Trust me, when people see 6 figures on the “Cash to Seller” line of the HUD, the creepy crawly’s come out of the woodwork to see how much of that they can grab…
The Project
Scaling your real estate business can be hard, especially if you’re like me and don’t have a staff to help administer the business. Sure, I have a CPA, but as far as managing projects on a daily basis, especially remotely, there can be some challenges.
I considered a 6 figure profit to be one of my goals, an internal milestone – a marker for for a personal accomplishment that was supposed to mean something to me. Of course I’m delighted with accomplishing that goal, finally! I don’t know if my year end will show a 6 figure profit since I’ve had a few other painful issues with projects taking too long, dealing with slow-selling properties, and outrageous extension fees from hard money lenders (of course that was never in my pro-forma at the beginning of the year, but that’s another long and painful story).
Let’s get back on track to what it’s like to make $100,000 on one project, and what backfired on my way to that goal…
I remember the excitement when I got the deal. I knew it was a great money maker and I even told my agent (who likes to spend more of my money than I like to spend) that I had 6 figures as a profit goal for that project. I made it very clear that I was watching the budget very closely and I was to achieve my goal. It would happen! And as it turned out, it did happen.
How did I get the deal?
Every now and then you stumble across a sweet deal that scares everyone else but YOU. This particular deal was a foreclosure in Chicago that suffered from a broken water pipe due to improper winterizing. Mold in basements in Chicago are not that big a deal, but this one was from a broken pipe between the first and second floor. So the amount of mold was throughout the house and the bank didn’t want to do any of the mold remediation. In fact, I made a pretty low offer to begin with, but they came back to me and mentioned there was mold inside the unit. I responded to lower my offer about $12k with that news. They accepted my offer!
Mold is one of those issues that can be easily cleaned up or a growing glob of danger. This was a growing glob of danger. This is the reason the banks don’t want to mess with mold. It’s a lot of work and they aren’t in the rehab business. You have to remember that there are people at these banks that make the decisions…people have their own perceptions, and mold, especially growing globs of danger will scare the heck out of a lot of people. I only back off if there are mushrooms growing on the walls. You may have heard the term “mold is gold”? Yes, this mold was gold.
We totally removed all the drywall and hired a mold remediation company to clean it up – a company that had a transferrable guarantee. We replaced flooring, kitchens, bathrooms, doors, hot water heaters, all the usual that comes with a rehab project and YES, I went over budget. Not only that, delays came into play due to weather and other stupid issues (all learning experiences). Yes, the appliances got stolen in this unit too so I installed a security system. Each day I was concerned about not reaching that goal. But I digress from the real point of the story.
The Biggest Surprise I Never Expected
The place looked beautiful! We listed it and had multiple offers and within 24 hours accepted an offer above asking price! That was great news! I was really looking forward to the closing on this property – my bellwether accomplishment! The one thing I didn’t expect was what happens when OTHER PEOPLE COUNT YOUR MONEY.
First, the Hard Money Lender
It’s common amongst hard money lenders to waive an extension fee if the property is under contract and there’s a high level of confidence it will close in a timely manner. It’s also very common for most lenders charge a per diem for daily interest. Even though we had the property under contract with a solid buyer prior to the end of the 6 month loan, this hard money lender refused to waive the extension fee (because the buyer’s lender was taking forever), and not only that, he had in the fine print that the monthly interest payments are monthly, not daily.
I mean, you can’t argue with the hard money lender on what you signed in a document. And it’s hard to convince them to waive the extension fee as a common practice when they can see on the HUD how much cash you are to receive at closing. They stood their ground and were paid the extension fee and a full 2 months extra interest payments. 🙁
I don’t mean to complain, because without their help I wouldn’t have gotten the deal. But clearly they saw what I was making and made sure they got their fair share.
The Contractor…
Towards the closing the contractor and the buyer were going through the unit, making sure all the little punch list items were being taken care of. However, I get word back about all these other things the buyer wanted done and the contractor agreed to it. HOLD ON! Wait a minute here. The contractor has no authority to add extra work at the buyer’s request. Yet my attorney told me that my contractor is considered to be an agent of ME. Towards the end, the buyer wanted to withhold an outrageous amount of money at closing to ensure the contractor did all the items promised.
You don’t want that to happen. Often times money’s put on hold are never seen again. I agreed to give them a few extra hundred dollars for credits just to get the property closed and move forward.
The Title Company…
This was the biggest surprise of all. When someone sees 6 figures in the “cash to seller” column all the players want to see what they can get out of that deal. The biggest surprise of all was the Title Company decided to withhold $30,000 to make sure we give them all the receipts from the rehab. WHAT?!? Not only did this NEVER happen to me before, even the title company found a reason to get their grubby little hands on my money. I am sure had the “cash to seller” been $20k-$30k they never would have given it a second thought.
Needless to say, I went ballistic. (If you’re like me, you would have already had plans for those funds, and this disrupted my plans significantly.)
The Lawyer…
The lawyer was probably the nicest and most supportive of this issue. His charge was $600.
Illinois performs their closings through attorneys as opposed to title companies. I never really paid much attention to all the line items on the HUD, because for me, it’s all about the bottom line. All those other line items are trumped up charges and taxes and stupid wire fees, and document fees, etc. However, this time I happened to see a hefty commission go to MY ATTORNEY for the title policy. A title policy from a company that kept $30,000 of MY MONEY.
I had complained to him that all the vultures came out of the woodwork when they saw that “cash to seller” line item. He claimed that he wasn’t one of those vultures…Um…Ah…”Don’t think I didn’t notice that hefty commission on the title policy made out to you.” – “Hey, I worked 6 hours on that closing Jean” – “OK, $100/hour plus that commission? I hope you’re buying dinner the next time I come to Chicago!”
I happened to send him my accountant’s report which was all he needed to get me my refund! I’ll keep him.
The Moral of the Story
Hide your money. Even if you have a goal of a 6 figure profit, instruct the closing company to pay off your credit cards, to pay a consulting fee to yourself, whatever you can do so that the “cash to seller” is a low amount.
Before you think I got to keep all that money…
I’m delighted to have reached that level in my business. It was a result of pushing myself outside of my comfort zone, allowing myself to take on more projects than I had ever done before, that I was able to enjoy this project.
Know This…Real Estate Investors Lie…
Just in case you think I’m wildly rich and successful (I may be successful, but I’m NOT wildly rich), I know from experience that it’s easy for us to speak about the 6 figure profit on that one deal, or the $30,000 assignment fee from that other deal, we as business people never talk about the losses. So know that I made $100k on one deal, and I’m not going to tell you about the other 11 properties I rehabbed, not this year anyway.