Why We Backed Out of a Deal
TL;DR - Found a great looking property that was in our buy box, engaged with the sellers, did our due diligence, and decided not to move forward with the deal for various reasons.
We found a great looking property.
Located in St. Louis, it was right up our alley.
It even fit our buy box to a T.
New bathrooms, great kitchen, nice backyard, the works.
Heck, the owners were investors themselves!
We were falling in love.
But… we didn’t pull the trigger.
Why?
Why We Backed Out of a Deal
Doing the Work
Yes, we backed out of this specific deal.
But in the long run, that doesn’t matter.
What matters is putting in the work.
Look at properties, negotiate, learn, and grow.
Sure, this property didn’t work out. The numbers didn’t work out. So we backed out.
But always put the work in.
That’s how you find success in real estate.
The Story
Just like we do every day while drinking coffee, we pulled up Zillow to check out properties in our buy box.
We like to see if things have changed or stayed the same so we can stay on top of the market.
Our buy box/investment criteria are:
Buy-and-hold long-term tenants
Single-family homes
St. Louis, MS
3 beds
1.5 - 2 baths
A basement
A garage or carport
The Interest Period
Back in late April, the property in question was listed for sale at $155,000.
We added it to our spreadsheet where we calculate the typical returns we’d get for a property.
It hit our radar in particular because compared to other local properties, the inside of this one looked pretty new or redone.
The kitchen, flooring, new baths, new doors, new windows, and finished basement were the main reasons we liked the property.
Plus the heating and cooling system looked new. Backyard was also nice.
On April 29th, we immediately put it into our spreadsheet to run numbers.
At this price point with April 2022 interest rates — despite us liking the property — the numbers (return) did not work.
We bookmarked the property and checked in every week.
Until June 30th, nothing happened. Then it went into pending, meaning the seller had a buyer for the property.
We thought it was under contract, but later on Zillow notified us that the property was back on the market.
The contract signed in June didn’t end up completing for some reason or another.
In late August, the property still didn’t meet the numbers we liked.
But in September, there was a price change. With price cuts, we began smelling a motivated seller.
There was a second price cut, so we decided to see how aggressive we could get with this property.
Engaging With Sellers
We asked our real estate agent to get in contact with the sellers’ agent so we could begin negotiating.
For our numbers and investment criteria to work, we needed to purchase the property at $120,000 when it was listed at $140,000.
When we verbally discussed this with the seller's agent, they immediately refused and said they wouldn’t go below $135,000.
There was another price cut of $4,000-5,000 on the property. We went back to the sellers’ agent and reaffirmed our interest at $120,000.
The listing agent went back to the seller and the seller started warming up.
Between 9/26 and 9/30, we got a full list of the occupancy inspection violations.
In St. Louis, every property — before you can place a tenant — needs to be inspected to ensure it’s safe for a tenant.
At this point, we knew our $120,000 offer was fair since we would have to do some repairs to pass the occupancy inspection.
We waited 3-4 days and went back to the listing agent and sellers. We told them we could go up to $125,000 if they wanted our offer.
The listing agent said, “Okay, great, I think I can get my seller to accept.”
Sellers Accept, Contingency Period Begins
Which they did! We had the property under contract by 9/30.
This started the inspection/contingency period. This is when you can do due diligence, inspect the property, and try to find any problems with the property.
We did a sewer inspection and started to get the ball rolling with our lenders and the bank.
As this was happening, we got the results of the inspection report.
Generally, the inspection report was fine. There weren’t a whole lot of troubling findings. Nothing was too concerning.
Although, there’s always something.
In this particular report, we found out that the roof had to be completely replaced. It was too old, past life, and buckling
Replacing the roof would cost $7,000-9,000.
When we learned this, we went back to the seller for concessions.
We wanted to see if the seller could reduce the price or fix the roof before we closed.
The seller wouldn’t budge because they already came down $10,000 to meet us at $125,000.
The sewer inspection was also completed during this time. Or rather not completed. The inspector couldn’t complete the inspection because the sewer was clogged.
Go figure.
We needed more confidence that the sewer was in good shape.
So we went back to the seller again and wanted more concessions.
There was a lot of back and forth at which point the seller agreed to have the sewer cabled — or cleaned out — and rescoped with a camera.
That was great! We didn’t have to cover that expense.
At least now the sewer was in decent shape.
Crunch Time
Around this time during contingency/due diligence you have to decide if you’re going to move forward with the deal.
We were looking at contractors that could fix the roof before winter came in St. Louis. This made the timeline tight because we wouldn’t have been able to close until mid/late October.
In St. Louis, roofers stop working on roofs by mid-November until mid-February for the winter.
So we weren’t super enthused about:
Not being able to fix the roof before placing a tenant or
Finding a contractor that could fix the roof within a 2-week time period.
To add salt to the wound — while we were going back and forth about the roof — we were still doing due diligence to get insurance for the property.
That way, when we close on the property (for the lender and ourselves) we have the proper insurance in place to cover it.
At this point, we were 2 days from the drop-dead yes or no decision on moving forward with the property.
Our insurer came back saying that they wouldn’t cover the property in its current state. Because the roof was past life, missing shingles, etc.
We began scrambling to try to find insurers that would cover the property.
We found some, but we had never worked with them before and they were more expensive than what we normally budget for when running our numbers.
Altogether, these issues were making the transaction more complicated than we were comfortable with.
Plus, we would have been getting suboptimal returns.
We had already gone up $5,000 to $125,000, plus the price of a new roof — $7,000-9,000.
Both of these things combined AND we only had a few hours before we had to make a decision.
The Big Decision
At the end of the day, we decided to pull out because things were getting too risky and complicated.
We were able to get our $2,500 earnest money deposit refunded which is great!
But we were $750 out of pocket for all of the inspections for the property. Sunk cost — won’t get it back.
After we walked out of the deal, the same or next day the sellers relisted the property at a price cut.
There was another pending contract on 10/21 and it has yet to close.
Closing Thoughts
We missed out on this property and that’s completely fine!
Our mindset is:
“If we don’t get this one, we’ll wait for the next one.”
Because every property you don’t get helps you get closer to the property you will.
Do the hard work and eventually, it’ll pay off.
Maybe not on the current property you’re looking at…
Or the next one…
But it will.
Happy Hunting!
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