As mentioned in yesterday’s post, Pam, the Brown Street property homeowner, was very willing to help sell her home through a short sale process. She understood the short sale benefitted her by reducing future issues with the mortgage company. More importantly in her situation, utilizing the short sale option gave her a definitive date and process so she could effectively find housing for her children.
One benefit of purchasing a property through short sale with a willing buyer is that the seller is typically very helpful in terms of letting you know about potential hidden problems.
In this property, for instance, there was a serious foundation leak. Since we inspected the property during a particularly long dry spell, we wouldn’t have known about it without her firsthand knowledge. However, we would have found out a week after the sale when the basement flooded and we had 3 inches of standing water.
Our contractor surveyed the property thoroughly and with Pam’s information he was able to determine a work estimate of $18,600. This included quite a bit of minor repair work, such as replacing broken gutters and a few broken windows and sills, but also some fairly substantial items such as new cabinets and counters in the kitchen.
As a rule of thumb, I always add 25% to any work estimates I receive in the event there is hidden damage or repairs that need to be addressed. In virtually every project I’ve ever been involved with there is at least one issue that arises after you begin renovations, and it is better to be financially prepared to address issues ahead of time.
The amount owing on the property according to the court documents was $116,000. Taking closing costs, renovation costs and carrying costs into account, I needed to purchase the property at $90k to make a suitable profit. I obtained written permission from Pam to begin negotiating with the bank and contacted the mortgage company immediately. The mortgage company was not originally receptive to any offers.
During my discussions with the mortgage company, the “loss mitigation associate” took a decidedly different tone as soon as mold was mentioned. As soon as I noticed her change in tone, I asked if I could send pictures. I immediately sent pictures of the mold covered kitchen cabinets, and also took the opportunity to show pictures of the broken windows, damaged walls and generally filthy condition of the property.
After seeing the pictures, the mortgage company agreed that a short sale was an option for the property. However, since they had already begun foreclosure proceedings against the homeowner, they imposed a 30 day deadline to have the deal finalized or they would continue with the sheriff’s sale.
The mortgage company ordered their BPO and I made sure to attend the inspection. I had all of the pertinent information concerning the property condition printed in an outline for the agent to take back to the office. This included information about the basement leak that wasn’t readily apparent.
Several weeks went by as I waited for the mortgage company to determine if they would agree to the sale. During the negotiation process, I had to leave to attend a wedding. The weekend of the wedding happened to fall on the same week of the mortgage company’s deadline. The wedding was on a small island off the coast of Virginia, which has a population of only a few hundred. Needless to say, with such a small population and being off the coast, I had no cell phone reception at all. I enjoyed the wedding, but assumed the entire weekend that I had missed the opportunity of the Brown Street short sale.
When I returned to Pennsylvania on Monday, I called the mortgage company and was pleasantly surprised to find that they had approved a 60 day extension to complete the transaction.
After another week of negotiations with the mortgage company, they finally agreed to sell the property for $82,000. I had originally offered $75k but would have agreed to the sale with a purchase price as high as $90k. I had verbal confirmation from the mortgage company, but they informed me it would take several weeks for them to prepare the paperwork for the sale.
Because the paperwork with the mortgage company would drag on for so long, I made a decision on this project that I may end up seriously regretting - I made the decision to begin the renovations of the house prior to the contract being signed by the mortgage company.
This presented several potential risks:
- If the mortgage company decided to decline the sale at a later date, I would lose any renovation costs I incurred
- The mortgage company may have requested an additional inspection after I had repaired the property and increased their sales price, which would have eaten up the potential profit I was to earn.
This was an incredibly risky move and one that, admittedly, was not wise. Realistically there was almost nothing to gain by moving forward with the project early, and plenty to lose. To learn how this situation played out, check back each day until the conclusion of the project. Tomorrow we will show pictures of the before condition, as well as discuss the planned renovations.