How I failed my first deal !!

[Rohan Attravanam]

Learning: NEVER sign a contract if you are not comfortable with the contents, no matter how bad you want the property.

I was a typical BP newbie. Searching for financial freedom, I stumbled upon rental properties as investments and soon I was at the doors of Bigger Pockets. I signed up for Brandon’s webinars and got hooked to the passion in the BP community. I read up the Ultimate Beginners Guide, and read up starter books recommended. I listen to podcasts like crazy, made my car my learning university. I have some savings and so I decided to start investing in multi family units.

I live in Bay Area in California, and it’s nearly impossible for me to start of investing in my area. So I decided to look outside. I have family in Tampa area and it is one of the growing places in the country. I research on the geography and find a decent 4-plex to invest in. Numbers made sense on paper, based on certain criteria I had set for myself. I quickly realized the property was not managed well and they did not care about raising rents. There was significant room to improve rents ($150-$200 per unit). I had built a good relationship with my agent over couple of months. He helped me walkthrough the property, took videos for me and gave me a good visual. We made an offer and decided to go into the contract.

One of the units needed some minor repairs (new flooring and some paint, about $2k worth of work). I decided to do the repairs and increase the rents once I buy the property. Seller had other ideas. This unit was at end of the lease and they decided to fill in the unit “as is”. There were a lot of applications already to fill the vacant unit, so the seller wanted Rent + Deposit in case the deal falls through. I was confident of making the purchase so I agreed to the clause. Mistake #1.

We put contingency in our contract that if inspection reveals something of not my liking I back out. What we did not explicitly put was backing out from the clause too. My agent said the contingency covers the clause as well even when it is not explicitly. I agreed. Mistake #2.

We got an inspector, he gave us the list of things needed fixing and seller wouldn’t fix the items I needed fixed at the minimum. Contract fell through and we learn contingency doesn’t explicitly state the ability to back away from the clause. I felt a punch me in my stomach and I couldn’t even fight back! I failed my first deal, because I lost money even before I acquired the property.

Learning: NEVER sign a contract if you are not comfortable with the contents, no matter how bad you want the property.

[Jim Kennedy]

Rohan,

You humble approach is a very commendable one which reinforces the need for me to not be the center of the universe, because sometimes I make mistakes.

As a result of my mistakes made (which are less frequent today) my approach is "Sometimes you win, sometimes you learn". You never lose and you never fail. You fail when you quit. You have nothing to be ashamed of and your willingness to share gives you high integrity in the eyes of readers. No need to beat yourself up endlessly over it, either. You are human and you were doing your best. You learned and next time you'll do much better!

I understand real estate is off the charts expensive where you live so I get the need to look elsewhere. That puts you between a rock and a hard place. The idea of family i Tampa is good. The question is can they help you manage? I live in a small town outside of Philladelphia in NJ. We invested successfully in a few buy-and-hold SFH's in Houston, and had family help us manage. They want to be in real estate too so this was good training for them too. If your family is willing then good for you. However, I should say we already owned a half dozen units before we went out of state. Nevertheless, you need to blaze your own trail, so just take what you want and leave the rest.

I learned in my first property too. It was a SFH and we had to rehab it since everything was new for 1973 - painted living room fake wood paneling, etc. What I learned was in NJ you can;t stop payment on a contractor's check. You can get arrested for it. I didn't though, because my attorney explained to me why the contractors was unhappy and we re-issued the check. We were unhappy that he got the last check and we learned he didn't finish the last punch list. We (stupidly) trusted him and looked at the big items. Now for the last 11 years, we check everything.

Like you, we want to get as close to turn key as possible - maybe $3500 for paint paper and patch.  We (my wife and I) use the home inspection to beat up the Seller and get a credit at the closing table.Besides being a CPA who specializes in real estate tax and accounting, my wife and I have been investing for 12-13 years, and I  lecture frequently at several REIAs in my area. On Jan 7th I presented my 21 year plan to retire with a million dollars in the bank an a $64-$73K annual income from interest, and I spent about 10-15 minutes discussing just the home inspection and how to use it to your advantage. You are headed in the right direction.

I (and I assume all BP readers) am looking forward to your next post, where you tell us of the big win you pulled off!