Updated: Apr 14, 2020
When you take the first steps in real estate investing you’re often caught off guard by the simplicity of it all. One day you can’t get past the $$$ to make an offer, the next day you say screw it, submit one, and it eventually gets accepted! How hard was that? Sure it’s exhausting for your fingers to digitally signing an endless number of forms. And writing a check for the initial deposit can be a little nerve wracking. But once you make the decision, the steps are simple!
That’s how I was as I entered my first investment process. To that point I’d played my mental tug of war and won. I was comfortable with my projections, knew my offer limit, and was ready to go. From there, the rest of the process was simple!
But it certainly wasn’t always easy.
Take it back
The byproduct of months of research, education, and planning, I decided to take action on an MLS deal. The property was a fourplex that had been on the market for an extended period of time and was listed for $210k. We asked questions of the sellers, and we ultimately found that not only were the units already rented but the seller was motivated. On June 14 we submitted a verbal offer, and by June 17 we had verbal agreement at $160k! That’s where I learned my first two major lessons:
LESSON #1: LISTEN FOR CLUES...AND ACT ON THEM
Based on my initial analysis of cash flow and value, I established a target range as well as a maximum price that I'd be willing to negotiate to. When I heard the sellers were motivated, that all changed. I submitted a lower offer, and wound up at a price lower than what I initially expected (stay tuned for a future post on what makes a good offer-I'll add the link here). Hang on to every word!
LESSON #2: WORDS ARE NICE, SIGNATURES ARE BINDING
It would be over two weeks until we officially got under contract. A series of small delays and slow coordinations led to our agreement not becoming official until July 2. Words are nice, but get it in writing!
In the two weeks I waited for a signed contract, I had everything else in place:
1. My lender had pre-approved me and was awaiting the contract to start paperwork
2. My insurance agent was waiting for me to say "go!"
3. An inspector was on hold, ready to schedule once the contract was inked
4. My property manager was on standby awaiting confirmation and dates
I gave the word to all parties on July 2 and we were under way!
Lender 1, Appraisal 1, Close 1
The wheels were in motion and on July 12 the circus arrived at the house as we began the walkthrough. It was the perfect storm as all four tenants sat outside and watched six of us scurry around the property like ants-the inspector inspected (kind of), the appraiser appraised (kind of), the agents walked and talked, the property manager took pictures, and I took it all in (and acted like I knew what the hell I was doing).
Part way through my inspector pulled me aside. He said that while he'd love to make money on this one, the 100 year old house needed all sorts of repair inside, and he recommended I have specialists inspect the roof, electric, and plumbing. I thanked him for his honesty, and by the time I left I had pictures, a timeline, a gameplan, and a lot of excitement.
Less than a week later the excitement built as I received the appraisal report back-it appraised! Unfortunately, that excitement was short lived and on the last day of due diligence, July 19, I learned my next 2 very important lessons:
LESSON #3: THERE’S MORE TO AN APPRAISAL THAN THE DOLLAR VALUE
Unbeknownst to me, there was a little alphanumeric code on the appraisal report signifying the condition of the house. C1 is brand new, C6 is condemned. I only found this out when I received the devastating email from my lender: "I’m so sorry to have to tell you this, but the lender turned down your loan due to the appraisal. The property is in too bad of shape to lend in." The appraiser conditioned it C5, meaning abysmal.
Enter lesson 4...
LESSON #4: APPRAISERS AND INSPECTORS HAVE DIFFERENT JOBS - KEEP THEM SEPARATE
My well meaning and inconveniently friendly inspector shared with the appraiser the same thoughts he shared with me. The appraiser wrote this into his report as the only justification for the condition, nearly quoting the inspector comments. My agent was as shocked as I was...sure the property wasn't in fantastic shape, but in his years as an agent he'd consistently seen significantly worse receive a better rating.
I was crushed, but I don't quit. I won't start now.
Lender 2, Appraisal __?, Close 2
I immediately started looking for other loan options while my agent negotiated to delay the close with the sellers. They obliged, and I applied with the mortgage branch of the bank I've been with for 13 years (fun side note-I completed my application via phone roughly 2 hours after getting out of a fairly substantial shoulder surgery to repair my torn labrum. I strongly advise against this...the anesthesia hadn't fully worn off and I remember very little of that conversation 😁).
From the very first call (pre-surgery) I explained every detail of my transaction to that point, stressing the urgency due to the appraisal as well as the new close date of August 21. Everything was smooth sailing, until it wasn't.
My loan officer was horribly unresponsive. Any time I called I'd leave a message and follow up with an email, only to receive an email response 24+ hours later but never a callback. This was frustrating but ok the first week, but when I was a week out from close with no appraisal scheduled I was beyond frustrated. I'd then call him, his supervisor, and his supervisor's manager, leaving voicemails for all of them followed by emails. I wouldn't get a call, but 12-24 hours later I'd receive a partial response that said little more than the equivalent of "we're trying". 3 days out from close I was furious and learned a lesson not about real estate, but about business:
LESSON #5: COMMUNICATION IS EVERYTHING - DO IT CLEARLY AND CONSISTENTLY
Lender 3, Appraisal 2, Close 3
Feeling the deal slipping away, I reached out to another loan officer that someone put me in my network put me touch with. She was more responsive in the first day than the previous lender over 3 weeks! With the communication lines open and the loan underway, we adjusted close a second time to August 30 and I promptly called Lender 2 to cancel the process (there wasn't so much as an attempt to prevent me from cancelling).
8 days before the new close date the second appraisal took place. There were no additional parties present to sway his opinion, so we were almost there! All we needed was the appraisal report and we were ready to close.
Just the appraisal report...
One single report...
Fast forward a week to the morning of close #3 and...nothing. The appraiser was never heard from again and the report was never submitted. He never responded to the lender, stopped answering calls from both agents, and the appraisal management company has not heard from him to this day. I still haven't fully learned Lesson #6, but it's applicable nonetheless:
LESSON #6: BE PATIENT
At this point everyone is furious, and there's not a thing we can do to get that report. My property manager said "I'm starting to wonder if it's a sign trying to tell you that house is not for you." My argument was that God was testing me to see if I'd quit when it got hard. Some day we'll find out which one of us was right, and I sure hope it's me!
Lender 3, Appraisal 3, Close 4 (SERIOUSLY?)
Remember when I said simple, not easy? I never expected these issues. My lender had never seen an appraiser disappear in her career and scrambled to line up a new one ASAP. My agent worked with an incredibly frustrated (understatement) selling party to negotiate our fourth closing date on September 13. I...watched?
8 days before close #4, appraisal #3 took place. Since the previous one was 8 days before I should've have seen the parallels and red flags, but I didn't. I got excited when on Monday I heard he had submitted the report!
Jokes on us, it was kicked back by the management company because of major errors. On Tuesday evening, 3 days before close, the report was resubmitted! Just kidding, kicked back for another error-the address was wrong (THE ADDRESS! SERIOUSLY???) I was waiting for Ashton Kutcher to tell me I was being Punk'd, but instead I just had the seller telling me this better close Friday or else.
Thanks to incredible effort on all sides, and incredible patience from both parties, everything made it in time to get to close Friday afternoon. As we sat around the closing table we all got to share a laugh about just how unfortunate the situation was, but also how happy we were to have it done. To top it all off, the sellers expressed interest in selling additional properties to me! That was an unexpected and pleasant surprise.
It was a strange but incredible feeling as the sellers wrote a check for pro-rated rent and slid it across the table with the keys. It was official-I could finally call myself an investor. I had received my first check, had the keys in my hand, and I was underway.
It felt nothing short of amazing.
Now the excitement starts. As I write this 10 days after close, I'm working with my property manager to time the start of repairs. All four units are rented, so one-by-one I'll start updating them as tenants turn over.
Rent is currently 30-50% underpriced, so once the units are updated I'll bring the rates up to market value. At that point through forced appreciation and increased cash flow I should significantly increase the value of the house, and I will likely go back to refinance and pull most of my cash back out of the house.
This will all be done at the same time as I begin planning and working on the three duplexes that were purchased a week after the fourplex! Both will be an exciting work in progress as the true labor begins.
I'll keep you posted as I continue with this deal and all the rest! You can follow along with any of the updates on the Deal Log on my website, where I will keep you up to date on the status of the house and the project. Additionally, I recommend you follow my Instagram account and see the struggle firsthand. Finally, if you've found the content helpful, I ask you to share it! This is just the beginning of Invest DGP and I'm excited to be able to help more people learn from my experience and achieve their goals!