They say you learn more from your failures than you ever can from your successes. This post is proof of that. When I sat down to write it, I came out with double the word count I usually target. Hopefully there are some helpful lessons in here though!
Last Friday I had a unique experience. My veteran closing attorney said he’s only seen it one or two times in his career. I was under contract to buy a house, the seller and I both showed up to the closing table, title was clear, the funds were there, paperwork was prepared, everything was all set. But the closing didn’t happen. It was shocking. It was a failure anyway you look at it.
However, like most failures, this became a fertile field for improvements. I learned a lot that will make me better going forward. For that, I’m thankful that it happened.
Here are the notes I took after a week of reflection on this experience.
- I take all the blame. It would make sense to point fingers and complain about my counterpart in this transaction. That would be an easy thing to do, and it would feel good. Those thoughts have obviously crossed my mind. The problem is that it would be unproductive. I’m a professional, she’s not. I need to improve my game. I want to keep all the blame for myself, so I can learn, grow, and be better for the next round.
- Communicate better. Proactive communication is the key to real estate deals. In this transaction, I should have dug deeper into why the seller was asking me to close early. I should have let her know immediately when I realized we would need to make rent prorations and transfer security deposits. This was probably the biggest cause for failure.
- Always be willing to walk away. When I walked into closing, we rehashed the difficulties we’d overcome in getting to that point. The seller felt that I should have closed two weeks before. Because that didn’t happen, she argued that I should pay her for $1,800 in credit card interest she’d accrued during that time. This was not something I was willing to do. At that time, I knew it was best to walk away. Maybe I could have negotiated this number down, but I was emotional and wanted to walk away on principle. There’s no shortage of good deals out there.
- My private lending program got stronger. A week before the failed closing, we had closing where only I showed up. Because of this, my private lender’s capital was sitting in the closing attorney’s escrow account. I wanted to pay them interest for the time that their money was in limbo. I learned that’s easy to accomplish. You simply date the note as of the original wire date. Why does this matter? Most private lenders want to keep their money working. I pay 12% interest on these type of notes. At such a good rate, lenders want their money working at all times. The ability to backdate notes means that when one deal exits, we can roll the money into a new one, and backdate the note to the previous deals closing date. My lenders keep their money working for them, and I have a predictable source of capital. I’m going to be expanding my program significantly as we move into 2019.
- If lenders trust you, It’s possible to substitute properties. When it was clear that this deal was dead, my closing attorney asked if I would like him to keep the lender’s capital on hand so I could substitute another property. That blew my mind. I obviously had to consult with the lenders, but there were two other great deals on my radar at the time. These were actually stronger deals than the one that just blew up! Because I do a lot of networking with other investors, I never have a shortage of available deals. Combining the ability to quickly submit properties for lender underwriting and their keep money at work is a game changer for my business and the lender’s investment portfolio!
- Understand your contract inside and out. When the seller asked me to close with the tenants still living in the property, I agreed without thinking of the ramifications. Our contract, like almost all purchase contracts, contains language to address tenants. Security deposits must be transferred, and monthly rent must be prorated to closing. I didn’t communicate this until right before our first closing date. Again, bad communication on my part.
- Describe the closing day process. This seller was upset by the fact that I may not be at closing when she was. It was her understanding that both parties need to be present for it to be on the “up and up.” In my experience, both parties are present maybe 25% of the time on investment properties. Going forward, I plan to tell sellers at contract signing that I may or may not be at closing.
- Set a closing date and time immediately after going under contract. As an agent, we set a date and time for closing immediately after getting a signed contract. This gives everyone a firm plan to work towards. I failed to do that for this deal and it created a lot of miscommunication and distrust. Everyone works better with a firm plan in place. In future deals, I’m setting a firm closing time immediately after we go under contract.
- Multiple people invest time into making a real estate closing happen. The seller was asking to back out of the deal one hour before our second closing was going to happen. That should been a red flag for me! I told her I couldn’t do that because too many other people had invested their time into this closing. The closing attorney, title attorneys, insurance providers, private lenders, our marketing team, contractors, none of them get paid without a closing. That’s a lot of people of who need to feed their family, and I couldn’t just throw it away right before the finish line. I had never really thought about that. But it makes me extremely proud that I’ve gotten over 50 houses to the closing table this year.
- I’m conflicted about letting her out of the contract. I decided to cancel the contract when it was clear the closing couldn’t happen as agreed. She felt other investors would give her more money for the home. Legally, I could have refused, and blocked the sale by clouding the title. Many people I spoke to said I should have done this. Personally, I no longer wanted the house, and saw no reason to place her under hardship. As I reflect on it, I’m not sure that was the right decision. I don’t know exactly how I’ll respond if this situation arises again.
- Sellers seem to want a flat price. I never tell a home seller that they will receive a check for the contract price at closing. It’s not true. There are taxes due, possible title issues to fix, and many other things that could pop up. However, that is what the seller of this home wanted. That’s what she said she heard from me. I’ve spoken to other investors in the last month who had similar experiences. I don’t know where this idea comes from, but it seems pretty common. My best guess is that “we’ll pay all the closing costs” gets interpreted to “you’ll walk away with a check for the contract price.” This is definitely something I’ll be aware of from now on.
Thanks for reading! Hopefully you can learn from my failures and avoid some of these pitfalls. We can all step up our game!