Tuesday, October 9, 2007

Fastest Close Ever, Part 1

I haven't written much about the property referenced on that stylish Lousy T-shirt that did not elicit one bid on--dare I even mention the name--eBay.

We had been trying to sell the Ohio property since May, 2006, a mere 10 months after we bought it. Our purchase price was $2,950,000, with $554,477 out-of-pocket to assume the loans ($451,717 in exchange funds from properties we sold and $102,760 from personal funds) and pay the various impounds and fees. We had sold three of our single family rentals to obtain the exchange funds. We listed it ourselves for $2,995,000. We used "proforma" (projected) financial figures to support the sales price. Most buyers don't trust their accuracy, but we had to show what the property was capable of doing under new ownership.

The ten months before had been a roller coaster--one with only stomach-churning falls. While we were changing management and trying to make it perform, the numbers were so bad that it automatically brought down the property's worth (known as a "CAP rate").

We had some things going for us, though. Because the complex had been built in 2000 and 2002, with two assumable loans at 5.5% and 5.9%, it was attractive to investors (the principal was paid down by over $50,000 a year). We had spent the prior 10 months "cleaning it up" (read: throwing money into it) and felt that it would make a great investment for someone who knew how to manage managers.

Immediately, the activity began. We received offers for less than what we paid for it (around the $2.9M to $2.925M, so we snubbed our nose at those. Then, to clinch the property, we were offered $3,025,000 by an Arizona investor and we snatched it. Now we're talking!! My husband met the husband and wife investors at the property for the inspection. Unfortunately, it didn't show well. First of all, there were seven vacancies that we didn't know about (to our chagrin, our ace PM seemed surprised, too). Then there were a couple of tenants (one in particular) who had not only not paid us for many months, but their units were in disrepair.

I was six months pregnant with our seventh (that's not a typo) child, visiting relatives for a graduation in Northern California, when we received the e-mail. The buyers pulled out, partly due to "tenant quality." With an assumable loan, we needed to contact the mortgage and title companies right away and have them send the buyers the paperwork necessary, so that we had preliminary approval and the close was not delayed. Therefore, the contract had to be cancelled and the mortgage and title companies notified. There went buyer #1--and the return of our investment.

We contacted the "back-up" offers in the low $2.9's, but they had already moved on to something else. By the end of the summer, we were coming to the conclusion that we needed to be more flexible on the sale price, so we reduced it to $2,895,000. Buyers #2 were very skittish and nervous from the beginning. We negotiated them up to $2,808,000, contacted the mortgage and title companies and started to issue the disclosures: performance history, rent rolls, etc. Before my husband could fly out for the inspection, they were gone.

By February, 2007, we decided that we should hire an agent. One had sent us a sample listing packet through our PM, so we contacted him and signed a 3 month contract. The agent listed it for $3,080,000 (I think--I know it was over $3M), and thought we'd get a "bidding war." I rolled my eyes. No offense to the kind gentleman, but, professionally, he wasn't always helpful to us (until he found the buyer, that is).

By June, we were getting desperate. The complex was on the cusp of performing at its capacity, but we were plagued with constant vacancies and uncollected rent. Although, it was doing much better than when we had purchased it. Our PM would come this close to being fired over and over again. Then we'd have a good month and relent, and then it started all over again. Our agent found a buyer who owns a development company. What he wanted with our property, I will never know. The contract was for $2,825,000 (which netted us less than the last one because of the negotiated 4% commission). We started the ball rolling with the mortgage and title companies, my husband flew out for the inspection, and the guy cancelled the contract. Being a contractor, he was particular about how buildings were constructed. Goodbye, Buyer #3.

By the end of June, we had received three offers for $2.7M, which we countered, but never had a contract from one of them. Then Buyer #4 comes along through the agent, whom we had fired--but he agreed to bring us buyers anyway. We were offered $300,000 over the assumption amount (remember what our out-of-pocket was to purchase the complex). We upped it to $379,000, our agent agreed to take a flat $50,000, and we had a deal. When we marketed the property ourselves, we always, always disclosed it's history and assumed that the agent was doing the same. Well, he wasn't, and, when this buyer saw the numbers for the previous two years, she almost fainted, but pulled out instead. Again, we had to close the files that the mortgage company and title had started.

You know the allegory about the man in the flood who stands on his roof refusing the raft, boat, and helicopter that come by to save him, saying, "God will save me." He drowns and then asks God, "Why didn't you save me?" God answers, "I did try to save you. I sent a raft, boat, and helicopter."

The agent who we fired brought along another buyer whose offer was so low, it would necessitate us to write a check for $100,000 at the close. Duh. I was beginning to think that those three offers for $2.7M were our raft, boat, and helicopter. During our negotiating process with these jokers--I mean, buyers--Buyer #4 returned with the agent. I offered to give her a $25,000 hold back, so that she might feel comfortable with any vacancies that arose. She took it directly off the sale price, which we had since reduced to $2,695,000. We had a deal for $2,670,000, and it was to close in a mere 30 days--just in the nick of time for our finances. But how in the world could we pull it off . . .

I'll detail the miraculous close in tomorrow's post. Please stay tuned!