Episode 11: The Epic Case Study of an Incredible Real Estate Acquisition

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Episode #11: The Epic Case Study of an Incredible Real Estate Acquisition

Episode Summary

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In this episode, host Jeff shares the case study story of how he recently completed an epic, complex acquisition of an incredible, rare commercial building. The story highlights many of the key elements of the Thoughtful Real Estate Entrepreneurship approach, the skills and art of Seller Relations, and the mechanics of creative, off-market real estate acquisitions. Make yourself a batch of popcorn and join us for this epic story!

Free PDF Guide: 5 Critical Mistakes That Make Most Real Estate Investors Accidentally Lowbrow

We’ve created a free PDF guide just for listeners of the Sleaze-Free Real Estate Investing Podcast, called “5 Critical Mistakes That Make Most Real Estate Investors Accidentally Lowbrow.”

For instant access to the PDF, just go to http://Pod.thoughtfulRE.com

Music Credits

The theme song is an excerpt of “No More” off the album “Golden Era” by Forest For The Trees.  You can check them out on Amazon, iTunes, and Spotify.

Meet Elizabeth

This is “Elizabeth,” the building we discuss in today’s episode!

Full Episode Transcript

This is Jeff from a Thoughtful Real Estate Entrepreneur. Welcome to episode number 11 of Sleaze Free Real Estate Investing. This is a show for those of us who’ve never felt at home in the We Buy Houses crowd. The show we take a stand against what we call the lowbrow approach, the mainstream guru seminar, distressed seller approach to ends up giving real estate investors a slimy reputation. Instead, we discuss the strategies, tactics and philosophies that we call it the thoughtful way. And enlightened approach to real estate entrepreneurship that focuses on constantly sharpening the sophisticated real estate entrepreneurs, three most critical capabilities, seller relations, skills, deal architecture, skills, and opportunity vision. When all three of these are fully in successfully in motion, then you can make an excellent living today and be building long term wealth, while creating value for everybody that you touch along the way. Show Notes for today’s episode can be found at www.thoughtfulre.com/E11. So please do yourself and do us a big favor by hitting the subscribe button in your podcast app. That way you’ll know exactly when the next episode comes out. And everyone after that. In the last two episodes, we discussed the topic of seller financing. First, we talked about the five myths of seller financing. Then we talked about what seller financing is to a Thoughtful Real Estate Entrepreneur, a TREE. So go back and listen to those if you have not already done so. In today’s main course, we’re going to talk about the story, I’m going to tell you a story of an epic deal that I recently completed, full of twists, turns, complications, near collapses, and all sorts of lessons to learn from. But first, as always a little bit of food for thought. Because after all, stuff for real estate entrepreneurs we like to feed our minds with things to think about. And ironically, today, what we’re thinking about is this. It’s a quote from a guy that I know named Joe polish, who runs Genius Network, which is a mastermind group that I am a part of. And I was at one of these meetings with Joe recently. And he said, You can’t think yourself into entrepreneurial success. And boy that hit me right between the eyes. I thought Boy, that’s kind of ironic because thinking as a TREE, or Thoughtful Real Estate Entrepreneur is our superpower. But it’s also potentially, our kryptonite, as well. And this isn’t really about analysis paralysis, per se, I guess that could certainly be the case for some people. But what I find that I experienced the most as a Thoughtful Real Estate Entrepreneur is not so much about analysis paralysis, but empathy. And empathy is our ability to see things from a different perspective. And it could be seeing another person seeing another situation from another person’s perspective. But it can also just be seeing a topic from a bunch of different perspectives. And TREEs, we tend to have great empathy. And so that means that when we are looking at a seller situation, or we’re looking at a property or we’re looking at a deal, or any kind of opportunity, it means we’re actually pretty good at seeing all the different angles on that situation. And instead of seeing one clear path that says, hey, this is what we should do, we see several potential paths. And we want to make a thoughtful considered decision that we know is the right thing to do. And the fact that we can see it from so many different angles actually can get in the way. So it can create inaction and us but ultimately, as Thoughtful Real Estate Entrepreneurs, we have to take action because nothing happens until we take action. So I think step one is simply to be aware of this dynamic to be aware that thinking is actually potentially kryptonite. And once we’re aware of it, then we can start to notice when we’re doing it and feeling that way. So I want to give a thank you to Joe Polish for this great quote, you can’t think yourself into entrepreneurial success. And that is today’s food for thought, Hey, everybody, just a quick interruption to tell you about something we’ve put together for you. I don’t know if you’ve ever heard this funny expression, but a powerful one that says you can’t read the label when you’re inside the bottle. Well, real estate investing is kind of like that, when I got started, I was just reading and listening and studying everything I possibly could and taking massive action based on that, which was fantastic. But it took a long time, like a long time for me to realize that so much of what I was learning was actually pretty lowbrow, I just didn’t have that perspective. And you know, you might be in the same kind of position right now. It’s very difficult to know and to see your own situation clearly when you’re right in the middle of it. So we’ve created a free PDF guide, available for download. It’s just for you guys as listeners to sleep free real estate investing, not available to anybody else. And it’s called Five critical mistakes that make most real estate investors accidentally low ground. So you can go get this right now if you’d like to get this free PDF guide at pod pod pod dot thoughtful rd calm pod dot thoughtful Rei com, go grab it, and see if you are making any of these five critical mistakes. All right, moving on to the main course of today’s episode. Today’s topic is the story of a building that I recently bought. It’s a commercial property. And it’s not just a single transaction. In fact, it was really a series of moves. Over time that ultimate came together into a single, multifaceted, coordinated effort. It’s an epic and multifaceted campaign of prolonged seller relations effort. You know, I you can probably tell already from previous episodes, I like metaphors and analogies. And I feel oftentimes, like entrepreneurial real estate is like a chess match, both on a deal by deal basis, but also on the basis of an entire portfolio. And sometimes the chess match is a longer chess match over time, that might play out over a longer period of time over lots of interactions. And it might seem like a series of smaller chess matches, but it’s really one bigger chess match. So today’s story that I want to tell you is about a really cool, charming building in my town of Portland, Oregon, that we call Elizabeth, I’ll tell you why we call it Elizabeth later. By the way, I’ve put a few photos of Elizabeth in the show notes for today’s episode. So check that out. Again, that’s thoughtful r e.com, slash e 11. And you can then sort of put a face to the name, so to speak, as you listen to this story. And you hear about Elizabeth. So I’m going to tell you this story. And as I have moments, when we can start to point out the lessons that I learned along the way are important things to make sure that we don’t accidentally gloss over, I’m going to do that from the important strategic points and whatnot, so that you too can be sure to really learn from every little move along the path of this deal. I want to stop at first actually do this for the for the very first time. and point out a major point. People tend to think that a deal has a negotiation. Like, there’s just one negotiation, you know, like you go into you negotiate to buy property, and then you simply buy the property. That’s not how I think about it at all, I think of the entire relationship. From the moment my mail arrives at the sellers house. From that moment, until literally the closing of the transaction and the recording of the transfer of title to me, that entire thing is a negotiation, it can last for months, it can be a shorter period, it could even last for years. But even when it seems like it’s over is not over until the recording is complete. And we’re talking right up to the last second. So you’re not really trying to get one yes, it’s not a negotiation, you’re trying to get a yes to you’re trying to get a series of yeses, a sequence of smaller yeses over the course of the transaction. It’s like trying to get them to eat a series of bread crumbs along a trail, one at a time, rather than trying to talk them into eating an entire piece of bread at once. we’re dropping these breadcrumbs in a certain order leading this conversation to where we want it to go and where they want to go. And we’re working with them, to get them to eat those breadcrumbs in that order and keep progressing the conversation forward. And that is really negotiation. This whole thing is what the art of seller relations is all about. You hear me talk about seller relations a lot. And it’s about navigating this conversation carefully and deliberately to understand where all the opportunity in this particular deal or any deal really lies. And learning how that you can present your proposition to the seller in a way that makes them feel you’re like you’re simply giving them exactly what you understand that they want that it’s not about you. You’re not framing your proposition as here’s what works for me, you’re framing your proposition, through this entire progression of discussions and breadcrumbs in a way that gives them exactly what they are looking for. And if you’ve done this, right, they won’t even really know what it was that you wanted in the first place. Because you’ve done such a good job of framing your proposal in a way that is going to work perfectly in alignment with what they have told you they want to accomplish. So on with our story, here’s how it all started. A few years ago, the New York Times published an article about earthquakes and the likelihood of earthquakes on the west coast. And it really focused on Oregon near where I live. And it really focused specifically even on the Portland metro area. And it really freaked a lot of people out. I mean, freaked everybody out, really, it really put the spotlight on the topic of earthquakes. And not too long thereafter,
the City of Portland, created and published a list of all the buildings in the city that they considered to be made of unreal, enforced masonry. So that would be cinderblock buildings, brick buildings and things like that. On reinforced masonry is not built these days, the engineering and the requirements in the code are completely different. But originally in and in Portland, there’s a lot of, you know, old buildings about 100 years old, or 70 or 80 years old, that were built before those codes were around. And so there are quite a few buildings that are made of and reinforced masonry, or as we say you are. And so they published this list. And they started to say that the URL building owners were going to have to seismically retrofit they’re buildings. Well, now this can be extremely expensive. I mean, nobody knows exactly how expensive it’s going to be until they get a specific quote, and they don’t even know exactly what the scope of work is going to have to be. But if you’ve got a commercial building made entirely of brick, it’s not going to be cheap and easy fix. It could be hundreds of thousands of dollars. And it raises lots and lots of questions about how how can they expect you to just come up with several hundred thousand dollars to retrofit this building? And where’s the financing package going to come from? And as if the city or the state or somebody offers financing? How is the financing going to be secure? Is it going to be secured with deed of trust? Well, what if you already have debt on the property? Is that what position with a deed of trust Be and it just raises a million questions. And so we started to think about that we thought how or this probably means that these sellers are these these property owners to very optimistic always called property owners sellers. But these points property owners own unenforced masonry buildings are probably feeling a little bit more motivated, maybe to sell those buildings now than they might otherwise be. And yes, obviously, we would be inheriting a one of those challenges from them if we were to buy one of those buildings, but I felt like it was going to open up doors to conversations that might not otherwise happen. And I as a, you know, late 30s, four year old guy probably have more energy, and willingness to figure those types of things out and cross those bridges than maybe somebody who is 70 and has owned the building for a long time. And they just don’t want to have to, to worry about those things. So what I did is I downloaded the database of this published list of URLs on reinforced masonry buildings. And I sent them a letter expressing my interest in them building. I did not mention anything about and reinforced masonry in the building. Or in the letter I just simply said, my name is Jeff I’m interested in your building, would you be open to speaking with me about it? Okay. So fast forward a couple of weeks. This is now late October 2017. I receive a phone call from a woman who owns a building and we’re going to call her Cindy. Cindy says, Hey, Jeff, I was just about actually to list my building. When I got your letter. I had signed the paperwork for the listing agents who had been after me for months and months and months to list my building with them. I was just about to fax it back. I just hadn’t faxed it back or emailed it back yet. But it’s even saying sitting here in my office. And I thought to myself, well, that’s interesting is that maybe that’s a little clue in itself says something about Cindy, who signs things and then sets it aside and doesn’t scan it affects you right back anyway. But so I look up this building ratio, what she gives me the address, and I have to look it up, just to make sure I remember because I had sent the letter to probably in 2000 property owners. And I look it up and I’m just wowed by it’s a beautiful historic building, built in 1907 was two stories. It’s made of brick. It’s got retail on the main street level. And it’s got offices above. Or in this particular case, part of what was upstairs of cities building was actually an apartment residence. But it was empty. It was needing renovation, she told me. And I could see that this was originally the building of the Bank of Sellwood. So what is the neighborhood that I that the building is in, it was originally built as the Bank of so beautiful brick building, very, very charming, very vintage. And I’d say overall pretty like well preserved a sort of had that really lovely patina of age that is just really beautiful. And it’s hard to replicate. And I also saw here quickly that had a very interesting physical setup, this whole building was was just one building. But at some point, someone had drawn a lot line right down the middle of the building, and split it into two parts, one of which was about 60% of the full square footage, and one was about 40% of the square footage. And so the two ends of this building, even though it’s one building, had two separate owners is almost a little bit like a condominium type setup. But it was so long ago, before really condominium law was around that it just ended up being one building with a lot line drawn along one wall and two different owners. So city is the owner, along with her husband, and her brother, the CO owners of the 40% side of the building, so the smaller of the two sites. And we Cindy and I agreed to meet up. And I thought to myself, I’m going to take my wife with me this meeting because this is a really cool building, it has this a residence above. Maybe this is something we didn’t want to live in ourselves. And we’re going to meet on a Sunday. And so I just grabbed my wife. And we’re what’s funny is she didn’t know exactly where we were going, or what type of building we’re going to look at. I just didn’t give her all that information as as we were driving down the street. As soon as she saw this building, not knowing what we were going to see. She goes who we should buy that one. And I looked over and I said, holy cow, that’s the one we’re going to see. She’s like, Oh my gosh, are you kidding? It’s gorgeous. So why did I take my wife? Well, I wanted her to see the building, and wonder if it would might work for us actually, for our own personal use. But I also love having my wife along with me. In these types of situations. I actually mentioned my wife and my letters A lot of times, and it’s about, she’s helpful in building rapport. She’s helpful in positioning us as just a regular couple, because looking to buy a building, which is a exactly how I see us and how I exactly how I want the sellers to see us, as well. So we meet Cindy at the building, and she brings her brother, who we’re going to call Stan. So Stan, and then Stan owns half of the rights to their building, and Cindy and her husband on the other half. And they had inherited it from their mother who had passed away many, many years before. And they’ve been managing it ever since then, she tells us immediately that they are just not good property managers. And that that’s kind of why they’re ready to be done with this. And it becomes very clear very quickly that Cindy is the business person here. She’s the driver. Her brother Stan is older, but he is just not quite as alpha necessarily as Cindy, and he’s physically more in charge of the building. So if attended had a question, their phone call would be routed to stand for that. But Cindy was really, in the driver’s seat became very quickly very quickly. Cindy is a business consultant by trade, and she’s very, very busy. Turns out she’s also very difficult to reach as I would continue to learn over and over again in the future. Stan runs what it seems to be like kind of a dying small business. He’s running an antiques business, which is the same industry that his mother was in as well. He loves antiques, he’s he’s excellent with fixing old things. But that business overall is kind of drying up, I get the impression. So the upstairs apartment was where we spend most of our time in our meeting, because it was faking. And the two retail spaces below were occupied. And we didn’t want to disturb those tenants. This upstairs apartment had been vacant for about a year, and they just had not wanted to do the renovation, they even though they kind of Of course said well, we could just go ahead and clean this thing up and read granted, we just really don’t want to. And every time somebody says that they’re trying to, you know, position themselves as having a lot of options and, you know, make make me feel like they don’t need me to buy their building. But I was clearly getting the impression that they didn’t have what it took to get the renovation done probably just in terms of time and organization wise, and maybe even the cash to get it done to the two retail tenants below are good, and they were stable, but they were under market with their rents. So Cindy tells me that they’re asking $900,000 for this building, which seems to me like not unreasonable if it was fully functioning well and fully occupied in that market rents. But it feels steep to me, given the fact that the income and the noi net operating income is kind of low. Because you know, a third of the income is not non existent as if the apartment is vacant, and the other two units are below market and their rents. So one thing I’m listening for this conversation is Cindy, or stand to mention on reinforced masonry. I’m wondering if they know that the building is on this URL list. And I intentionally did not mention this in my letter. And they don’t bring it up in our conversation. And so I just note that I put that aside in a little vault of my mind. And I say that’s an interesting observation, are they withholding that information from me, maybe they don’t even know, whatever it is, it’s interesting, I’m just going to file that little tidbit away, for
later. So we leave the meeting. great rapport, we agreed to chat again, right away, I let them know definitely very interested in and I can’t wait to talk with him about some more specifics. So I started thinking about what kind of a proposal I would put together. Now, it’s really important to know, at this point, I don’t know, you know, half of what I would really like to know, before I ever like to put a proposal in front of somebody, I always really want to know, someone’s real motivations, their issues, their concerns, their situation, what they’re hoping that this, this transaction might lead them to where they’re headed, I need to understand the bigger picture. So that I can frame my proposition in a way that’s going to make sense for them. But my gut here is telling me that I’m not going to be able to figure all that out before the window of opportunity for this deal closes and vanishes. Because Cindy is telling me she’s got the listing agreement signed and just sitting on our desk waiting to run through the scanner, and send back to the listing agents. So I reach out to Cindy and I schedule a time to go to her house. I’m going to meet her husband for the first time he hadn’t been at the previous meeting. And I see all three of them. This is really important to me, as three people making decisions here. I always like to meet the sellers, and I like to meet them in their own home. Now, I always want to involve the seller, the financing of the property whenever i three whenever I can. But I don’t know how feasible that is at this point. Because again, I just haven’t had enough chance to really uncover or turn over those puzzle pieces. And ideally, of course, I’d like to know this before I make my proposal, but I don’t in this case, and my gut is telling me I need to act fast and then circle back to that later so that I don’t lose this opportunity. So I decided I’m going to act quickly traded the property in contract and tied up, as we say, and then became a little flexibility to myself to be able to uncover some of these things and then be able to address them in the negotiation. As we proceed even after I’ve had it in contract. I like actually the idea of securing this property in my rate to buy it before the Unreal enforced masonry conversation comes up, because Cindy and Stan have chosen not to bring it up proactively with me. And so it will be up to me to bring it up them later. But I’m feeling my gut is telling me that later, after we’re ways down the road, after their ways closer to the outcomes they’re wanting that I get have more leverage if I bring up the and reinforce masonry conversation at that point. So this brings me to another really important point in a learning point out of this whole thing I’m going to give you yet another metaphor or analogy. negotiation I find is a lot like a card game. Now I’m not a big card player, I have to feel like I have to relearn poker every time I play poker. But with card games, you’ve got a handful of cards. And some of those cards you know are valuable in the context of that game. Some are less valuable. And there are times when you want to just immediately lay down your cards and, you know, bring up the big gun so to speak, and use all the leverage you have right away. But there are other times when it’s very important the order in which you play those cards, the sequence the timing of those cards, because sometimes a card will give you more leverage if held on to later. And in this case, I felt like playing the URL card the and reinforce masonry card later, was going to be more powerful card than if I had just laid it on the table up front, especially before we even put the property in contract. And a classic gives me if I hold on to this URL card, it gives me more time in the relationship with them to engage what they know what they don’t know. And what they perceive in their opinions are about unreal, enforced masonry. So the lesson here is take stock of the card. So you have that you can play but don’t go and just drop them all on the table right away, be thoughtful and strategic about when playing each card is going to get you the most leverage. So city told me that they want $900,000. And I go ahead and even though I’m I don’t feel like I have enough information to make my proposal, I want to take action quickly. So I offer her and Stan and her husband the $900,000 that they want with what I felt like we’re very reasonable contingencies that they would not object to whatsoever. Because after all, if they end up listing this property with a broker, chances are, they’re going to find a pretty traditional buyer. And that pretty traditional buyer is going to be asking for pretty traditional contingencies. So I felt like it was safe to go ahead and do this. So I wrote my offer for $900,000 with two contingencies, one contingency for financing, which was very standard. And I actually went so far as to make it very specific and say that it has to qualify for a commercial real estate loan of 75% loan to value or higher. And secondly, for an inspection, due diligence contingency of 25 business days. To them, this $900,000 is what they were planning to list the property for. And if they sold it to me, Now, obviously, they don’t have to pay a sales commission. So that’s a win for them. And I knew that that would be a no brainer. And then if I could get them focused on the $900,000, putting in those other contingencies would not be a problem at all, because they’d be so focused on the price. I offered them a couple thousand dollars of earnest money, they came back and said, I we’re going to need more than that. And they demanded $10,000 of earnest money, definitely more than I typically put down. But I agreed and I gave them I gave I gave the escrow company, the title company, the $10,000 of earnest money for their request, in our time together at their house. At the same time, I am talking about my proposal with them. I’m very focused on building rapport and learning as much about them as I possibly possibly can. There’s still major questions I have at this point, you know, what do they still owe on the property? If anything, is that’s going to help me understand maybe what some of the seller financing options are? What exactly is it that Cindy and her husband are going to do after the sale? And what are they going to do with their proceeds? Is this part of a plan to get them into another property? Are they just trying to get out of this property? What is Stan going to do with his part of the proceeds? And it turns out through this conversation, I learned that they owe about $300,000 on the property with a traditional commercial real estate loan from a big national bank. Cindy and her husband want a 1031 exchange into what seems like a very specific piece of property, which I infer is on the beach, about an hour to an hour and a half away from Portland, that they have found, and they want a 1031 exchange into this property and sort of technically make it an investment property but I’m getting the impression that ultimately they want this to be a personal use property, down the road. So they’re motivated to create, to convert their inheritance from their mother into a beach property that they are going to use themselves. That’s a strong motivator for them. Stan I’m getting the impression, just wants his money. And I’m really getting the sense that his business is not doing well, it’s drying up, and that he wants his inheritance to kind of shore up his own financial situation, sitting there in their living room. Cindy also brings up for the first time, the physical setup of the building. And she mentions the people who own the other side of the building. And she says, You should talk to Larry and Mona, they are the other side of the building. They might be willing to sell to you but they are tough people trust me, very hard to deal with. And again, I just kind of filed that away and I thought, that’s interesting. What I’m doing here is I’m collecting their opinions. That’s what we do a stop for real estate entrepreneurs using our seller relations skills as we are listening. We’re listening hard. We’re taking note of people’s opinions about certain topics, and we’re not responding to those necessarily but we’re just taking note of them, because they tell us a lot about our seller. And she thinks that Larry and Mona are tough people to work with. Okay. Duly noted filed away. So, our deal involves my ability to conduct due diligence and a feasibility, basically, of the, of the building. So we’re going to do physical inspections which we do I begin exploring the financing options for the building of course, I am reviewing the leases for the two retail units that Cindy has that she shares with me. I started getting bids from my contractors on things like renovating the unit of the apartment unit that’s a vacant for addressing some of the things that come up in the physical inspection and getting all my ducks in a row. So that, ultimately, when I go back to the the seller and share my findings for my due diligence, I can let them know what some of the impacts of those findings might be, and they can be quantifiable and objective and black and white. At the same time, another big part of what I’m doing is I am now boning up quickly and aggressively on the whole conversation with the city, about what they are proposing to require 400 reinforced masonry buildings. What are they going to make you do, what’s the time horizon for making you do that. How is it going to be financed, what’s it going to cost what exactly is the scope of work, but it’s difficult because the city doesn’t know for sure what is going to be required. They just know that they’re saying this is going to happen. But as, as you might expect, the city council’s having a lot of lengthy discussions about this the community especially the building owners themselves are pushing back pretty hard, their implementation timeline for even deciding what they’re going to require is well past my escrow period to buy this property. So, meanwhile, I get a call on my letter from Larry and Mona, that people who own the other side of this building, because again, I had sent a letter to every property owner, on this on reinforce masonry list. And I just kind of got lucky that the other end of the building that owner called me as well. So I kept it to myself at that moment that I was already speaking with the other end of the building solder. And I went and I met with Larry. And I, at that point did tell them that I was in contract. On the other side of the building, because I wanted to establish credibility and I just was meeting with Larry. First, and getting to know him, and just trying to feel him out and his situation, and maybe his motivations he very quickly made it seem like they were not committed to selling by any stretch of the imagination but would entertain the conversation. And so I wanted to him to see that I wasn’t just a tire kicking buyer I was actually in contract to buy the other side and with that bit of knowledge comes to assumptions on his part of course that I have the ability to buy, you know, to buy these types of buildings and I have the horsepower to take them down, and the experience to do it. Now I don’t tell Cindy, that I’m going to speak with Larry and Mona Of course I just keep that part to myself, so I express my interest sincerely to Larry and Mona. I let, I get Larry to allow me to come to his house and meet his wife Mona, and to discuss the deal with them they live in a beautiful house up in the hills and Mona I find is nice but she’s a pretty hard nosed business person. Larry’s more the physical maintenance guy. And, Mona though is the finance person, and she’s really kind of driving the decisions around the sale of the building, and what the terms of that and the price everything will look like. Mona does a lending of her own. and that she and Larry about 70 years old or so, and they’re very well off it’s a beautiful house up in the hills that I’m visiting them at, they’ve built quite a real estate Empire they do private lending, and they’re really very well established they’ve owned this building for about 40 years. And what I learned is that they don’t really like Cindy and Stan and the people on the other end of the building. I catch them making a couple off handed remarks about them, and implying that they have not done a very good job of maintaining the physical condition of their side of the building and that they have not been easy to work with, because as you can imagine when two parties own one building, there are things that probably require some collaboration, and some communication, and it sounds like a relationship between the two owners of the two ends of the building has not been very good. So Mona I find to be overall kind of cold and business II, but Larry and I, we’ve got great rapport and I’m thinking I really like Larry I, I want to be like Larry when I’m his agent at his point. And at one point Larry actually says to me, I think it would be great if you were the next person on this building. He tells me he’d feel really good about that. And he tells me, incidentally, that if I did, by his end of the building to. I would be the first person to own the whole building, and who knows how long he didn’t know how long, but he knew it was a long, long time. So I try really leveraging the credibility that I’m buying the other side of the building because of course that means I’ve got what it takes to do these deals but Mona is not really taken the bait. And so she tells me that if they were to sell and this is a big if she’s going out of her way to make sure she knows, or she knows that I know that they’re not to really particularly motivated the so she says they’ve got lots of other suitors, they don’t need to sell them at all. And if they were though they would demand, $1.3 million for their side of the building machines very indifferent, in a way, she’s playing the communication with me cuz she said they’re in the process of selling so much other stuff that they own many other properties that they’re feeling kind of overwhelmed, and they don’t really have the time now to go and find a replacement property. And I’m listening to all these crews thinking wow these people are perfect candidates for seller financing. And I know they own it free and clear, because they’ve, they’ve told me that now. And I test out a few different inquiries about seller financing, and they’re clearly not interested in doing that. I’m also simultaneously, just like I was doing with Cindy and Stan. I’m listening for them to mention on reinforced masonry because I have to assume that they’ve been receiving letters from the city, saying your building is on this list and we’re going to be making you do something about that in the near future. They don’t mention anything, so again I just found that a little tidbit away. And I think that’s interesting. Either they don’t know they’re withholding it from me, or something but it’s an interesting observation that I just hold on to for now. So I tell them I’d love to buy their building, and I said, Look, I’ll give you the $1.3 million, you’re looking for. And Mona is saying, Okay, before we accept your offer we need to know that you have the money to do this. And I was hoping that my dying, letting her know I was already buying the other side that she would just assume that I did have that capability. But no, she was looking for verification. And I said, Well, you know, we have a little bit of a catch 22 here because once I have your property in contract that I can go to my lenders and find that out. And she wouldn’t she wouldn’t go for them. So I offered to buy their building but they politely declined and say it’s just not the right time for them, and they’re not 100% sure that I can get it done. Anyway, so again I never mentioned this Cindy and Stan that I talked to Larry and Mona, but I did, and I felt like this was probably a dead end with Larry and Mona, at this point. So back to Cindy, and Stan. I conclude my due diligence. And I find that basically the building is, it’s, it’s only Okay, it’s not great. There’s a lot of stuff that can be a lot better. There’s some electrical panels, there’s some that need to be replaced. There’s a bunch of plumbing there’s a very old, the sewer line is in kind of rough shape it needs to be redone. The roof is in really bad shape. And it needs to be done as well. And plus and this URL topic is especially difficult to assess because it’s
not clear what rules are going to be put forth by the city. And we probably won’t know for a little while, so it’s really impossible to determine a scope of work and I’m just doing my best here to make an educated estimate of what that might entail. So I go back to Cindy, And I asked for a meeting to share my due diligence findings I started having difficulty, reaching her. And I’m trying to call Stan and Stan just all he can really say is, we got to talk to Cindy, but I can’t really reach Cindy and it’s getting more difficult. Pretty soon The holidays are coming up that I find out that they’re sick, and they’ve got a loss in their family and they’re out of town. So over the course of this, I am able to reach them and we extend the due diligence period three times. Now all the way into early February of 2018, before we can really sit back down and discuss the due diligence findings and figure out if we can find a way to move forward and make this work. So we finally Sit down. In the early part of February, 2018 now good five months, four months or five months after way that were originally met. I go back and I present my findings to them and I tell them that. I think it’s going to need close to $150,000 of work to make it really worth the 900,000 that we had agreed to know, and in a lot of ways this is mostly just a test to see how they react to the whole situation, and to uncover what they know or don’t know about the URL, because it’s still hasn’t really even come up. And I’m testing to see how they react to these things, we get together I share these findings. And I learned that yes oh they do know about the Unreal enforced masonry discussion that’s coming up, but most importantly, I collect an important insight on their attitude about it. Their attitude as expressed by Cindy, is it’s not a big deal. It’s not even likely to come to fruition. Cindy says I know people in local government there my, my clients, and they say won’t happen. One of our tenants at the building her husband is a contractor, and he says it’s not likely to happen. So Cindy, is very dismissive of unreal enforced masonry, and in my opinion is acting very very unrealistic, about this particular situation, but again, interesting observation file the observation away in the file of insights about the seller. So, based on my due diligence findings I propose a $750,000 purchase price revised purchase price with the same deal structure. Or, I say, I’d love to be able to pay you more. If you can help me with the financing itself, I said so I can pay you $825,000. So again we’re only reducing the price by half as much as I originally proposed. I could pay you, $825,000, if you will, let me go out and get a new first position loan of $350,000. This will pay off your existing debt. And then you carry the balance of what I owe you. On a promissory note for the next five years, because if you do that, you will make it much easier for me to get financing and I can afford to pay. 825,000, which I think is overpaying for the property but I love the property, and I’d be happy to overpay for it. If you help me, facilitate actually doing that from the financing perspective. So in doing this, what I’m really doing some testing how badly they want, what they want. I’m testing how badly. She wants to 1031 exchange into this property, and I’m testing how badly Stan wants his cash for whatever he’s going to do with his part of the inheritance, and immediately decline the promissory note proposal, they have no interested in that at all. Even though it means they could, you know, sell the property still for $825,000. This is a valuable insight, it tells me a lot about their the strength of their desire for what they want and it seems very strong desire that Stan wants his money and probably needs his money. And that Cindy and her husband, really want to buy this 1031 exchange property. So again, valuable insights, very powerful for the negotiation. I file it away in the back of my mind, with all the other insights about them. Deliver call me back, and they agree that if I would be willing to pay $110,000 for the property, using the same structure originally proposed in which I would go get all new financing, then they would agree to that price so this is a 10% discount, which is a significant amount $90,000, and I would then have to waive my due diligence contingency with my financing contingency being the only thing remaining. So I agree to their counter, and we write up an addendum for me to be paying now $810,000 no longer and due diligence contingency. But our financing contingency remaining requiring a 75% loan to value commercial loan approval. So I’m still very safe in the sense that my earnest money is not at risk because I still have a totally acceptable contingency which they have to be able to get the right loan. We now adjust the closing timeline to be for April, and I’ve got. At the same time, awkwardly a very big trip coming up a long time, pre planned trip that was going to be gone for nearly a month. then now with all of the renegotiation of the extensions has resulted in a very conveniently timed trip in the middle of this deal so we had to work around that. And we pushed the closing timeline into April. And this brings us to another important point. Now, you might have assumed at this up to this point that I have my own financing lined up for my down payment, whatever my down payment might be 25% seems like might be making sense consider I’ve been asking for a 75% loan to value loan. So you’re probably assuming that I’ve got my 25% of either $900,000 or night of $810,000 lined up and ready to go. And if you made that assumption, you would be wrong. Now I didn’t have some funds available for a project like this, but it’s very important to note that as a real estate entrepreneur. You can’t wait until you have everything all perfectly lined up before you begin to take action. It’s not as if I had saved up a bunch of money and I said, I want to buy a property now. Now I will do marketing. Instead, I’m constantly doing my marketing. And once I get a deal, put together. And I renegotiate it as needed and I’m confident that that’s a deal worth doing. Then I go about putting all the resources together to get the deal done. So, at this point, I really don’t know necessarily where the down payments going to come from but I know the deal is now in the strike zone of being a deal worth doing at the $810,000 price point. So I continue exploring my financing now that the price has been significantly adjusted. And it’s becoming clear that this building, with its an ally, which is kind of a low net operating income, given the fact that the one unit is vacant the other two. More importantly, or below market rents is not going to qualify for 75% loan to value low. My commercial mortgage lender is telling me that the maximum loan amount, they could give based on the noi of this property and they required debt service coverage ratios, is going to be about 60 to 62% loan to value. Even with this price adjusted 10% down. So I started to wonder, Is it really is this a deal that’s worth that much cash out of pocket. And I’m starting to question that a little bit. So I go back to the sellers and I tried to talk with them about the financing difficulties I’m experiencing because after all, if I’m experiencing these difficulties, any buyer is going to be experiencing these difficulties because it’s not about me as a borrower. It’s about the building as an asset that creates income and simply not creating much income, and it’s not creating much income because of the way that they have managed it so at the end of the day, the low net operating income on the building is really their problem, and it’s really their fault now of course I don’t want to look at them and say this is your fault, you know, but at the same time I’m trying to help them understand that the consequence of the way that they’ve been managing it is that they’re building is not worth as much as it was, as they thought it was, and is more difficult to finance, and that’s more difficult to get what they want to out of it. But you know what, I’m having trouble reaching them again. Can’t get Cindy on the phone call Stan, he says you’re gonna have to talk to Cindy cannot get Cindy on the phone, I’m sending Cindy emails, I’m sending Cindy text messages I’m calling her on multiple phone lines. I’m simply now it just, if I can’t get her on the line I’m trying to just express some of the basics of my message to her in voicemails and emails explaining the financing difficulties, trying to get them to consider reconsider being involved in the financing, and I’m hearing nothing. Nothing at all but crickets and it’s not looking good. I decided to write up a two page overview of this deal and send it out to a few of my colleagues because I’m starting to think there’s no way I’m going to get this deal done. I can’t even reach Cindy to adjust our conversation or negotiation at all, but I hate to see this deal that I think I’ve done a pretty good job negotiate up to this point, or four very cool rare building, I hate to see this go to waste. And I’m starting to wonder, Is there anybody else in my world who might be able to get this thing closed. Even if I made you know five grand for referring it to them. At least this great deal would not go to waste this this great property this great opportunity. And I sent it out to a handful of people, small network of people and trust. And I got a lot of great feedback, a lot of people wrote back to me and said my goodness this building is beautiful, but I also read a lot of feedback that said, you know, it’s a little awkward to buy half the building. If I could buy the whole building, I’d probably be more interested in. So if you can get the other part tied up to let me know. and then
we could talk, but I couldn’t get the other side tied up because Larry and Mona, they weren’t having it at that point to run it out of time. And I’m also now at this point wanting to make sure that my $10,000 in earnest money is not going to go to waste and be forfeited either. I cannot get a hold of Cindy and her family for the life of me. So unfortunately, I decided that I have to submit a termination. In April, six months of being in escrow, because the closing date is now looming, I cannot even reach them to have any conversation whatsoever. And I’m not going to go to close it by the closing date. But I have my financing contingency to work with. And I terminate under my financing contingency. I send it to Sydney. I send it to my escrow officer and it takes a couple of weeks before my escrow officer is even able to reach Cindy and get her to acknowledge determination and release my earnest money. But eventually, I did get my earnest money back. But you know, I was frustrated is such a beautiful building. This was months of being in escrow dozens of hours of effort, probably at least $1,000 worth of actual hard due diligence costs, spent on inspectors. I’ve got unreasonable. And now, in communicating with people, unreasonable is one thing to deal with, unable to reach somebody in a business transaction. So frustrating, so helpless feeling so disrespectful feeling. Larry and Mona, they won’t cooperate with me either. I just feel defeated. And I have to just move on, I have to let this negative bad energy go. And I just say, to let it go. Looks like a dead deal, doesn’t it looks like the end of the story, but maybe not. Maybe it’s not the end of the story because maybe this chess match that we’ve been playing. Maybe the chess match that we have, add up to this point is just a small chapter in a greater chess match. And next week. I’m going to tell you the rest of the story. Thank you for listening to Sleaze Free Real Estate Investing. I’m excited to be back next week because next week I’m going to tell you the rest of the story, this epic case study, and how I became the first person in 101 years to own this entire building. Again, please do yourself and do us a big favor by hitting that subscribe button in your podcast app. And then that way you’ll know the very second this next episode is released reminder, you can find show notes, including a transcript and photos of Elizabeth at www.thoughtfulre.com/E11. Until next time this is Jeff from the Thoughtful Real Estate Entrepreneur, signing off.

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