Our First Deal That Wasn't

[Jessica Muto]

Hello there,
We've been around for about a year and a half, learning so much. I've been waiting to post about our experience this past year until it was finally over. We were so excited to find a multifamily property in our general area for our first deal, but more than 8 months later, we are so glad it's all over. 

Here we go:
In December 2018 my husband and I found an 11 unit property in Crestline, CA. He grew up there and his mom still works there as a real estate agent and property manager. This property was being run a lodge for vacationers: 11 individual tiny cabins. It was so cute and had so much upside. 

The seller knew that the property as he was running it wouldn't qualify for enough of a commercial loan for what he was asking, so he offered seller financing. Here are the facts:

Asking price: $869K

Offered: $800K

Down: $90K

Deal: purchase price $790K, + $10K for the furniture (90% of which needed to be trashed or donated)

Terms: Originally 8% interest, interest only payments for 3-5 years while we worked on restructuring and stabilizing the property.

Trust me, I ran this deal every way I could think of. We planned on renting out half of the units with year leases to residents of the area, and the other half for short term rentals. We looked at what it would make during the interest only years, the year we would have to pay principle as well, when we would refi it into a commercial loan down the road, and we factored in the interest we would be paying on the HELOC we used for the down payment as well.

Some ways it did really well, some ways it did just oK, but it always made cash flow.

So what happened? In a nutshell, we got lawyered out of this deal. After missing several closing dates, the seller produced an incredibly onerous promissory note and a personal guarantee that came completely out of left field 5 months into negotiations. After an infuriating back and forth between my lawyers (I had to get a real estate litigator involved at the end) and his, in which his attorney treated us like low life beggars who were seeking a loan, not buyers taking a property off his client's hands and giving him a monthly payment for the privilege, we decided to cancel escrow.

We tried every way we could think of to meet them in the middle and to be reasonable about their demands, but finally I woke up one morning realizing that I did not want to be in a business relationship with these people for the next 3-5 years. I kept thinking, "A good deal with bad people is a bad deal." and "No deal is better than a bad deal." The agreement was not something we were comfortable signing.

We cancelled escrow in June, and it took a full 4 weeks to hear a word out of the seller. Even after he called me expressing his regret that the deal didn't work out and saying he just wanted to return our down payment so "everyone could move on," it still took two more weeks and more back and forths between attorneys to get the thing done with.

SO, it's finally over. We learned a lot throughout this process, about taking ourselves a little less seriously, about the reality of working with other people in a negotiation, about what to pay for ahead of a closing date and what to hold off on, about what questions to ask up front, etc.

We're already working on another deal, and we're doing our best to stay positive. I'm so glad we went for it, and that we didn't get caught up in the emotions of wanting that first deal SO BAD that it made us ignore our instincts and better judgment. We gained confidence, and learned a ton about real estate, investing, and our own partnership (and marriage.)

Have any of you had a great deal that was better as a no deal? What did you learn?