The Art of the Deal: South Street Part 1

“Perhaps the most misunderstood concept in all of real estate is that the key to success is location, location, location…First of all, you don’t necessarily need the best location. What you need is the best deal.”             –

Donald Trump, The Art of the Deal

Welcome back! Last post, I talked about how to run the numbers on an investment property and specifically how I run mine. Now I want to tell you how I found, negotiated and closed on our first investment property. This is South Street Part 1.

After meeting with Melanie to discuss my property criteria, we commenced our journey with an MLS search. Melanie managed to find close to 30 multifamily homes that were on the market in the Hampton Roads area. We just could not make the numbers work with the vast majority of them—probably why they were still on the market. One thing Melanie told me when I was considering bending my numbers was “numbers don’t lie”. Stick to the numbers and trust the numbers. Don’t be emotional. I stuck to my guns and we narrowed down the search to four properties: two quadplexes, a triplex and a duplex. I could make $100/door in cashflow on all of these properties—for the right price of course. The real kicker was would my wife approve.

You see, we were not using a traditional residential or commercial loan—we were using a VA loan because we planned to house hack. House hacking is purchasing, living in and renting out a property so that your mortgage is paid for and you are essentially living for free. The VA (Veteran’s affairs) loan provides a zero-percent down payment for military members on an owner occupied home up to four units. So, not only could my wife and I house hack but we could do it for zero money down! Why wouldn’t you take advantage of that?!

This may seem like a great deal all around but the best deals are often in the worse areas and I had to convince my wife to live wherever we decided to buy. We started viewing properties with a quadplex in arguably the worst location of the four, with good reason. Just driving by initially, my wife said “nope!” It was in a rough part of town, the building was rundown and there was a great view of industrial vehicle parking across the street. We quickly walked the property and moved on to the next one.

Let’s Get Ready to Rumble

After visiting the duplex and the triplex, we reached the last quadplex: South Street. It was a former mansion in Olde Town Portsmouth built in 1900, split into four separate units. I was not crazy at first due to the age but it had a lot of good aspects: it was in a nice, arguable developing part of Portsmouth; had good strong bones and a solid foundation; the units were well kept despite being vacant for two years and it had a small backyard for our dog. The kicker was the price. It was about $60,000 overpriced for the market rents in the area. I figured, “no sane owner would take a 20% discount on a property!” But like they say, you miss 100% of the shots you don’t take, so we put in an offer of $290,000 with asking at $350,000. They counteroffered $325,000, we let the emotions of the moment take us, and we responded with $310,000, knowing that the numbers were very slim at $310,000 to make this a good deal. They held firm to $325,000 and I had a flashback to Glenville Circle.

When Glenville first went on the market, there was two other offers below asking. I figured the only way I could get the house was to offer asking price and we obviously bought the house. I did not look at the numbers, got emotional, and relied on an experienced realtor to get me the best deal. I vowed with South Street, I would stick to my guns and get the best deal I could. Therefore, we rejected $325,000 and walked away from the deal.

For the next week, we continued to look at other properties but nothing popped out. The whole time I had South Street in the corner of my mind thinking about the different options to make the deal work. After discussing the matter with Melanie, my wife and I decided to write a letter to the owner asking them to reconsider. We knew that the elderly couple were having health issues and the vacant home was not helping the situation. Before we could get the letter in the mail however, Melanie called us to let us know the seller was coming back to the negotiating table. We were ecstatic! The sellers had us in the back of their minds too and thought they were missing their dream buyers. We agreed to $310,000 with 3% seller-covered closing costs and signed the contract. This was mid December. 

Blindsided

For the next month, we went through the normal due diligence and lending items: inspections, ordered appraisals, personal financial statements, W-2s, etc. Everything was going smoothly until about mid-January. We had figured out the PICRA items and were waiting for the appraisal. The closing was set for January 23rd and day after day the appraisal was still pending. January 22nd rolls around and the appraiser hasn’t even visited the house yet! Melanie finally gets ahold of the appraiser and he is planning to assess the house on Friday the 25th and have the report by Monday the 28th. I was floored that someone would blatantly disregard timelines despite numerous reminders and prods. With the closing rescheduled for Wednesday January 30th, we finally received the appraisal on the 28th. We were in for two shockers in a week with an appraised value of $287,000—$23,000 less than purchase price!! Not only did we now have negative equity upon closing but the VA loan would only cover the appraised value meaning we were on the hook for the other $23,000! I remember that day vividly because I sat in my car after getting the news and stared out the garage for 20 minutes trying to figure out what to do. We could get a personal loan, we could try to pull equity from the house, maybe scrap together cash to cover the difference; no option was ideal. Mike Foster recommended I attempt to negotiate the price to half the difference and cover the rest personally. While I was milling over our options, the seller got news of the appraisal and were making their own plans. Saved by the bell, the seller decided to lower purchase price to $287,000 but with a caveat: we had to cover all closing costs. We went from receiving close to $2,000 back at closing to owning $9000 in a matter of hours. In a mad scramble, my wife and I managed to pool the required $9,000; liquidating savings accounts, emergency funds and even pulled from my IRA. In a last ditch effort the day of closing, we survived the roundhouse kick to the face (appraisal) and the uppercut (paying closing costs) to return a one-two punch and scored the knockout. After 45 days of Six Flags rollercoaster rides, we finally closed on our first investment property: South Street!

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