House 3: Looking Good

I received another addendum today from the buyer that details the air conditioning info and purchase price increase I talked about earlier. The lender also wanted the contract to include instructions to the escrow company that the $2,500 be made payable only to an air conditioner licensed contractor. Apparently the lender doesn't want the borrower to get any cash back at closing. It doesn't matter to me one way or the other. I was also told that the lender had requested a final list of charges, which means they are working on finalizing loan docs. This is good!

The buyer's mortgage broker today also mentioned to my agent that the termite inspection report indicated some dirt around the base of the house that should be moved and said we "would have to address that." "Excuse me," my agent told him, "but that should have been addressed during your inspection period. We're not doing anything about it." She suggested he pay for someone to move the dirt. He said he'd get back to us on that. Tough luck fella. Contracts have deadlines for this very reason.

Closing is scheduled for one week from today!

Giving Up On Prosper.com

I'm going to give up on Prosper.com. I think they have a good idea, but it doesn't really work for me. I have a couple problems with it:
  • The 3 year loan period. I realize this is to help the borrowers to give them a lower payment, but right now, I prefer loans of 1 year or less.
  • Small payments. I am unwilling to lend large amounts of money on unsecured loans to people. A small loan amount combined with the 3 year repayment period equates to tiny monthly payments to me.
  • I don't think their peer review system works. They push "groups" as a way that people will police each other to help prevent loan defaults. Supposedly, if a group member is behind on loans, the other group members will encourage the late payers to make their payments so that the group as a whole looks good to other lenders. I don't see this happening. With my one late loan, there has been no response from the borrower to the one polite email I have sent. The borrower belongs to a group and the group leader also was a lender to this person. His emails have not been answered either. She is still a member of the group too. I can see people using Prosper only one or two times - it's not like eBay where one person will be conducting many transactions. As a result, the "feedback" or community policing has little to no effect. If people want to take the money and run, they will. This is especially true of high risk borrowers. Their credit report is already not good, so I don't think the threat of another ding will deter them too much.
For people wanting to get into hard money lending, Prosper is a good starting place. It is an unsecured loan, but you can start lending with just $50. You will get the experience of lending and receiving payments, the headaches of late payments, and all the other little details and worries that are part of money lending, all for a low entry cost. If you like it, however, I suggest leaving Propser and moving on to making larger loans through private parties secured by tangible assets.

House 3: Buyer's Inspection Report

They managed to beat the deadline. They had 10 days to inspect the property and get me a list of what they wanted fixed. At 9:30 PM on the tenth day, they faxed it. As usual, it was just a copy of the inspector's report with a note saying they wanted everything fixed. (Actually, there was one minor thing they didn't want fixed, but it was basically everything.) Anyway, we counter-offered back with crediting them $1,500 at closing for them to fix the stuff themselves. After talking to their agent, we found out the buyer really wants air conditioning. (The property has a brand new swamp cooler that I had installed, but the buyer wants A/C.) The appraisal came back $1,000 higher than the selling price, so we decided to up the selling price by $1,000 and I'll credit that back to her as well. She will then use the $2,500 to get air conditioning installed.

How Do They Stay In Business?

I am continually amazed by the fact that escrow companies are able to stay in business. They have about the worst performance record for any industry I have ever dealt with. (And this includes dishonest cabinet makers.) It is even more mind-boggling when you consider all their instructions, every single thing they have to do, is in writing! They cannot do anything based solely on a verbal order. How hard is it to follow written directions?

As of yesterday, I had not received the earnest money deposit from the aborted sale of House 3 that I was told would be coming my way. So this morning, I called the title company to find out what was going on. Neither my title agent nor his assistant had any recollection of speaking to my real estate agent about this. They said they would call me back while they did some research.

About 45 minutes later, they called back telling me they found my fax instructing them to release the deposit to me and asked me for an address to send it to. They also said the amount was $1,000. This is what I thought it was, but whoever my agent spoke to earlier told her it was $500. I never bothered to look up the correct figure on my own, figuring the escrow company wouldn't make a mistake when dealing with actual cash. Anyway, supposedly a check for $1,000 is going out to me today.

But I am still uneasy because the same property is in escrow at the same title company with a new buyer. Their earnest money deposit is also $1,000, so the potential for a mix up is quite large. I made sure they understood that the current escrow was not to be cancelled, just the old one. We'll see how it goes.

House 3: Still In One Piece (Updated)

I stopped by the property this morning and it is still in good shape. I think two things are helping keep the vandals at bay: the padlocks I put on the back gate and all the construction going on in the neighborhood. The construction has caused some streets to be closed and I had to take a rather circuitous route to get to the property. I'm glad the house is under contract now. Viewings for buyers would probably be low due to the construction.

I still have not received an official Buyer's Inspection Notice yet. Technically, this means the buyer isn't asking me to fix anything the inspection turned up. However, I am wondering if everything is ok with my agent. I haven't seen her online recently and she hasn't responded to my email of a couple days ago. Both things are rather unusual. I called her this morning and got her voicemail, so I am still a bit up in the air.

Update: Heard from my agent, who is on vacation. She has a friend checking her fax daily, however, and she has not received anything yet. The buyer has 10 days from contract acceptance to notify us of what they want fixed and that deadline is fast approaching. In fact, I signed the final counter offer on the 10th. My agent hasn't faxed me the seller-signed copy of the counter offer, so I don't know when they signed that. We gave them until the 11th to sign it and I've got a post here dated the 12th, saying the house was sold, so I'm guessing they only have 1 or 2 days to get us the form. Otherwise, I don't have to fix anything!

The Next Venture Has Begun

As I alluded to earlier, I have started a new venture that is pretty exciting. Things have been finalized now and I am willing to discuss some details.

Several months ago, I attended a get-together of several people from the richdad.com message boards. I came out of that meeting very fired up on apartment investing and got started on educating myself on that subject. I haven't gotten very far in that respect, but I have put another one of the important points from that meeting into play - partnering.

Les, one of the presenters and participants at the meeting, is someone whom I have had some limited contact with over the past 4 years. He has recommended a couple of investments to me that have done pretty well, he has a great reputation, and after spending a weekend talking and listening to him, my comfort level with him is fairly high. So when it became apparent that I wasn't going to be ready for apartment buying in the near future, I decided to look at other investment opportunities. I contacted Les to see what he had available. Most of the projects he had were medium- to long-term investments that were expected to generate large capital gains, but no cashflow. Since I am looking for cashflow right now, I eliminated these. There were two that did provide cashflow and, after reviewing them, I decided on one.

My investment is part of a $1.75 million dollar first mortgage on a commercial renovation project going on in northern Louisiana using hard money loans. The project consists of two office buildings, a parking garage, and a parking lot. The project has been going on for 6 months so far, with an estimated 6 to 18 months remaining. At this time, the principals will refinance to a conventional loan and pay off the hard money loans. One office building has a 30% occupancy rate, the other 5%. However, the building with the 5% occupancy rate already has a positive cashflow, so there is huge room for profit there. The people doing the rehab feel the other building can be brought up to market occupancy and rates in a short amount of time. (One reason the occupancy is so low is the previous owner was planning to convert the top two floors to condos, so they weren't even attempted to be rented out.) The renovations they are planning will improve the existing office space, allowing higher rents to be charged - going from around $5 per square foot to $8 - $10 per square foot.

My investment is actually a separate contract between Les and myself. He had a large amount of his own money invested and I am buying out most, but not all, of his position. My investment is for $150,000 at 12%, with interest only payments for 6 to 18 months, after which the principal amount is due. There is no prepayment penalty. The project has a history of on-time payments. The contracts were faxed on Friday, the money was wired, and I am now a hard money lender on some commercial property! This is my first investment with the "big boys" and so far, I am impressed. Les is the total professional and doesn't keep you hanging - less than 1 week elapsed from the time I decided to invest until the process was complete.

Several things excite me about this investment. First, it a large amount of my money. The houses I have written about to date are investments for a group of investors (except for the very first one, which was also solely my investment) who have basically hired me for a percentage of the profits. I am using their money. This investment is all mine. Second, it commercial property. And lastly, it out-of-state. Although I have a couple investments in companies in the San Francisco area, they are relatively small, so I consider this my first real out-of-state investment in real estate.

House 3: Another Update

I've received a copy of the inspection report summary. Nothing too out of the ordinary, considering the house is 50+ years old. Some things were found that the first inspection report found and some things were noted that weren't in the first report. I have yet to hear anything from the buyer regarding what, if anything, they want me to fix. I expect that will come Monday or Tuesday. I also received a copy of the earnest money deposit check.

One nice surprise is that I'm getting the $500 earnest money deposit from the last sale that fell through. (Hmm.. looks like back then I wrote the buyer put down $1,000 earnest money. It was really just $500.) If you recall, the deal fell through because the buyer couldn't get financing. With the new contract Realtors are using, this actually is not categorized as breach of contract and therefore, the earnest money deposit can go back to the buyer. We submitted a Cure Notice when we reached the scheduled close of escrow date. This gives the buyer an official notice that they have 3 days to correct the situation (i.e. find a new loan) or they are in breach of contract. But this buyer never responded to the notice! According to my agent, this means the title company has no official reason why the buyer has backed out and, therefore, the earnest money is forfeited to me! All the buyer had to do was let the title company know in writing that they could not get a loan and they would have gotten their deposit back. Oh well. I guess this is just another piece of evidence that the buyer's mortgage broker and agent were not very experienced. And I'm not feeling sorry for this person either. It's been almost exactly one month since the deal fell through. That's plenty of time for them to contact the escrow company and ask for their deposit back.

House 3 Update And The Next Venture

Escrow has been opened on House 3 and the inspection is supposed to be happening today. I will be getting a fax of the signed contract and the earnest money receipt sometime today. I'm glad to see the inspection is happening just one day after escrow was opened. The buyer is not selling a house to buy this one, so perhaps she is hurrying to get into the place before the first of the month so she doesn't have to pay August rent. (Not to mention collecting the $50/day credit I am giving her for closing early).

In other news, I am embarking on new REI venture that is exciting and somewhat scary... I won't say much now because nothing is finalized, but I will say it involves commercial real estate in another state.

House 3: Sold!

My counter-offer was accepted and the property is now in escrow again!

House 3: Two Offers Received

While I was in Las Vegas last weekend, my Realtor got two offers for the property. One was for full price with a 3% seller contribution. The buyer pays for the home inspection and I am to pay for a home warranty at a cost not to exceed $350. The buyer put up $1,000 earnest money and is getting a 100% loan. The good news is, even though the contract says the buyer wants to close around mid-August, the agent said they would be willing to close sooner if possible. So we counter offered with using my title agency (for discounted title insurance for me), the earnest money is to be non-refundable after the inspection period, and a clause that said the seller will credit $50 per day to the buyer for each day before the specified close of escrow date that we close but the sales price goes up by $50 for each day after the specified close of escrow date that we close. No response yet to the counter offer.

The second offer with almost identical to the first except the sales price was $5,000 below the list price. We didn't even bother responding to that one.

On a side note, my agent told me the only properties she is seeing offers on right now are those in the $215,000 and under price range.

For The 30 And Under Crowd

I came across the Penny Foolish blog, written by Kira, a young recent college grad just starting out on her financial education. What caught my eye was the Festival of Under 30 Finances she is putting together. (More info here.) She is soliciting articles about financial issues relevant to people under 30 years old. I think this is a great idea and I hope it is a success! If you have something relevant to contribute, please submit it to her.

House 3: Security Update

I stopped by the property this morning on the way to work. We had a monsoon last night with not a lot of rain, but lots of wind, at least where I live, and wanted to make sure the property was ok. I also needed to make my weekly visit to check on it and make sure it hasn't been broken into again. The fact that I had a dream a couple nights ago that someone had broken in and graffiti-ed the inside also had me a bit nervous.

I was pleased to see everything looked good. Over the weekend, I used the free $25 Lowes gift card I got when I bought the stove to purchase another padlock for the back gate and five paper temporary window blinds. I now have window coverings on all the front-facing windows and all the windows on the side of the house. I need about 4 more blinds to cover the windows in the back of the house, but I'm not as concerned about those as I was about the ones in the front.

Looking back, I think the backyard is where people were getting into the house. Of course, the window they got in through was facing the backyard, but I finally realized that, because there is an alley behind the house, vandals were probably getting in through the gate in the backyard. The gate is rather large and has two openings. The whole thing slides open wide enough so you can drive a car in. This is how the stolen car got in. The other gate is a standard width gate set into the sliding portion. The last time I was there, I only locked the sliding gate because I only had one padlock. The pedestrian gate I did not lock, but there was a latch that I shut and the only way someone could unlatch it would be to break through the fence. Since the fence has wooden slats, this is a possibility. So this time I also put a lock on the pedestrian gate so it could not be opened either. The backyard is also fairly large, so I don't think you could look over the fence into the uncovered windows and see the place was empty with a fair degree of certainty. Either way, I am still going to put some more blinds up, but all in all, I feel better about the security of the place. Also, the blinds give the house much better curb appeal.

Unfortunately, the streets in the neighborhood are still all torn up for construction, so buyer traffic may suffer. The house next door, which is being remodeled, has wood over the front windows one of the pieces of wood has had a big face spray painted on it. That probably won't help my place sell either.