Well there I go again. Out of action. We are finally settled into the apartment, and starting to find our routine. One of my “Walk and Talk” campaigns began to bear fruit, when we found what appeared to be an acceptable house in our desired neighborhood. The deal on the house was progressing nicely, and we had negotiated mutually beneficial terms for the house sale. The deposit, sales price, and closing date all looked great. The sellers asked me to draw up a contract, because they weren’t using a realtor. I used one of the two acceptable FAR-BAR contracts, asked an attorney friend to review it for any obvious pitfalls and sent it to the sellers for comment. They they said they wanted to send it to their attorney for his review. That was the beginning of the end. I can only assume this attorney was not a real estate attorney, because he killed the deal. Just flat killed it.
You wouldn’t think there was much left to negotiate once the deposit, sale price and closing date were negotiated, but you’d be wrong. We agreed with the sellers on the inspection period and were using conventional financing. What could be left?! Well according to this jerk, a whole bunch. I know that any good attorney tries to add value to the transaction while protecting his client, but this was ridiculous. First off, he told the seller that the seller was a fool……and tried to add $10k to the deposit and change the closing date. I immediately called the seller and put an end to that talk.
The biggest issue was in deal structure. Most residential sales contracts I have been involved with are structured where the closing date and the effective date (the date on which all parties have signed the contract) are the only date certain events. Everything else, like the inspection period for instance, is based off the number of days from those two dates. Well that’s just not how this jerk saw things. He wanted to add a group of date certain milestones to our contract. Such important provisions as the loan commitment and appraisal, needed to be performed by specific dates. I knew that we could perform those functions before the closing date because we gave ourselves a shade over 6 weeks for the closing, but could we do it by the arbitrary dates . suggested?! I was skeptical
A quick call to the bank we intended to use, indicated that we could hit those dates if the contract were executed and applied for that day. So what was the problem?! Well the attorney insisted that the sellers not sign the contract until we provided an updated prequalification letter. When it would be signed, I didn’t know. I don’t think much of those letters personally. Anyone who can fog a mirror can get such a letter, and they are not legally binding. The seller didn’t care about the letter, because we were proposing putting well over 20% down, but he acquiesced and refused to sign the contract. At that point I became very unsure that we could perform our side of the contract. If it took us a couple days to get the letter to the sellers, and they took another couple days to sign the contract, then I was certain we would be unable to hit those arbitrary date certain milestones. The seller thought the attorney was being ridiculous, but refused to stand up to the attorney……even though the attorney was working for the sellers. The time line was too tight.
Anyway, long story short, we walked. It is a shame, because it was a solid deal……in an amazing neighborhood. The sellers then listed with a realtor and had it under contract within a day. Amusingly enough, the new buyers will be paying $13k more than we had agreed to……but the sellers will be receiving less than we agreed to because they are now paying a commission. Some people are strange, but this contract will almost certainly go through…..because the sellers will listen to the real estate agent and not an overzealous attorney. Some people are crazy, but it was an interesting experience. Oh, one last thing. So the standard contract says the buyers will apply for financing within 5 days of the executed contract. (Keep in mind that all references to “days” are calendar days not business days.) Would you believe the attorney was hemming and hawing about giving us 2 or 3 days to apply….because 5 calendar days was entirely unacceptable? It didn’t matter that I pointed out that applying for financing a day or two earlier would not affect the closing date……or that if the contract was executed on the Friday before a three day holiday I would not even be able to meet that requirement no matter how hard I tried. Nope guys, you can’t argue with stupid.
A Bigger Loss
We also suffered a much larger and more painful loss, when our beloved Black Lab passed away unexpectedly. She was 10.5 years old, and in pretty good physical shape. Unfortunately, she ate 4 of the Little Man’s socks……and they were hung up throughout her digestive track. Eventually we made the decision to put her down, but it was a devastating decision. Labs don’t typically live to be very old, maybe 12 or 13, but we weren’t ready to say goodbye. Our vet said she could remove the socks and felt reasonably confident that our girl would recover, but we just didn’t feel right about it. The tough part was that were were in kind of a gray area. If she had been a couple years older or younger, the decision would have been easy. Instead she was right in between. Further complicating the issue is the fact that we live upstairs, and helping a 64lbs Lab negotiate the stairs would have been really tough. In the end, I believe the correct decision was made…..but I’ll damn sure miss her. She has been my constant traveling companion for years. It does make me feel a little better that she led a great life. We took her on constant road trips, as well as camping and boating. She has visited many more states than plenty of people I know. She will be sorely missed. The really painful kicker is that the Little Man kinda knows what Heaven is, but doesn’t grasp at death is permanent. He called her “Puppa” and has made us cry a couple times by casually saying…… “ I miss the Puppa. When can we go pick her up from Heaven?” Just heartbreaking.
Ok, enough disappointment. Dealing with loss and disappointment is part of life, just not a fun part. On other fronts, we are are all happy and healthy. We’ve been enjoying more time at the beach and the weather continues to be outstanding. My consulting activities have slowed down some over the past month. The two most interesting activities are outlined below.
I was asked to design and permit a new entrance for an existing apartment complex. As I began to familiarize myself with the project, I was shocked to learn that the residents are currently using an unmarked entrance that dumps out from the side of a parking lot, onto an adjacent road. I really need to get you guys a picture of this. Apparently what happened, is that the current owners bought the complex……but did not realize that the existing driveway and access was not on their property….nor did they have an easement. Shortly after they purchased the property, a new apartment complex broke ground next door…..and was being built right across the driveway access. Yep, that’s a problem. The lesson here is to always know where/how your ingress/egress access is established, otherwise your tenants may be jumping a curb to get to work. We’ll see how the little project turns out. It should be simple, but the owners are debating my scope and fees.
Land Rich and Cash Poor
I have been a developer, or as an engineer serving developers, for several years. Along they way, I have learned that there are basically three kinds of real estate developers. The first kind are the professional, experienced and well capitalized. The next are the mom and pop novices who have zero experience, and likely only read a book on the subject. The third kind are what I call “land rich and cash poor”. Often times the previous generations were involved in agriculture, and the family came to own a large amount of valuable land. Now the current generation, which may or may not be involved in agriculture….. are looking to unlock some of the value in the land.
Often lacking the experience and funds to self develop, most sell out to professional developers. Others, whether out of guilt….greed…..or genuine desire, want to develop the family property themselves. I want to share a cautionary tale, about a ranching family that was my client 10 years ago. Think back to the heady times of the early 2000’s, in Florida’s last ridiculous real estate bubble. This particular client was a ranching family who’s grandparents had purchased about 25,000 acres of land in the depths of the great depression. They were fortunate enough to have a thriving cattle operation in the Tampa Bay area, and leveraged up when the market for agricultural land was down. R2R and the FI Fighter would be proud! Fast forward about 80 years, and the original owners had all died. The next generation were still alive, but enjoying their rocking chairs on the porch, and not actively involved in the business. Decisions were being made by the grandchildren of the original owners, who were now in their 40s. These folks wanted to do something to honor the previous generations and leave a positive mark on the community by developing a great community, but were long since divorced from the land and their agricultural roots.
So they formed a family corporation and started to proceed with developing the land. The siblings all got along pretty well, which was both good and unusual in my experience. They owned this land free and clear, and retained the vast majority of the original ranch. I have no doubt that a couple of the national developers (usually home builders principally), would have purchased the whole remaining ranch for between $200 and $250 million. The family didn’t want to do that, because they wanted to leave their mark. Fine. What they did next however, nearly cost them their legacy. They took out a multimillion dollar loan against the property, and started paying consultants to help them develop the land. A couple years later, once that loan money was nearly spent……the bottom fell out of the real estate market. They could have sold off a piece of the land, repay the loan in full, and wait for greener times…….. but they didn’t. Instead they waited, and eventually defaulted on the loan. Remember that the land was the collateral for that loan.
In this particular case, they were bailed out with a bridge loan by a local syndicate of my other clients…..but the situation could have turned out much worse. They gave a few hundred acres to the bank to stave off forclosure, paid the local syndicate for their help, and sold the rest to a group of investors. They pulled some money out of the property, but likely netted $150 million less than they would have. I think the most painful part is probably that they watched someone else develop their land…….and not in the way they would have chosen.
I am not telling this story to be judgmental. I just want it to be a cautionary tale for us all. Leverage can be a good thing, but too much leverage can wipe you out. An alternative approach is one being pursued by another ranching family in the area. They reached out to my development partner and I, asking if we would be willing to partner with them as contract developers. Given the size of the potential deal, their presumed liquidity, and the point in the market cycle……I am skeptical that a “contract developer” relationship will happen. I always like to flush out potential opportunities, however, and that process is under way. More likely, I’ll consult for them……helping establish the highest and best use for the land and providing ideas about entitlements and potential deal structures. Either way it is an exciting proposition, and I am glad to help another family navigate this process while leaving a mark on my community.
Global Stock Markets
Regular readers may be wondering how I could ramble on for 2000 words, without so much as mentioning the global markets. Well, it’s probably no surprise that I remain skeptical about value in the markets……but we are continuing to watch and wait. I am somewhat surprised by the resilience of the S&P 500, in light of the TrumpCare debacle. I would think that investors would have been more spooked by the whole thing, especially because the divide between Donald Trump and the conservative wing of the Republican party seems to be wider than ever. So wide in fact that both Trump and his Chief of Staff have told various media outlets that they will be courting moderate democrats to help make tax cuts and infrastructure a reality. So much for a single Republican party controlling both Congress and the White House. I am not surprised the divide between congressional conservatives and the president is as wide as it is…..Trump is a real estate developer after all……..and after working for developers for over a decade I can assure you that very very very few of them are fiscally conservative. Still, I am surprised that the Trump administration openly discuss working with the Democrats so soon. Time will tell if they can get anything done, but I’m skeptical that anything that does get done will be significant.
Happy Value hunting…..and remember to hug your loved ones!