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Tricky Transaction April 16, 2007

Posted by W. Keoki McCarthy in real estate, Transactions.

My brokerage just represented a client in a transaction that almost reads like a mystery novel with twists and turns that were just not expected.  The house was a larger house (2600 square feet) in the north Seattle area for under $400,000.  These are hard to find so we knew there could be multiple offers.  It was a bit beat up and needed a lot of work.  Mostly cosmetic but some larger issues.  The first question was how do we make sure we get the house?  As an investor it is vital that you have a strategy for winning the homes you make offers on.  Not having a strategy in a sellers market (and yes it is still definitely a sellers market) is a sure fire way to lose to someone else. 

Our client had access to cash so we threw out the financing contingency.  This is a huge advantage for our client.  So much so, that even if you do not have access to cash, you may want to work out a way to purchase a home without a financing contingency.  The first step is to simply ask your lender if they can give you a guarantee that they can close this transaction by a certain date understanding that there are risks. 

The second thing we did was pre-inspect the property.  That allowed us to make an offer without an inspection contingency.  This combined with no financing made the offer essentially say the following to the seller.  Mr seller here is a check for $10,000.  If I do not close this transaction by the date specified you can keep the money period.  You don’t need to worry about what an inspector will say or worry about us walking away 2 weeks later because the financing failed.  We conveyed these things to the seller and won over 5 other offers.  Here is the best part.  There were higher offers than ours.  It turns out that the seller was in pre-foreclosure and needed to sell ASAP.  So, this simple guaranteed sale was a huge benefit.

Now, here is where the story gets interesting.  A couple of days before closing, escrow calls and says that the seller is $10,000 short of being able to sell this house.  Essentially the seller owed more to the bank than they were collecting from our client.  The listing agent was told by the bankruptcy attorney that the seller would net about $25,000 after the sale of the home so was not alerted to this problem ahead of time.  The buyer could pay $10,000 more and things could close or we had to come up with some other solution because the seller is bankrupt.  As an investor buying problem homes these stories are fairly common. 

What we did was called the bank and explained the situation.  We explained to them that we had a contract ready to close if they would do a short sale.  A short sale is simply a sale where the bank agrees to take less money than is owed and release the owner of their obligation.  This happens often and can be a great way to purchase properties.  It took a couple of weeks of negotiating with the bank but they finally agreed.  Things were looking great.  Our client was getting a great deal on a home and the seller was getting out of an upside down situation. 

2 hours before the transaction was to be recorded we received a call from escrow.  They were notified that a contractor was rushing to the courthouse to record a lien on the property for $6,500.  Escrow wanted to know if they should close and record the transaction right away before the contractor could record his.  The escrow closer thought that if they recorded and closed the lien would be unenforceable.  Luckily, we knew escrow was wrong and advised our client that this contractor could record the lien a week from closing and it was still valid.  The tricky part about contractor or mechanic liens is that they are attached to the property even if the person responsible for the lien no longer owns the property.  That’s why when you buy new construction it is vital to always get releases from all subcontractors before closing because they can sneak up after you own the property and make life difficult for you.  Especially if it is a small builder and he folds.

Now, our client had a difficult choice to make.  Do you close on the home and hope the seller takes care of their bill?  In this case we know the seller is in bankruptcy.  It is probably not likely that they will pay it off.  Do you terminate the transaction after all of the work that has been put in to keep the deal alive?  It would not be wise since the buyer was getting a good deal.  There was another option.  we could call the contractor and negotiate with them to pay off the lien at a drastically reduced price.  The stick we had was that if he did not work it out with us we could terminate the transaction allow the home to be foreclosed on and then he would have no recourse because, a foreclosure wipes out mechanic liens.  This would have been the safest strategy because you would know what you were getting into. 

In the end, the buyer purchased the property with the risk of a lien being there because he was nervous that the short sale terms might be revoked, and at the time of recording there was no mechanic lien recorded, it was still just a rumor.  In essence he took the risk that even if the lien is there it is still a valuable property.  Ideally the seller can work it out with the contractor and it will go away.  Where the buyer will have a problem is if he needs to sell or refinance.  In order to do either of those the lien will have to be paid off.

The moral of the story is problems can arise during a transaction and certain types of transactions lend themselves to problems.  Understanding that there are multiple solutions to each problem and weighing each one seperates the good investor from the bad.  This transaction could have died in multiple places.  Through creativity it was saved.



1. Jesus Negrete - April 29, 2007

What a story!

2. W. Keoki McCarthy - April 30, 2007

When we talked to the client the other day we all laughed about it, but it was sure stressful at the time. 🙂

3. Redmond Oregon Homes - December 31, 2007

Short sales are looking even better right now. I noticed the inventory is raising locally. Might be a good thing for investors.

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