“Top 10 Mistakes that Make Deals Go Bad” Series – Part 1

#10 Relying Solely on Seller’s Research

What a way to kick off our Top Ten Ways to Make a Deal Go Bad (for you, the rehabber, that is)! 

In any arms-length, investment real estate transaction, it should be assumed the buyer and seller of the real property are at complete and opposite odds with one another. 

  • Price is the just the beginning of the illustration.  The buyer wants the lowest possible price; the seller hopes to maximize profits (or cut their losses).  The seller should, it stands to reason, market the property in the best possible light and point out all the best features in an attempt to maximize selling price.  The buyer should be making the best possible, lowest cost deal for themselves in order to lower their cost basis and maximize future profits.

Buyers and seller opinion of condition is also at diametrically opposing views.  The seller will have the house in best possible condition, possibly covering up defects and hiding blemishes.  The rehab investor will want to peel back all layers to expose any flaws with the property and completely understand the scope of the work that needs to be done.

  • Seller information, such as comparable sales, tenants, neighbors, school information, etc., is not reliable and should be taken with a grain of salt.  In the current foreclosure environment, most properties are non-warranted, sold as is where is, and this point may not be relevant to the buyer.  However, anything offered up should be seen as an attempt by the seller to maximize selling price and should be vigorously vetted and verified before proceeding.

Remember the buyers golden rule: us versus them.  Act professionally but be diligent in your buying process and assume the seller’s motivation is not your own.

#9 Commingle Personal and Business Money and Debt

When running a business the line between business and personal regularly gets fuzzy. Underwriters HATE fuzzy.  If there is any vagueness to the situation they will always assume the worst. This is most pronounced when it comes to debts.  Business debt, even if on your personal credit report, needs to be only business debt and only paid from a business checking account. If this is NOT done then the business debt will be held against the useable income for loan approval. The best plan of action is to have accounts 100% dedicated to the business, only using them for business reasons, and have other accounts that are 100% personal. Good record keeping and proof of what is personal and what is business will increase your income useable for mortgage qualification, lower your debt ratio and make your CPA happy at the end of the year.

Co-mingling personal and business assets needs to be avoided also. Keep business accounts and personal accounts separate. Deposit all business income into the business account and then pay yourself with a check drawn on the business account. This accounting method places the income where it was derived and eliminates any fuzziness in debts, assets and income when your loan file gets reviewed for approval.