A House By The Park

Before showing up at the property yesterday, I asked my real estate agent what he thought the seller wanted for the place and he gave me a low price and a high price with about $200,000 of room in between them. When I was at the house, however, I saw some literature a prospective selling agent put together for the seller which suggested a number at the higher end.

My agent thought I should bid close to the middle of the range, but once again, I do not find myself agreeing with this advice. Since the middle of the range is the absolute most I would pay, I think it’s best to start low and move up if necessary. I still haven’t heard an actual price directly from the seller, so for all I know, if I do this deal in cash and waive a bunch of contingencies, I can get it for substantially less than even the seller was thinking. Maybe it will fly and maybe it won’t, but since three out of the four beneficiaries are attorneys, I can’t imagine they wouldn’t be up for some negotiating!

That in mind, I’ve decided to put my first offer in at $100,000 less than the bottom of the range my agent gave me, $300,000 less than the top of the range, and $150,000 less than what I’d feel 100% comfortable with. The offer is easy to justify, especially when using the first prospective house that I didn’t get as a comp. I’m writing in no contingencies (not even financing) except for a quick geotech inspection and hoping that the seller will value a quick close to a solid buyer who really wants to make the place shine again. If I were the seller, I would favor selling to someone who actually wants to live there instead of a developer. Also, it’s well known that end-users like me will generally pay more than developers for properties like this because our time horizons are far longer and we’re not in it for the profit.

I do not expect this first offer to be accepted, but I do expect it to be a starting point.

It’s been about 48 hours since I put my offer in, and I just heard back that the seller said “thanks, but no thanks.”

The problem wasn’t the response, but rather the lack of additional comment or counteroffer. The situation is weird in that the prospective selling agent who was at the house works in the same office as my agent and he wants this deal to go through him even though he is not the agent of record with the seller. I have a problem with this as, for all I know, the seller has no intention of signing on with this guy. To put my fate in the hands of a selling agent who hasn’t even been retained by the seller yet seems crazy and risky.

I asked my agent to get more information from his fellow agent about the reaction to my offer, and something just smelled bad to me. When asked if we should submit another offer, the other agent apparently responded with “Why, so you can re-insult him?”

Hearing that response convinced me that I needed to engage directly with the seller. I’m not going to let this deal get away because someone is trying to get in the middle of it. I enjoyed meeting the seller at the house, and he’s a professional negotiator (attorney), so I don’t see why we can’t negotiate directly. I will be calling him this evening to see what his thoughts are.

Calling the seller directly last week turned out to be a great idea. Our rapport is excellent and we’ve already traded several phone calls and a number of long, well-reasoned e-mails backing up our positions and compromises. To try and describe the emotional rollercoaster of this back-and-forth in a blog entry would not do it justice. It’s very trying, but it’s also been very educational. Negotiating the sale of your company is both very different and very similar to negotiating the purchase of your home.

So anyway, very long story short, I eventually came up $150,000 from my initial bid (which is still $150,000 less than the asking price), offered to put down $100,000 in earnest money and waive all contingencies except geotech, and the seller has tentatively accepted! I’m happy with where we ended up, because it was the exact dollar amount that I decided from the outset I would be 100% comfortable with. I won’t exhale until we have a signed contract, but it appears we’re within eyesight of the finish line!

Will try to get a good night’s sleep tonight after a week of tossing, turning, and overanalyzing.

Bad news.

Upon presenting the seller with our proposed Purchase and Sale Agreement, the seller called me and told me his accepting of our price was with the understanding that there would be no real estate commission paid out of the proceeds. It is customary for the seller to pay all real estate commissions so my agent and I just assumed that while he would be paying no sell-side commission, he would still be picking up my agent’s commission. In a deal of this size, that’s kind of a lot of money.

The seller is an honest guy and I’m sure this was just an honest misunderstanding, but if I were to pick up my agent’s commission, it would put me above my “100% comfortable” price.

After a long jog to think about it, I called the seller up and essentially told him we could argue for hours about it, or we could walk away, or we could just split the difference. I offered to split the difference and he said he was probably ok with that but he needed to run it by his siblings first.

Hopefully splitting the difference gets us across the finish line. Yet another sleepless night coming up…

Well, apparently my offer to split the difference was not good enough to get us over the line and unless I pick up my agent’s commission, this property is going to go on the market in three days — for $200,000 more than my offer. When driving by the house today, my agent spotted a van taking professional real estate photography so it’s not a bluff. Additionally, the seller has officially retained another agent, but he has smartly carved me out of his contract with her; meaning, if I end up buying the place, it’s still considered a direct deal.

I have a charity golf tournament that I organized which I have to play in tomorrow, so I imagine it’s going to be a stressful day of negotiating between holes and trying to get something done by the end of the day, should I decide to proceed.

After a marathon day of golfing for charity, negotiating, driving, and executing documents, we finally have a deal!!!. In the end, I agreed to pick up my agent’s commission and also indemnify the seller against any claims or lawsuits coming from the real estate agent he didn’t sign on with, and he agreed to put a clause in the contract which allowed for reasonable extension of our closing date if circumstances beyond my control prevented closing by the official closing date of July 31st. This clause was very important to me as I waived my financing contingency and put $100,000 down in earnest money. If some shmoe at a bank fat-fingers a few keys and causes this thing to close on August 1st instead, I don’t want my earnest money to be at risk.

The indemnification thing is a bit of a calculated risk for me. Essentially, this other agent feels he should be compensated as the selling agent even though he was never retained by the seller. I have worked out a deal with my agent to pay this agent a .5%-of-selling-price referral fee out of his commission so everything should be good, but I understand why the seller would ask me to indemnify him. I don’t like having to do it and I don’t think any lawyer would advise anyone to ever do it, but I figure the chances are tiny that it becomes an issue, and even if it does, the amount we’re talking about is just 3% of the sales price. It’s not a trivial amount, but it’s not millions of dollars either. I will just have this other agent sign a release form before releasing his referral fee from escrow. Since both my agent and the real estate office that they both work for have confirmed to me that he has no claims to any commission, I’m not worried about it.

As for the deal itself, it was signed about an hour ago, at around 11pm and I’m still in shock that it came together. The seller and I both drove out to the real estate office, and as I was waiting for him to show up, I honestly thought that there was a chance he was going to take our signed offer and just sit on it over the weekend as the property went on the market. To his credit however, he read over the deal, faxed it immediately to his sibling that was the executor of the family trust, got it signed and faxed back, and congratulated me on being the new owner of their beloved home.

It’s such a great feeling to have made it through this process. By taking matters into my own hands and not allowing myself to be governed by the customs of the real estate industry, I have a once-in-a-lifetime house at a great price from a great family.

The stress isn’t over quite yet though. I have five business days to do the geotech inspection to make sure this house isn’t about to fall off the cliff and only a few weeks to close financing.

Since this house sits a mere 50 feet or so from a steep cliff, I felt it necessary to call an experienced geotech inspector from the area in to tell me if the property was at risk for landslides or other natural disasters. The inspector, William Chang from Geo Group NW, started off telling me what most geotech people probably tell you if you are buying anywhere near the water:

“In 10,000 years, this will all be in the ocean anyway.”

Haha… but not exactly what I want to hear. :)

Mr. Chang spent the next hour showing me topo maps and checking out the soil and the hillside looking for telltale signs of erosion. He did not find anything alarming.

And so with that, I am going to sign off on the geotech inspection and make this Purchase and Sale Agreement binding!

I’ve only had two mortgages in my life and they were both for small amounts of money and during pleasant financial times. Since the sub-prime market collapsed several months ago though, getting a loan has become much, much more difficult. My credit is great and I have a strong cash position, but even so, getting a jumbo loan is seemingly 10x more difficult than it has historically been.

Shopping for mortgages is not a pleasant process either. Most companies want you to give them all sorts of personal information before they even hint at what rates they can get you. Even places like Lending Tree that purport to streamline the process are little more than information-selling lead-generators that put your personal information in hands you may not be comfortable with.

One service that seems to stand above the rest, however, is the recently introduced Zillow Mortgage Marketplace. The great thing about Zillow is that you simply enter as much or as little info and you want, and mortgage brokers simply send you offers through the Zillow website. They don’t know your name, your contact info, or anything else you may not want them to know. They only know what you decide to tell them. In my case, income, net worth, desired loan style, and a few other things. Within an hour of filling in some info, I got ten mortgage offers via my Zillow inbox, at least a few of which would have been great to go forward with.

In the end, since I have such a small closing window (July 31st), I felt more comfortable going with a local institution who underwrote their own loans. I went with Wells Fargo and loan officer Steve Altchech, upon the personal recommendation of my real estate agent (UPDATE: 5/30/09: I no longer recommend Mr. Altchech). He got me the following terms, which are crazy-good in this tough market. Even my previous mortgage guy who wanted my business again said “Take it!”:

• 1st Mortgage: 5/1 ARM at 5.85%
• 2nd Mortgage: HELOC at 4.75%, indexed to prime minus .25%
• No points and no fees other than title, escrow, etc.

Once the mortgage market settles down again, I can think about refinancing to a fixed mortgage, but for now, I’ll take the cheap money.

All set to close on the 31st!

So we’re all set to close tomorrow and the real estate agent who was not retained by the seller apparently thinks he is still owed a commission.

Unbelievable.

I presented this agent with a release form to sign (just to be safe) in order to get the 0.5% referral fee that my agent was willing to give him and he won’t sign the release form!

Do I really need him to sign a release form? No, since he has no contract and therefore no claim to any commission, but since I indemnified the seller in order to get the deal done, I want to make 100% sure this is all settled before this agent sees any money at all. If he still has thoughts of raising a stink, he can do so without my money.

What I ended up deciding to do is to close this deal tomorrow, as planned, and have escrow hold this other agent’s 0.5% in escrow until he signs the release. If he doesn’t sign within a couple of weeks, I will just have escrow pay my agent the full commission instead.

I’m not too worried about this situation at this point, but it’s annoying to even have to deal with it. I do like having the power to keep this money in escrow, but honestly, I wish I had the power to withhold all commission related to this deal if I needed to.

This is important: most people don’t realize that the buyer’s agent contract they sign usually specifies that the buyer will be responsible for paying a 3% commission to the buyer’s agent if the seller doesn’t pay it (which they usually do). I do not like this arrangement at all and I will be writing it out of my next contract. I was still going to pay my agent 3%, but I don’t like giving up the right not to under circumstances like an intra-office commission dispute. Another thing people should change about their contracts is the termination clause. My stock contract didn’t allow me to sign on with another agent until three months after I terminated my existing contract. I ended up changing this to 14 days, but I would go even further in retrospect. Probably one week.

Alright, as of a couple hours ago, the funds are wired, the title is recorded, and the property is officially mine!  This is day zero.  Tomorrow begins the long, but hopefully fun process of building this place out.

Now that it’s officially on, I’m off to backfill and pre-date some blog entries which describe the process up to this point. But this day — day zero — is the official start of A House By The Park.