Anatomy of a Complex Deal

Incredible but True Story of Heartache and Triumph over a Historic Luxury Property

 

Background

My client has stable income in the high six figures but cannot qualify for a bank loan due to a foreclosure.  To protect my client's privacy, I'll call him "Tom."  Tom sees real estate prices rising and wants to buy a home for his family before the market gets away from him, but fears he will be stuck renting for years since the banks won't lend to him.

I inform Tom that he has many options despite his foreclosure, and that I routinely help people buy luxury homes who have credit challenges. Our options include seller financing and multiple alternative lending programs. Hence, I encourage Tom to begin looking at homes despite his fears -- after all, if we cannot find him a home that he likes, the financing is irrelevant.

Furthermore, Tom insists upon owning an architecturally significant mid-century modern home.  The architecture is paramount above all other requirements, and he would rather wait for an architecturally distinguished home to come on market than purchase a home more quickly.  So, we may in fact be looking a long time.

 

The Search

Tom is setup with daily updates of homes in his area of interest, since it's a fast moving market -- especially for architecturally significant properties.  He looks at everything that comes up, comments to me on what he likes and dislikes, and I adjust the search accordingly.  We look at properties when something is promising, but Tom's schedule is very challenging, and we often get to a property too late and it's already under contract.  Other properties are at asking prices that seem far too high to Tom, and while I assure him that I will negotiate aggressively on his behalf, he is worried that he may already have missed the boat.  We persevere and keep looking at new listings, occasionally running out to something that has impeccable architecture.

 

The Home

A home that looks interesting falls out of escrow, and Tom and I run over to have a look.  Having looked at many homes and discussed architecture with Tom for years, I sense the moment we open the front door that we have found "it."  The home is mid-century modern heavily influenced with Japanese architecture, and the landscaping integrates the Japanese theme brilliantly.  The layout, flow, and interior/exterior synergy is extraordinary, with a spacious interior and a 2.2 acre lot.  However, the house itself is a disaster.  It hasn't been lived in for years, and it was originally built in the 40's.  The last owner started to remodel some parts of the home and never finished, leaving rooms with no flooring, and a general sense of chaos. 

We open a cabinet to find a veritable treasure trove of architectural magazines from the 50's, 60's, and 70's -- they are all tabbed, each one featuring this very home or the architect who designed it.  We have stumbled into a home of great significance, designed by one of Phoenix's great mid-century architects as his personal residence.  As we get deeper into our diligence on this home, we find more treasure - a meticulous history of the home and the work done on it, literally decades neatly categorized in a file cabinet.

While the home had fallen into disrepair recently, it's clear that it was greatly loved for decades prior.  It's also clear that this home is of great architectural significance.  The draw of the architecture is too strong, overwhelming all the practical problems, Tom "must" have it.  His wife visits and falls in love with it too, she's willing to put up with a big remodel job to restore this home to its glory.

This will be their family home for life -- if -- we can make a deal.

 

The Challenge

The sellers are asking $1.1 million and it's not remotely acceptable to Tom nor me.  The comps don't bear out their asking price even if the home were fully renovated, let alone in its state of disrepair.  On the other hand, the sellers know that the architecture is a huge draw, and that someone will pay a premium for it, so what do comps really mean?  I begin my process of investigation regarding the owners and their debt on the property.  I also begin asking questions to figure out what the sellers might be willing to accept;  they are cagey of course, but I at least confirm there is some willingness to negotiate. 

Tom's wife is sitting out of the negotiation process, she says that whatever Tom figures on the numbers is fine by her.  So I ask Tom "What purchase price for this home would make you happy, make you feel like you got a solid deal?"  Tom looks at me intently and says "If I could get this home for $750,000 it would be a no-brainer."

So here we are: $1.1 million asking by the seller and $750,000 bid from the buyer, they stand apart by a chasm of 32%.  Plus, Tom needs financing to close this deal, which we haven't begun to arrange.

To most people this sounds like a dead deal, to me it sounds like a fun challenge.

 

No Financing, No Agreement, No Problem

Problem #1: Foremost, we don't know how Tom is going to pay for this property.  He makes a great income, but he has 3 kids, and like so many others Tom took his lumps in the economic chaos of the past few years.  So, one thing is for sure: this won't be a cash deal.  It also won't be a traditional bank deal because of the recent foreclosure.

Solution: I asked Tom about the details of his foreclosure, and figured out based on lending standards in place at the time, the foreclosure should no longer impact Tom's ability to get a bank loan as of January 2013. It's summer 2012 when we found the home and if we close in 60-90 days, we're looking at less than 6 months of a gap. We could potentially do a longer close, bring in hard money (high cost temporary financing with very liberal underwriting standards), or do some other creative things to ensure that Tom doesn't lose his dream home over a few months gap.

 

Problem #2: We're over 30% apart between buyer and seller.  Because this is such an architecturally significant property, it's virtually impossible to come up with comps.  Of course, I come up with comps to support my client's position, but the seller will come up with their own, and because there are no other homes truly like this, valuation is more art than science in this case.

Solution: As the saying goes, this ain't my first rodeo.  I sense the agent on the other side of the table lacks the experience and training I have, he's already unwittingly tipped his hand that he is desperate to do a deal;  he is also inadvertently providing me valuable information about the seller that I would never disclose in a million years if it were my client.  I have negotiated over $1 billion in real estate and finance, and have extensive formal training in negotiation -- it's clear to me that the ambiguity of the numbers can work to our advantage by applying a methodical negotiation process.

Through a series of tense exchanges, and producing large amounts of documentation to justify numbers, we get the price down to a bit over $900,000 -- which is way more than Tom wants to pay.  However, I simultaneously am negotiating a second deal for Tom to sell one acre of this 2.2 acre property, and that one acre will bring in $350,000.  Net of transaction costs, we figure Tom will get the property for about $600,000 - that's over $150,000 less than his dream price of $750,000! 

Plus, I demanded that the buyer of the land put down $100,000 in earnest deposit that would be non-refundable when Tom executes the purchase of the house.  That way, if the land buyer defaults, Tom has a basis in the property of $800,000, and can find another buyer for the land, getting his basis well below his dream number.  Slam dunk for Tom!

Or so we thought...

 

Problem #3: I know that an appraiser is going to have a heck of a time valuing this home, which means that even if I can get Tom qualified by an alternative lender, the deal may fall apart in the 11th hour because of the appraisal.  That means that we're left with seller financing as our most likely and best option.

Solution: I literally wrote the book on seller financing ("The A to Z of Buying a Home with Seller Financing in AZ" -- click here to download), and I know that the luxury segment remains the best place to negotiate a seller financed deal in 2012.  Indeed the higher the price of the property, the more likely there's a well-heeled seller on the other side of the table who can afford to carry a note. I will present every conceivable option to get this financed.

 

Problem #4: Tom is freaking out.  He is beside himself, the uncertainty of how we're going to get this done is driving him nuts, and the wants the house so badly.  He says he "knows" the deal is dead and is lamenting the loss of this incredible home.  "We're asking for so many things Alex, and we're so far apart, this will never work!  I don't want to waste your time, this will never work!"

Solution: I assuage Tom's concerns, "Listen Tom we're not going to come at them with everything all at once.  We prioritize, and strategically introduce things and solve one problem at a time.  If you throw a frog into boiling water it jumps right out, but if you put it in cold water and let the water boil slowly, the frog gets cooked."  He laughed.  I also assured him that he wasn't wasting my time, "I live for this Tom.  If I didn't need to work I'd still do this for free."

 

Problem #5: The seller had previously sold a home and carried the note (i.e. offered seller financing), and it did not end well.  The seller had to foreclose, and has determined that never, ever will they ever "make that mistake" again. Never!

Solution: I highlight the fact that it's only 6 months, and that my client is a stable family man who wouldn't move his family around willy nilly.  Plus, he has a superb income, and last but not least the seller will get $150,000 in cash which they'd keep in the extremely unlikely event Tom were to default.  The seller eventually backs off the "Never!" posture since it's only 6 months.

 

Problem #6: It comes to light that Tom is actually one year off with the foreclosure date he provided, and so he is farther away from bank financing than he thought.  So we would need to get him safely through January 2014 before a bank will step in.  That extra year makes this a lot more than temporary financing, and raises all the concerns the seller originally had.

Solution: I have vetted lenders that offer financing to people with credit challenges, and their rates are very reasonable. The good programs are not advertised, indeed they're almost a secret.  I've had to "kiss a lot of frogs" to find the princes that deliver for my clients.  Fortunately now I've got some reliable sources to ensure that the perfect home won't escape from my client.

I discuss values with the lender to ensure that they are on board, and while "it ain't over til it's over" they are working with us.  They like the fact that we're selling the land and will reduce the size of the loan early on, and this lender is savvy enough to understand the transaction.  Score!

 

Problem #7: The seller says she is no longer comfortable with carrying the note for any length of time, and wants to sell the land herself before selling us the house. 

Solution: First take a deep breath.  So the seller no longer will carry, if everything else stays the same then the deal goes bust.  However, what if we stay in the deal and acquire the property after she carves out the land?  As long as the purchase price pencils out no higher for Tom, this would be a much better structure: lower initial purchase price means its easier to get bank approval, and fewer moving parts since we won’t be dealing with the land at all.  All I have to do is make sure that Tom pays the same price for the house he would have paid if he had sold the land himself.

Now, even though this new structure will actually benefit Tom, the seller’s agent did a terrible job of selling it to us.  He took a very aggressive “take it or leave it” attitude for the seller’s new position.  He wasn’t thinking through our wants or needs and trying to address them; he was trying to grind it out, to be tough.  Instead of just accepting the new terms, I bluffed my way into creating a paper tiger just in case we needed leverage for any future possible bumps in the road.  Let me explain…

I scream and yell and threaten horrible consequences if they try to change the deal.  Why would I do this when the new deal was even better for Tom?  Because there have been so many twists and turns in this deal that I want to make sure we keep some powder dry in case there’s another problem.  So if it looks like we are giving them something, rather than they giving us something, we have leverage to negotiate as needed.  But if we took this as a gift – which it was in reality – we would be out of ammo, so to speak.  This is where negotiation skill and experience really come into play, if the seller’s agent had spent more time trying to see things from our shoes he could have presented this as the gift it was.  But he didn’t, he tried to play tough guy when there was no reason to do so, when in fact it was a huge disadvantage to do so.

So, now I play tough guy in response, even though we absolutely want to work with this new structure.  I rant and rave and ultimately make it look like we were providing a concession when in fact they were giving us a huge gift.  We lockup the deal so the net price to Tom is even lower than the original deal of buying the house and selling the excess acre.  We do better because now Tom isn't on the hook for closing costs on the land sale.  The new price?  $579,000.  That's almost 50% less than the original asking price, and $171,000 less than Tom's dream price.

 

Conclusion

Tom closes on his dream home for $579,000, when we started his "no brainer" goal was $750,000.  In the end, we got the home for almost 50% off the asking price, and the only thing that Tom didn't get was an acre of land he didn't even care about -- the 1.2 acres he kept was more than sufficient for his kids to play and his wife to have a wonderful garden. Furthermore, Tom was financed by an alternative lender at just 2% above the cost of bank financing, with only 20% down.  In sum, Tom bought his dream house, a true architectural gem that he plans to restore to its full glory and live in for the rest of his life.

As we toured the home right before closing, Tom's wife said to me as Tom nodded, "This deal would never, ever in a million years have happened without you Alex.  We couldn't be more thrilled."  I have never been more proud, honored, and delighted in my professional life. 

The End :) 

 

Postscript

Two questions have come up often as I have told this story:

 

1. Alex do you really go to these lengths on every deal, or was this just a one in a million situation?  I love to negotiate, and I am not afraid to put forward an aggressive offer.  However, it's not always necessary, nor advisable, to have such complex negotiations.  But it is always necessary to prepare for negotiations methodically.

The best analogy to negotiation is litigation.  The very best litigators settle their cases advantageously for their clients without setting foot in court.  But they are very skilled and prepared if the need should arise to go to court.  Similarly, it's my goal as a negotiator to get a great deal for my client, as quickly and painlessly as possible.  If negotiations get tricky, I'm prepared.

As Theodore Roosevelt said, "Speak softly and carry a big stick."  Most of what I know may be unnecessary to secure an excellent deal on any given property, but if it is necessary, it's there for you.

 

2. Can we really still negotiate aggressively in this fast rising market, and is seller financing even a remote possibility today? 

It's true that in 2012, sellers are driving the overall market as inventory declines and prices rise.  However there is an exception: the luxury market. The higher the price, the more the pendulum swings to favor the buyer. Sellers sitting on multi-million dollar properties, especially, have to be willing to be flexible and creative.  That may not be the case forever, but certainly through 2013 there will be a lot of multi-million dollar inventory looking for buyers.  Furthermore, owners of multi-million dollar homes are more likely to be able to carry a note than the average homeowner. 

 

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I hope you've found this helpful.  If you have questions or I may be of assistance, please call me on my direct line at (480) 442-7325.

 

Thank you,
Alex 
SearchParadiseValleyProperties.com




 

 


 

(c) 2012 Alex Goldstein