’d narrow down the list and go see them in person.
Our ratio looked something like this:
- I looked at 50 homes online over a week or two
- Of those 50 I was interested in maybe 15 initially
- After talking to Eric we’d narrow the list to 8 or 9 and go see them
- After visiting them, we’d make an offer on two or three
- Of those, we’d close a deal on one place (if we were lucky)
Early on in the process I agreed to set aside $300,000 to invest in rental real estate. I didn’t have an exact plan as to how this money would be spent, but I had an estimate in my mind that I would likely end up with three properties worth roughly $100k each.
Well, I was wrong. Maybe. Things don’t always go as planned…
We Found the First House
A few weeks into our search for properties (mid-July, 2012), a duplex came up for sale at $182,000. It was more than I had expected to pay for my first place but because of how it cash-flowed (each side’s rent was $1,300 per month), the numbers worked.
We made an offer and it was accepted at $170k. But from the get-go, things just didn’t seem right. It was a short sale (from what we could figure out), but the seller had convinced his bank that the property was worth only $130k.
So he wanted us to “buy” the property for $130k and then give him $40k “off the books.” This is illegal in Michigan (we would have had to sign something that said we weren’t doing this and then do it anyway) and we told the seller we were not going to make a transaction like that. He said “ok” and the transaction proceeded.
We did the inspection and everything checked out fine for the most part. We asked for a $2k concession and got it, but the seller asked us to cover the deposit owed to the current tenant ($1,100) and that we’d allow him to keep whatever rent had been collected in the month we closed. So the give and take basically ended up a wash.
We had a closing set and then it was cancelled by the seller. We then had another one set and the seller asked prior to that date if we’d again feed him some money under the table. We said “no, we weren’t going to do that.” He said “fine” again, but a couple days later his agent told my agent that he wasn’t going to close with us — despite the fact that we had a signed purchase agreement.
Time for a Lawyer
At this point I talked to my agent and advisor and we agreed to seek legal input. After relaying the details to the lawyer, the attorney said we had a good case but there were never any guarantees. He put our odds of winning at 50/50 (even though we had done everything by the book) and gave me stages of costs — $1,000 or so if we simply had to warn the seller and then he went through with the transaction (or was forced to by a judge) but as high as $10k if we went to trial.
I decided we would at least try to get the property. The lawyer sent the seller a letter that basically said “we are ready to close and we expect you to do so as well per the agreement.” The lawyer wanted to seem “fair” (so we would have a better position to argue from in court), so he gave the seller 10 extra days to close — which put the final closing a few days after Labor Day.
There was no response to the letter from the seller. The seller’s agent did respond (they got a copy of the letter) and said they agreed with our position, that the seller should go ahead with the transaction, and that because he was refusing to sell, they were cutting their ties with the seller. They also provided some contact info to my lawyer — names of people who owned the property (in an LLC from Chicago).
My lawyer attempted to call the sellers/people involved with the LLC. He got no response from the majority partner. He did talk to one of the minor partners but he was little help.
As our deadline expired, the lawyer started to prepare documents to begin legal action. Our hope was that we would file a suit, that the seller would not show up/respond, and that the judge would force the sale of the property. For some reason, this process took 10 days, much slower than I thought it would/should be.
Then in the third week in September I was looking at another property and my agent contacted the inspector who looked at our original property. The inspector mentioned that he had been contacted “3 or 4 weeks ago” by someone who said he was buying the property the inspector had inspected for us. The guy wanted access to our inspection (for free — the inspection I had paid for). What nerve! The inspector didn’t give it to him, but he also didn’t alert us to this event.
Once we found out that the seller was trying to sell the property to someone else, I immediately contacted my lawyers. They did a quick search and found that the property had been sold — a day after Labor Day!
Since we now had a claim against a seller in another state who didn’t have the property, we couldn’t sue for the property, but only for damages — which was maybe $10k or so. And even if we won, there was a big question of whether or not we would collect a penny. Since it seemed like there was not much to gain at this point, it was an easy decision to stop the effort.
There are MANY details I left out — otherwise this would have been a 10-page post. But the highlights are above. Welcome to the world of real estate investing! I now had a $1,500 education in how tricky real estate can be if you are dealing with the wrong people. 馃檪
What I Learned
I believe that things always happen for a reason, so while I would have liked that property, I’ve moved on and am not pouting over the loss. And I do actually have an education of sorts, so I don’t leave the process with nothing. Here’s what I’ve taken away from this experience:
- When dealing with shady characters trying to do something illegal/unethical, it’s probably best to walk away at the start. I talked via email to Apex during the start of legal proceedings and he advised that I should probably just move on. But since I had a 50/50 shot at getting the place and the cost was only $1k, I decided to roll the dice. Maybe next time I’ll bail out earlier if presented with an offer that just doesn’t seem right.
- I think the lawyers acted too slowly and we should have put a lock-down on the place from the get-go. I talked to them about this. They insisted that the protocol was to send a letter first telling the seller we expected to close and then start a suit, but I don’t know. I think they could/should have been faster.
- I told Eric that he should tell our inspector to ALWAYS contact us if anyone inquires about a property of ours. If we had known there was a potential sale in the works, we could have sued immediately and put a lock on the title (which would have kept the property from selling).
- I also learned to never take anything for granted in real estate. Even though you may do everything right and by the book, it doesn’t mean others will. And it doesn’t mean you can do anything about it if they don’t.
So, those are the details on how I almost purchased my first property. I was so shell-shocked afterwards that I almost stopped trying to buy places. Fortunately for me, I kept going.
And thankfully, things soon turned for the better. 馃檪
Dan@RichLifeHabits says
Wow, what a nightmare from the start… And you didn’t even get the property!
My first property had a smooth closing but everything broke once I bought it. Air handler, heat pump, dish washer, kitchen faucet, garbage disposal, bathroom plumbing issues, water leak causing new circuit breaker, new paint, and new floors. All of this while tenants were living there. I think I bought a lemon.
Seems like if you can get through the first property as a learning experience, you halfway to winning?
ESI says
Hahahaha. I’m just glad the second one went well!
mccms says
I can not believe that I had the same similar experience on my first real estate investment. My first was a townhome that someone put a right to purchase. So basically the deal on this is you pay the preset purchase price to the original owner and you basically pay any extra that you agreed to pay to the one who has the right to purchase. Being a very naive buyer, whose only experience is buying a home with a mortgage, I had a true learning experience. Several days before the closing, after I have signed the contract to buy, he told me that he will not sell because he has another offer that is higher. I was so upset and kicked and scream and told them this is not the right way to do business, etc. Luckily, the father who was dealing with me I think had been touched by what I said and talked to his son about me getting the property. I could have easily gotten down your path of legal option with no winners except the lawyers and still end up with no property. You are right these real estate transactions can be a treacherous road, it was such a bad experience for me that I am so afraid of this type of “option to sell” purchases that I turned down a good deal recently because the realtor did not disclose to me upfront that it was an option she had and pretended she was just a realtor.
This first property though rough in the start turned out to be a really good investment. The other two rental properties were my old homes so this was the only true “investment”. All three right now is what I am using to fund my retirement before my full retirement (70 yrs old), hopefully I can keep it this way so I do not touch my current investments.
David says
I bought 12 rentals, my mom bought 8. Only issue I had was a worthless inspection so I started doing my own inspection. My mom once ran Cross a sale, all contents included estate sale , on a Sunday. She had the owner sign a handwritten agreement at once. Monday, the guy changed his mind on the price. The court UPHELD the original handwritten agreement price and loser paid court costs.
M264 says
Over the 19-year period 1992 – 2011, I purchased four properties:
1992 – waterfront S. Florida townhouse for $132K as a for sale by owner.
2010 – 2800sf single family, Gulf Coast FL, 3 blocks from the beach, w/ a partner, as an estate sale.
2011 – 2000sf single family Gulf Coast FL, 3 miles from the beach, as a foreclosure from the bank.
2015 – 1900sf waterfront condo, Gulf Coast FL, as a foreclosure from Fannie Mae.
Purchase prices were very good and price appreciation on each of these has been phenomenal! But the partnership on the 2010 purchase went bad after five months and I sold out, losing $20K! The 2015 condo purchase was going to be my eventual retirement home in a couple of short years, but increasing property taxes, insurance, HOA, and assessments are going to force me to cash out and sell it, probably this year.