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October 2014

Why fix and flip when you can sell as-is

An unexpected call changes my exit strategy on a recent acquisition.


Back in August, I profiled a deal I did over by the local university. It was a manufactured home on a permanent foundation that I paid $90,000 for. I was planning on evicting the tenant (if he didn't move which I suspect he wasn't planning on it) and either rehabbing to flip or rehabbing to hold as a rental. Because of the loan I had on it, a 12% interest only hard money loan, I didn't really think holding it was much of an option so I was well prepared to write the check to rehab the property for a retail sale.


Unexpectedly, the tenant called me and said he spoke with the former owner, his landlord of 34 years, and learned that I paid $90K for the property. After going through his finances, he figured he could put together $100K and thought a $10K profit was fair. Well, I certainly don't like others telling me how much I deserve to make on a deal. I told the seller that the least I would consider was $150K. He emailed me the following email a few days later:


Please accept our offer of $130,000. Unbeknownst to me, my home of 34 years was sold & cleared escrow for $90,000. As per advice from a consulting attorney, mid September we offered $90,000 + 10% equaling $100,000. Per returned telephone call $150,000 was quoted as the price for which I would able to retain the property, procured from the current owner. Extensively researching relevant parameters of this property's current value, zillow contrasted as well, please consider our offer of $130,000.  I may be able to squeeze out $135,000, but I'm kind of maxing out here.


The first rule of negotiation; when buying, the lower price quoted in a price range is the starting point. When selling, the higher price quoted in a price range is the starting point. So, I never heard the $130K. I immediately zoned in on $135K. However, that was not really close to what I was asking, but it was a nice try. I emailed the tenant "I'd really like to see $150K. Let me get back to you." Now, I didn't agree to sell it to him at $150K, I just stated that is what I'd like to see. I'd certainly like to see more as well.


That same day, the tenant emailed me back, "After further (much) deliberation, we accept your offer of $150K for sale of the property.  Please contact us to expedite & finalize this sale @ your aforestated price of $150,000."


Funny huh? By sending one email, the tenant upped his offer an additional $15K. Unfortunately for the seller, that afternoon I went to an investor's lunch and one of my preferred buyers was there. This buyer really wanted the house and offered me $150K as well. Not wanting to disrupt the universe, I didn't think it would be fair to sell it to my buyer at the same price the tenant was willing to pay. I sent him the following email:


"Unfortunately, I went to a 1031 exchangor's luncheon yesterday and got to talking about this property with a few other investors. I have two other interested parties. One of them made me an offer yesterday for $155K. She's a landlord who owns a lot of student rentals in that area. She said UCR is growing and this property is a great fit for her to use as student house or even as a possible fraternity house because of its remote location.


I would actually prefer to sell the property to you since it has been your home for so many years, but I can't make that decision alone. If you can do $160K we have a deal. Attached is the contract. Sign it and send it back and I'll open escrow today."


OK, so my buyer isn't a woman and he only offered me $150K. A lie, a bluff, or strategy - you can decide for yourself. After I sent the email, I didn't hear back from the tenant for a few days.Thinking I might have overplayed my hand, I decided to reach out one more time and sent this email;


I have been out of town since mid-last week. I surely expected you to send back the signed proposal or at least mail it. I was surprised you didn't respond. Are you seriously considering passing on this opportunity to own the home you are living in? I'd like to point out the lowest priced house to sell in your entire neighborhood in the last 6 months was a fixer upper that sold for $275K. Every other house sold for more than $290K and most were over $300K.  

I believe this property, fixed up, is worth anywhere from $225-$250K. Don't get hung up on what the trust paid for the house. Focus on what you get; you finally have title to the property you have lived in and taken care of for 34 years, it is a prime location, and you're capturing something like $65K-$90K in potential equity. Personally, I wouldn't pass on that house and location at $160K. That is too good of an opportunity to let get away.

The trust's offer to sell you the property expires on Wednesday.


We went back and forth a few more times, but ultimately he happily accepted my offer of paying me $160K net. He thought it might take him a few more weeks to get the money together so I asked him to put a $5K nonrefundable deposit in escrow for the extension which he did. We closed, the 34 year tenant now has title to the property, I made about $64K net on a deal I never saw but one time when I put posted the 60 day notice and all is right with the universe.