Terminating Contracts

As investors, we all hope and wish that all of our contracts go smoothly. As much as we hate to admit it, the truth is that some things are out of our control. Appraisals, hidden renovation cost, weather and financing are just a few examples of what we have little to no control over. How one handles these obstacles is going to be what differentiates you from all the other real estate investors.

Last month I terminated my first contract of 2013. I contracted this property with the intent of purchasing it to remodel and sell. At first look it was a no brainer. The home was a newer property located in a popular suburb. It was in need of some cosmetic updating and stainless steel appliances but the market changed overnight. As usual, I did my due diligence, pulled comps within the last few months, calculated the renovation cost needed to match the comps, and offered accordingly. A week before closing I reviewed the market and it turned out the builder had sold two new construction properties and listed the homes directly to pending. These homes KILLED the deal. The after repair value I had in mind was for the same amount as the new construction properties. Obviously, a remodeled home cannot be priced the same as a new construction. At this point many others would have terminated and moved on but not me, and you shouldn’t either.

As soon as I saw this, I called the seller immediately and informed him of the new development. Usually, the seller would be able to reduce the price and closing would take place as scheduled. In this situation the contract price was just enough to pay off the existing loan. I know what you are thinking because I thought the same things: subject-to, lease-option, owner finance, lease-purchase, etc. Before contacting the seller I ran the numbers for all these possibilities but the profit was just not there. I offered the seller a few other routes and he decided to do a net listing. These are not permitted in Georgia but allowed in Texas. Unfortunately, the retail buyers in this market were not open to doing any renovation; they preferred the move in ready new construction homes. The seller’s relocation date was closing in and he did not want to carry two mortgages. I suggested he rent the property and possibly make a little profit in the meantime. He was able to find a tenant that agreed to pay a bit over the mortgage payment and perform the renovations needed.

In the end, I did not make the profit I was looking to make and the owner did not sell his property. The great news was that I hung in there to find a solution for the seller. He was surprised and pleased that I stayed around to assist him with everything. A few weeks later I received a call from someone he recommended that wanted to sell a home. In the end it was another win-win outcome.