E316 | Deals You Don’t Close: Why Walking Away Is a Power Move in Real Estate

Today’s chat dives into the wild world of real estate deals, particularly the ones you dodge like a dodgeball champ! The main takeaway? Sometimes, the best deal is the one you don’t touch with a ten-foot pole. Our host spills the tea on a promising construction loan that turned out to be a total mess – think lawsuit drama that’d make a soap opera blush! They break down how due diligence saved their bacon, revealing red flags that screamed, “Walk away, buddy!” With some hilarious analogies and a sprinkle of wisdom, they emphasize the importance of knowing when to cut your losses and keep your sanity intact. So, grab a snack, kick back, and tune in for some real estate wisdom that’ll make you think twice before signing on the dotted line!

Diving headfirst into the wild world of real estate investing, the crew kicks things off with a bang, chatting about the often-overlooked art of dodging disaster—like, you know, walking away from a deal that has more red flags than a bullfighting arena! Our main man breaks it down with a cheeky grin, reminding everyone that sometimes the best deals are the ones you don’t make. He shares a juicy tale of a seemingly flashy construction loan that turned out to be a hot mess of lawsuits and liens, making it sound like a family road trip gone wrong—think tantrums, tears, and the whole shebang! Turns out, a little due diligence can save a whole lot of dough, and our savvy investor knows this all too well as he recounts how digging a bit deeper into the paperwork revealed some serious skeletons in the closet.

As they peel back the layers of this deal, listeners are treated to a treasure trove of insider info about what to watch for when evaluating a property. Our speaker highlights that not all that glitters is gold; the construction was only half-done, and the HOA was already throwing legal punches! Like a friendly warning from someone who’s been through the ringer, he shares that while it might seem tempting to rescue a sinking ship, sometimes it’s better to hop on a lifeboat and sail away to calmer waters.

Wrapping things up with a high-five-worthy recap of the key takeaways, our host emphasizes the importance of knowing when to say ‘no thanks’ to a deal that smells fishy. Whether it’s a lawsuit lurking in the shadows or a builder who’s not playing by the rules, understanding the risks can save you from a world of hurt later on. So, grab your popcorn and tune in to hear all the laughs, lessons, and a few cringe-worthy moments from the trenches of real estate investing!

Episode Transcript

(00:44):
Welcome back, everybody.
Today I want to talk aboutdeals you don't do and how due diligence
can save you tens or evenhundreds of thousands of dollars.
You hear many people have beenaround real estate and I've aged
myself and say I've been 28years in real estate and some of

(01:06):
the best deals you'll ever doare the ones that you don't close.
But today's episode is aboutone of those deal that looked promising
on the surface, but once wereally dug into all the details,
it was pretty clear this onewas a extended lawsuit, rip your

(01:29):
hair out, kicking andscreaming child from pulling them
out of Disney World type of fight.
And I want to walk through howwe caught it, why walking away sometimes
is the smartest move that youcan make.
Let's talk about the deal on paper.

(01:49):
The non performing note thatwas a construction loan.
It was part of a large pool wewere looking at and the house was
50% complete.
And the tape, which is theExcel spreadsheet, noted borrower
low on progress, needed moretime, slash extension.

(02:10):
So when you see that, you'rethinking, okay, and this was an area
that had been hit by a storm,so the house wasn't impacted by it,
but the area was.
So looking at it at firstglance, typical rescue situation.
You give the person more time,maybe collect some extension fees.

(02:32):
I did a discount and let themfinish the build and then sell it
back on the open market.
That's typical.
What can happen these situations?
We've seen this and done thison many occasions.
Let's peel back that onion alittle bit and talk about what the

(02:56):
due diligence told us.
We get the collateral file, westart digging into the information
and the servicing notes.
And the servicing notes hadcomments in there about an HOA lawsuit.
HOA had filed a lawsuit.

(03:18):
No paperwork or documentationwithin the collateral about this,
but it was in the servicing notes.
Mechanics liens were in theservicing notes.
So we definitely wanted topull title, see what was going on
with those.
There's comments about permitissues and other items that really

(03:44):
made this one be very hot,very hairy, I should say.
And as we started diggingthrough this, essentially our first
inclination is, okay, alawsuit with the HOA is not something
you want to be in.
Sometimes HOA's can demand theentire property be torn down and

(04:05):
rebuilt and then as a lenderreally aren't going to recover from
that.
Dive into a little bit about.
But the due diligencedocumentation really showed us.
So first a lot of sloppy notein mortgage documentation.

(04:25):
And I say that because there'sa loan agreement with the borrowers
and they had an LLC with threemembers and a husband, wife and a
third person which I think wasa child.
And the personal guarantee,they only had the child sign, which

(04:46):
A is okay, throw them underthe bus.
But in the same token, youknow, a 22 year old kid doesn't have
any assets whereas the parentshad five or six other properties.
So that was red flag numberone when we were looking at this
documentation and who wasunderwriting this and clearly it

(05:10):
appeared this was aninstitution that uses a lot of brokers
and we see this a lot on thesetypes of loans.
Brokers just push a dealthrough and get their commission.
A lender sometimes has no ideawhat they're really doing.
They're just trying to get themoney out the door.

(05:32):
We dive into due diligence.
The title report, yes showed150/plus thousand dollars in mechanical
liens on this property whichthe borrower had been getting money
and they had got about$200,000 so far of the construction.

(05:53):
But the lender was nevercollecting the lien.
What's called the lien waiverconfirming the borrower has been
paying the subs.
Where was the money going isthe first thing.
So clearly mismanagement bythe lender in regards to giving money,
not tracing it, followingwhere it's going.

(06:13):
Then we got copies of thelawsuits from the HOA and what was
really going on and whathappened is the borrower actually
owns a home like three housesover within this community and property
is owned by one of their LLCand they went and got a building

(06:41):
permit in specific name but itdidn't match the owner of the property
because they on the buildingpermit which I don't know how this
got by.
It basically said XYZ owns a property.
XYZ is getting the permit.

(07:01):
Which as a homeowner, yes, youcan pull your own permit.
Problem is the city neverconfirmed that they actually own
the property.
So let me give an example.
I say I own one two three Mainstreet which I don't.
My seventy investments owns it.
I go and pull a permit underChris 70, say I'm the GC as an owner

(07:28):
getting the permit becauseChris 7 doesn't have a license but
actually I don't own the property.
So city grew up there.
The lender again clearlyshould have picked this up.
Did not.
The HOA picked it up.

(07:48):
The HOA turned around and suedand said time out.
You're building this thing aswith an unlicensed contractor, you
not an owner Occupant andperson also was a gc which was an
unlicensed GC as well.

(08:09):
So clearly a huge convoluted issue.
So we ask seller of the note,hey, we need more information on
this.
We're digging in and at thispoint we already know we're walking.
But let's get the informationmore for educational purposes.
This is sometimes not a bad thing.
People where like you look atsomething and you're gonna walk on

(08:32):
a deal, I'll ask for some information.
Now I wouldn't say go spendall this money, ask for the information
because it's a learning experience.
We're digging in and gettingall this information.
And the sellers, the HOA iswilling to work with you so you could
go foreclose on this thing andjust finish the construction yourself.

(08:56):
I don't know how many knowninvestors out there have experience
with new build construction.
Actually one, but people whenthey get in node investing get into
it because they don't want tobe responsible for the tenants, the
toilets and the termites.

(09:17):
So why on God's green earthwould a note investor want to take
over a half built propertyunless they have experience with
it and they're getting it at aridiculous discount?
I will say yes, we have donethis in the past on a property that

(09:39):
was a little bit cleaner, butalso a property that I'll give rough
numbers builder probably spenta million and a half dollars in construction
on the property that you getfor 25 to 30 cents on the dollar.
This instance they were like50 to 60 cents on the dollar which

(10:00):
still not worth it.
But even if it was there justso many issues.
But what also really gave me alot of hesitation was person that
was doing this.
What experience did they have?
Did they.
Were they actually like aserious builder?

(10:20):
What was the actual status ofthis project?
Was it even constructed properly?
Now in some of the otherdeals, yeah, there was a third party
GC and the property was well built.
This instance have no idea.
So really crazy type of deal.

(10:41):
Interestingly enough when wewalked, this seller came back to
us and was like why are you walking?
And they're like is it price issue?
They clearly wanted us offtheir books.
So could we have bought it ata deeper discount?
Sure, but we would have spentmonths, probably even a year fighting

(11:06):
hoa.
Even though the HOA might havebeen okay, I don't know if they're
okay, but I really wasn't inthe process of even taking the time
because here's the othercomponent to this.
I'd have to get somebody inthere to finish it.
But the guy who I'm takingthis from lives two doors down.

(11:26):
Every time I send a sub there,he's probably going to walk over
to property and then complainabout everything, tell them what's
going on.
Right.
And kill us from finishingthis project.
But also, and a project hasreputation and stigma sometimes to

(11:50):
it.
Like in this case, the guywasn't paying the subs.
You're not going to get thosesubs back to finish.
So you have to start basicallyall over.
And this was one that.
How much could we make on this deal?
Let's say it was a.
You could make a hundredthousand dollars on this deal.

(12:11):
Buying it for 100,000,whatever the case may be up for me,
that's not even at a 50%return because it's gonna take years.
The upside isn't there, it'sjust not there.
Downside way too high.
Why would I want to take oneof our asset managers and also myself?

(12:34):
Because I'm the one with themost experience on the construction
side of things.
Sucker time away on a 300,300, $400,000 home at the end of
the day to fight this fight.
That's one thing.
Also that when you're lookingat some of these super hairy deals

(12:55):
or you're looking at somethingthat is a lower value asset, understand
the time it's gonna take.
Early in my career I this isone of the mistakes I would make
is I would try and squeezeevery penny out of every deal.

(13:15):
Realizing of spending way toomuch time and effort on that one
deal.
Basically not make anythingwhere if I just let it go, even if
I lost a few bucks, spend thattime on the other assets.
Be much better off.
For example, watch a videothis weekend on management and team
efficiency.

(13:37):
And what they're talking aboutis how people sometimes spend too
much time on stuff they're badat trying to get better at it compared
to spending time on stuff theylove that they're good at.
To get great at it.
And most people do the formerwhere you really should be doing
the latter.
Take what you're good at, begreat at it.

(13:58):
The stuff that, excuse thephrase you suck at, get some help
or find somebody that enjoysdoing that.
That's how you build a greatteam is not by doing everything but
understanding what is the mostefficient, best use of time for process
for everybody.
This is why in this instancewe acknowledge that walked away.

(14:24):
And also just remember there'sa difference between buying a challenge,
in this case buying a lawsuit.
Because I looked at this thatwe would have been buying a lawsuit
fast.
Honestly, without hesitation.
As I wrap up here are fivetakeaways that I just want to mention

(14:48):
and talk about on this episode.
Remember surface leveldiligence Sometimes I want to use
term useless doesn't tell the story.
We just relied on the tape notgone through the servicing notes.
You've been toast.
Nowhere would you have knownabout this lawsuit title report.

(15:09):
Actually didn't know it.
Sometimes they don't.
In this instance actuallydidn't read the servicing notes.
So important anything in anhoa double the scrutiny.
Approvals, plans, litigation.
There could be fines from the hoa.

(15:31):
Can't assume everything is clean.
Trust but verify it's aproperty that needs some work.
Remember, permitting issuesaren't just paperwork.
They can lead to demolitionnotices, potential tear downs, fines.
If you're in Ohio, they'regoing to start fining you for grass,

(15:53):
for windows broken, for lights broken.
Understand at a minimum and ata minimum it could be six figure
construction liabilities.
Fourth is personal guarantees.
Nothing without somethingbacking them up.

(16:15):
Never assume that the personalguarantee equals actual money to
collect.
What does that person have?
Understand as part of that due diligence.
Who am I dealing with?
We've seen personal guaranteeson loans we bought that borrowers
have nothing else but that'sokay, but you just need to know that

(16:39):
up front.
Lastly, there's no shame inwalking away.
Passing on a deal isn't afailure, it's disciplined.
Don't feel peer pressured into closing.
I'll stipulate make sure youhave valid reasons to do it.
But a deal like this don'tfeel like pump your chest and bit

(17:02):
and again feel like I want totake on this challenge sometimes
mentioned from the outset bestdeals Once you walk away from my
final thought.
Good investors know when tolean in.
Great investors know when towalk away his business saying no

(17:27):
at the right time give youmore money and sanity than a dozen
good note purchases.
Thanks for listening.
If you want to see some realworld case studies of deals was closed
also ones we walked away fromat over 70 investments calm.

(17:49):
We just don't always show the wins.
Don't show hard decisionsbecause those are where real investors
thanks for listening.