NEWBIES- Listen To My Tale Of CAUTION! Beware The Informed!
Grab a comfy pillow and park it under your butt. This is a long boring story, though not good as a bedtime one for the kids.
I was contacted by a distressed seller. She had a house and 3 other lots for sale. One of the lots has a garage on it. All the lots have back taxes due. The one with the garage is going to be lost to tax auction May 19. Last day to redeem is May 14.
I went ahead and met with her. The outside of the house looked pretty nice. The inside was UGLY, I mean really UGLY. Just the kind of house that was a juicy catch for a rehabber.
Anyway, I spoke with her and my main focus was to get her motivation and to see what she wants. The house is too big, and she can't afford the tax payments, especially with 4 lots. Oh ya, house is FREE and CLEAR...no mortgage!!!!
Her husband passed away about 5 years ago and there was no will, or probate. The remaining children quit claimed her their interested in all 4 lots.
I asked, "so what is it you'd like to see happen now?"
She said, "I just want a trailer and be done with the place". My ears perked up and thoughts raced through my mind. She mentioned how much she could get used one for....I was excited to say the least. I told her I'd be in touch (I didn't have paperwork for a wholesale purchase on me, just subto stuff..ddoh!)
I went back home and did my research, tried to find comps, line up contractors, etc. I got advice from people on how to do this. I contacted my attorney and he agreed to handle this closing. I went back and forth with him on the paperwork, and when I was ready with it I went back out to the seller.
After fighting rush hour traffic for an hour and a half, I arrived at her door contract in hand. I went over the details and we signed off =) Closing was to be soon, with enough time to pay off the tax redemption. The seller also gave me a copy of her tax stuff, though it wasn't complete. She just obtained a redemption letter for the garage after going downtown to get it. Unfortunately she said they wouldn't give the that info on the other lots. You had to come in different days on each lot....which I thought was strange, but I took her word for it (mistake #1). She told me she redeemed the taxes on the house already, so my estimate in my head told me this all works out. I believed her on that, because when I searched online it showed her house taxes were paid except for the current one. More on this point later.....
Anyway, I get back home and fax my contract to my attorney. The next day he ordered a title commitment, and I was off and running. I sent contractors to the house to get me estimates. I had comps run and I had all my numbers in place.
My attorney told me to go downtown with that letter of redemption on the garage and verify the procedure to pay it. I did so, and while I was there I ordered the payoff for each other lot. $30, later I received the one for the house and the ones for the lots would come in the mail, since they weren't sold yet. Weird....I thought the seller said they wouldn't give out the info on all lots at once...I guess she was HONESTLY mistaken right? Hey, wait a minute....the lots weren't sold, but the taxes for the house WERE? I thought it was paid off...
I look at the paperwork, and BAM!!! $4500 to redeem the one for the house. No immediate deadline, but those were suppose to be taken care of!!! Still, the numbers are ok...it's not a deal killer. I'll still make a profit on this, with some cushion room just in case.
I call the seller, and she says she had no idea...I give her the benefit of the doubht...afterall, I'm the expert here right
So I'm busy contacting rehabbers out of the paper. There's a lot of interested, I'm getting callbacks, life is good. Numbers look good to them, they want to see the inside...I think this deal is a slamdunk.
Then today, everything crumbles like a house of cards in a wind tunnel. Attorney e-mails me saying something came up with the title search. I try to call him but he's out of the office. I contact the title company directly I speak to a nice gentlemen about the problem.
He tells me they've uncovered extra pins. I told him yes, there are 4 lots in this transaction...didn't my attorney tell you about that? No? Oh...well there are so don't worry about that. Life is good again.
But wait, he says there are some tax issues. I tell him, yes I'm aware and I'm taking care of those....didn't my attorney tell you about that? No? Oh...well I know about it and I'm ok. Life is good again...as long as this guy is finished.........NOPE.
He then mentions there's an open case file on this. There needs to be more research done because bla bla bla bla...damn, ok. I'll call the seller and see what she has to say. But wait, there is a gap in title on these 3 lots...and that other lot, they can't find anything proving any sort of ownership. They've gone back to the early 20's.
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My mind races...I remember last week searching online and the recorder of deeds website. I entered in the pins....and all that came up were her 4 quit claim deeds from the remaining children. There was no chain of title other than that. She told me her husband owned it since the 60's. I figured great, the records online only go upto a certain date....since I don't see any other mortgages, liens, judgements, title should be GOOD!
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Back to the present....
Damn, I should have realized that wasn't a good sign, it was a BAD sign.
The title guy says, it'll take us some time but we'll find something. I said great, but you know the closing is next Monday right? No? My attorney didn't tell you that? OH!!! WELL IT'S NEXT MONDAY! He says....OH...we'll put extra urgency on this one then.
So, I'm a little worried..but hey, that's ok because I'm sure it'll work out. I decide to call the seller and ask if she knows anything about the open case. She says no...she can't think of anything....
:-?
Well, except that she's going to FILE CHAPTER 7 BANKRUPTCY AFTER SHE MOVES! :-o
WHAT!??!
NOOOOOOOOOOOO.
I knew that was it. I told her the problems with that, then she quickly said she doesn't have to and that she can wait. I told her I'd call her back. I needed to consult my attorney asap. I finally got in touch, and my fears were confirmed....if she files BK after I close with her...I'm SCREWED!!! Completely. I thought, well maybe if I can show her that she'll lose out too.....
NOPE, she'll probably be able to keep her trailer. Everything else will be liquidated and divided among the creditors. Our deal will be undone, as well as any deal I have with a rehabber. That's it, it's toast.
I call her up and explain that this deal can't go through. I suggest other options for her. She said there are none...and that I have to do this. She promises she won't file, she's an honest person. I explain that I have no guarantees (and her track record with honesty isn't so great, but I didn't say that). She starts crying, and ranting how her life is all bad luck. I feel really bad, but what can I do? I try to think of options for her....and she's forget it and HANGS UP.
I then send her a nice e-mail saying I will try to find ways to help her. I offer up some suggestions, and that she can contact me anytime if she has questions. :-(
She replies with VENOM :-x
She said I called her making up the story about the open case, to try and trick her into saying something. Then I used it to back out of the deal! She's an honest person, and she believes in the honesty of others...but she should have been suspicious in the first place. She'll contact her attorney to see if they can force me to comlete this sale (which the can't). How I'm screwing her on this, and bla bla bla.
So here I am a few hours later, tired, out some cash, out a lot of time and effort. I tried to help, and even offer advice. I guess she needs someone to blame, and I'm the best candidate for that. But you know what? I learned a LOT in this deal.
1. Don't depend on the seller to provide info....EVER.
2. Don't depend on your attorney to do anything accept show up at closing. You contact the title company yourself and light a fire under their @ss.
3. Make sure you find out all the circumstances your seller is in. What other problems do they have, that can turn into YOUR problems.
4. Don't fall in love with a deal. I hit the pause button on my marketing after I got involved with this one. I missed out on other opportunities while this one sank.
5. Learn from your mistakes, because you'll make a lot of them.
This business is tough. It's not as easy as 1-2-3, but don't let that discourage you. I will move onto bigger and better deals. I hope you learn from this somehow, I sure have. Btw, I feel bad for the next investor she contacts. Because now she knows not to mention anything about the BK. I hope it's someone that has the financial means to take that hit. This deal could have cost me a lot of money. If she never mentioned the BK, I would have never known until it was too late. Besides the BK, I still don't know if the title issues can be worked out..and now I'll never know.
Thanks for reading.
Davis
Davis,
Very good information. This business has so many unanswered 'what if's' that it can drive you crazy. I would say lesson well learned.
Debra
Let me just start by going over your five lessons learned.
1. You're right. It's YOUR job to find out everything you need to know about the property. That's due diligence, and it comes with being an investor.
2. Get a new attorney. This one is plain sorry and sounds like he cost you a deal with some scare story about BK.
3. Again, due diligence.
4. NEVER fall in love with the deal. IF you become a motivated buyer, then you will lose control.
5. Good idea, but if you take the time to learn from OTHERS mistakes, then you will never have to make them yourself.
I'm still at a loss as to why her filing BK after you close on the deal would cancel out your deal. Exactly how did your attorney explain that one? Correct me if I'm wrong, but she contacted you, she made the price and you accepted.
Roger
Raj: thanks for the reply. It's because they trustee of the BK can reverse the sale as a fraudulent conveyance. Especially since I bought below value. I have since spoken with someone else that provided a possible solution to this ticking time bomb. I hope it works, I'll find out tomorrow....I'll keep you posted. Maybe I'll have a new post soon...The Deal That Won't Die.
I want to applaud you on your efforts and your wisdom! You were smart enough not to enter into a bad situation and you were smart enough to do the due diligence before you purchased the property!
It may have scared the shit out of you but you are in a much better position than I was on my first deal. I hadn't a clue what I was doing but had faith in the concept of real estate investing and figured I would jump in. 7 months later, tens of thousands of dollars in debt, ruined credit, no money, no food, i lose my insurance for not being able to pay for it and then get in an accident, etc, etc, etc.
I'm doing better now but the point is that I applaud you on your sucess! Keep at it and be confident you know when to run!
Wow I am impressed! GOOD LUCK!
Yep, that's what I thought you might say. Do this, have your attorney explain to you why he thinks it would qualify as a fraudulent conveyance?
If you're curious, the simple definition of fraudulent conveyance is the illegal transference of property to another party in order to defer, hinder or defraud creditors.
And In order to be found guilty, it must be proven that the intent of the property transfer was to put it out of reach of a known creditor.
Now, unless I missed something in your post, as stated before, she called you, she set the price and you agreed. You agreed to take care of all of the outstanding tax bills. Otherwise the property was free and clear. So what "creditor" is be defrauded?
Roger
Actually I consulted my attorney and told me if she files BK for her credit card debt, I could be screwed. Sure I didn't know, an the intent wasn't there, but it's up to the trustee ultimately to deside that.
Anyway, like I said I've been informed of a possible solution to this problem. If it works I'll report back and let you know how it was handled.
I wouldn't worry about the BK. Especially if it is for CC debt. They generally don't look as hard at past assets and transfers of asset as say, "Willie Nelson" or somo0ne a little higher on the socio economic scale.
As for attorneys, seldom do you find one that is pro-active. They are generally a gun that you have to point and shoot.
[addsig]
So Davis and I had a phone conversation last night and I've got more info than is posted here so some of these responses use that added info.
Well Davis as we discussed there are still some options here and I don't think this deal is necesarily dead.
How much credit card debt does she have?
The odds of the trustee unwraping your deal are slim given the purchase numbers involved. (Estimated FMV $40,000, you're cashing her out at $20,000. Given the pending end of the redemption period thats reasonable.) We've discussed alternatives depending on the level of CC debt.
The title issues are more complicated but don't jump the gun there. Give the title company and the attnys a couple of days to do their thing.
The lessons of due dilligence are well taken but there is another lesson here-- don't give up too soon. All the best deals have major problems in them, otherwise someone else would already have done them. The trick is to figure out how to deal with those problems economically and efficiently. And without too much emotion. I have a friend who says it like this, "I buy distressed real estate. I remove the distress and then I sell the real estate."
I'm not saying that this deal will work out in the end. Only that its too early to throw up your hands and walk.
commercialking,
You've just spoken two great lines in REI. I'll be quoting you for awhile.
All the best deals have major problems in them, otherwise someone else would already have done them.
How true. Most newbies don't realize this simple fact and spend their time searching for the 70% off FMV with no repairs.
"I buy distressed real estate. I remove the distress and then I sell the real estate."
I used to say "I buy problem houses" but I like this one even better. Again, the new investor usually only sees the problem and does not try to think of ways to "remove the distress."
Roger
"I buy distressed real estate. I remove the distress and then I sell the real estate."
I love this!
It explains what to really look for when looking for deals.
BRILLIANT!!!
thanks for your story. I too was a trusting fool, I learned that the hard way. I trusted people who I thought were just genuinly nice and wanted to help me. I thought I could "read" people and could figure out if they were for real..what a joke. Now I trust NO ONE when I do real estate transactions. its sad really but its just the way it has to be for me. I second guess everything someone says and want most things in writing before my money gets involved. look out for number one, because nobody else will.
Well, it's official...deal is dead. Seller won't talk to me, maybe she's found another investor to work some magic....though time is kind of running out for her. I doubt she's told the investor the whole story. Anyway, I've moved on as I think this is for the best. Not only was there this BK, the title company never resolved some of the title issues.
I've learned a lot and I'm ready to move on. I'm ready to make more mistakes, bring em on =) When I started out, I was afraid of making mistakes...that was the wrong attitude! We HAVE to make mistakes, it's the only way to really learn. I think anyone that's successful has made tons of mistakes. I'm happy this one didn't cost me a bundle, but at the same time I know that it could have.
I'd like to hear more stories of people's mistakes. I think we can benefit from them more that those smooth sailing success stories. The ones that are all neatly packaged, wrapped in a big red bow.
Thanks for listening and giving advice, I'll report back with a real success story soon. I did get to bird dog one property for a nice fee, so I'm on the positive side with regards to $ vs. REI. Maybe I'll do a write-up on that deal soon.
-Davis
This is indeed a great post, and as a complete newbie I can't tell you how much I appreciate reading this information.
I also *really* like the suggestion of having everyone post some of their best mistakes, for everyone to learn from.
In fact, this is such a great idea, that it seems like it could warrant its own forum - "Greatest REI Mistakes and Lessons Learned" - with the posts being case studies and analysis of deals that went all wrong. Moderator, what about adding a forum?
Thanks again for sharing your experience, and best of luck on your next deal!
Robert
I have to agree. This has been a very informative post and I wish we did have forum just for the Mistakes we make and learn from. I'm new at this and I'm always hearing stories about someone's uncle who lost their shirt in real estate, but I never hear how. This is the kind of information we need to know as we do our due diligence.