Example Deal: Retrade On A Fourplex

One of the best deals we've ever gotten was a small fourplex in Grandview, Missouri that was vacant, bank owned and very, very dated. Each unit had these massive aluminum windows in front that made the whole building look just terrible (and horribly energy inefficient to boot). Furthermore, the agent misslisted it and said there was a “special tax” equal to the property taxes when in fact there was not.

This mistake reduced the number of interested buyers in the property (at a time when the market was still very depressed) thus making it easier to acquire. Misslisted REO's are by no means uncommon so they are definitely something to keep a look out for. For example, I just went to a house that was listed as a 3 bedroom, 1 bathroom home but was actually a 3 bedroom, 2 bathroom house. No homeowner would make a mistake list this, but REO agents are known to. It's critical to keep an eye out for such mistakes as they can make for great opportunities.

Given all of this, the property was only listed at a paltry $55,000, or less than $15,000/door. We offered $40,000 and eventually came to terms at $44,000. However, during our due diligence we scoped the sewer lines with Snake and Rooter and found that the line was broken in many different places. Snake and Rooter is very expensive, which actually worked in our favor (at this time, I had no idea how much replacing sewer lines actually costed). They gave me a bid for $9800, which we submitted to the bank along with the video of the broken line.

We asked for the entire $9800 off expecting them to offer to split it, but instead, the bank dropped their price like a rock from $44,000 to $35,000. It's hard to complain about that!

Once we purchased the property, I got some more bids on the sewer line and found one a good deal cheaper. The entire remodel cost about $20,000, of which most went to the sewer line and updating those awful windows (as well as cleaning the carpets, new appliances, blinds and touch up paint). Today the property rents out for $450/unit and we pay none of the utilities. It brings in $1800/month for a ridiculous rent/cost ratio of about 3.27% and effective cap rate of about 15. In other words, it's one of the best deals we've ever done or seen for that matter.

Now finally, I should note that retrading is something you should be careful with. You don't want to get a reputation as a retrader because sellers won't trust you. Also, some institutions will very rarely or perhaps never renegotiate (Fannie Mae, Freddie Mac and HUD for example). Finally, it's very questionable ethically to get a property under contract with the intention of trying to alter that contract. But, I think this example does show the importance of 1) investigating parts of the listing that seem questionable (like the special tax) 2) proper due diligence (including scoping the sewers) and 3) a reminder that everything is negotiable. If something unexpected comes up during due diligence, don't assume you either have to accept it or walk from the deal. Go back to the negotiating table!

The worst they can possibly do is say no.