Always always always check the estimated closing statement

Always, always, always check your Buyer’s estimated closing statement.

Why?

First, you have to understand what a Buyer’s estimated closing statement is. It’s a piece of paper that shows escrow’s calculation of how much money needs to come in from the buyer to get the deal closed.

But wait, you ask, why do we need calculations? Surely the price is the price. Not so. There are all kinds of fees (for escrow, title, etc.), prorations for money paid or received by the Seller (property taxes, rent), and credits or debit (tenant security deposits, the Buyer’s initial deposit, etc.).

All of those adjustments cause the actual amount of money the Buyer needs to wire in to move around.

And, because escrow officers are human beings trying to juggle multiple deals at the same time, the calculations are often screwed up.

These aren’t tiny discrepancies. Among other instances, I once had escrow overpay me by $10,000 on a sale. Yesterday, on the other hand, we caught an error where we were being under-credited by $1,100.

Now, you may think that, in the context of a $3MM deal, $1,100 is not a lot of money. But our whole business is premised on the idea that we treat our investors’ money as if it were our own. And I don’t spend my days lighting $1,100 on fire, so I’m checking my closing statements.

And you should, too.

Rain’s coming

Yesterday’s LA Times had a pretty strongly-worded article warning about this winter’s El Nino, which is shaping up to be a once-in-a-generation weather event.

Why am I writing about this now, during the summer, on a real estate blog?

Because now would be a good time to replace worn-out roofs on your buildings.

Once the rain really starts to come, it’s difficult to work, plus there will be tons and tons of demand for roofers’ services. You can imagine what that will do to pricing.

We replace the roofs on all of the buildings we renovate. But we usually do so in the middle of the project. This year, I think we’ll try to front-load them, so that we’re less vulnerable when the late-Fall rain comes.

 

An interesting deal we won’t win

I got a call about an interesting building in Highland Park a few weeks ago.

Ordinarily, these are the types of calls I love… an interesting deal, a broker with whom I’ve done plenty of business, etc.

But this one is almost definitely not happening, and here’s why: Because it’s a bankruptcy sale conducted under the auspices of the court, there is no “inside edge” available.

It’s a straight auction, in which whomever is willing to pay the most wins, with no regard for actual ability / willingness to close, etc.

So, we’re bidding against everyone who ever read an article touting Highland Park as the next Silver Lake. And, because there are plenty of dentists who can come up with a few million bucks, it’s very unlikely we’ve going to get the deal.

There are three reasons main someone might outbid me on a deal like this:

  1. Underestimating the costs of the rehab;
  2. Over-estimating the rents (or, the rents achievable at a specific renovation level); or
  3. Willingness to accept a lower return.

I’m obviously fine with #3. The other two irritate me, because, while it’s always nice to see a competitor screw up, there’s no way for me or my investors to profit from it.

The benefits of being a good acquirer

Last week, we removed contingencies on the acquisition of a 16 unit building in an A area.

The price is far from a steal, but it’s fair and, more importantly, works for us.

The deal was never on the MLS or Loopnet. We didn’t win a bidding war.

Instead, a broker with whom both buyer and seller have done a lot of business made the connection.

Why did we get to do a deal no one else got to see? Because, for years, we have been doing exactly what we said we were going to do vis-a-vis brokers and sellers. That means no price chipping, no promising cash and then using loans, no delays to closing because we didn’t have the dough, no squeezing brokers for part of their commissions, etc.

Have we moved forward on a few deals in spite of rents being a little lower than advertised? Yes, we have.

Have we moved forward on a few deals where the disclosure from the seller was laughably inadequate and almost certainly fraudulent? Yes, we have.

Have we moved forward on a few deals with city or county issues which were not disclosed to us during the marketing period? Yes, we have.

And, because we’ve been willing to be flexible on those deals, we’ve certainly left money on the table. But, big picture, because of our flexibility, we generally get to see the good deals, sometimes before any one else sees them.

A real broker line

When discussing a deal with me today, a very good broker I know said the following, about a deal a client had in escrow at $1.1MM:

“Well, it was listed at $1.3MM.”

I don’t want to pick on this broker, because he’s good, but this is a bullshit broker line.

As a buyer, you should not spend a single second of your time considering the asking price, let alone what the old asking price was.

Instead, you should carefully consider what the property is worth to you.

Why?

Well, if the asking price is higher than what the property’s worth to you, you’re either going to offer what you’re willing to pay or else walk away. And, if it’s lower than your estimation of value, it’s very likely the price will get bid up (because, if you can tell it’s cheap, then others can probably see that, too).

The key is to look at enough deals to get very comfortable with your own numbers. And then, once you are confident, you can/should just ignore what the seller and the brokers tell you.

Brokers are very good at moving deals along to completion. Then they walk away with their commission checks and leave you with the building. Better make sure you know what you’re buying.