How to Handle Deals that Fall Apart at the Closing
John: Hello, I’m John Fossetti, here with Michael LaCava, from House Flipping School. We just got done talking about the property in Middleborough, and the disappointment you had there. Are there any other disappointments you have encountered in the real estate investing world?
Michael: Sure, John. We could be sitting here and videoing for a week if we wanted to talk about all our disappointments. The reality is there are disappointments, and it’s all about facing those disappointments, learning from them, and growing from them. One of the nice things that we’re going to provide you, or we are providing you, is some of the actual real life examples of situations I’ve been in and learned the hard way, and had to react.
The idea is always to be proactive and not have to react to situations, but the bottom line is, you are going to face these things. You, me, I know you’ve faced them. I certainly know I’ve faced them. For you viewers out there that are just getting started or learning, or even for you experienced folks out there, there’s always something to learn in this business, and whether its disappointment, excitement, or what have you.
Seeing that we’re on the lines of asking about disappointments let me share with you a particular story about a property I was actually buying. It was before we actually ever got to purchase this property in rehab and never sell it. What had happened on this particular property, I had raised private money for it. As you folks know, we raise money to do our deals that are funded by private individuals. We also work with hard money lenders, and we also work with banks.
This one happened to be a particular private money lender. He was a new lender for me, so it was just . . . he obviously had trust in me and we built up the credibility and we’re doing our first deal. It was somewhere around a couple hundred thousand dollars; it was a lot of money at stake here.
Not that the money was ever in jeopardy, but the fact is that we went through 2 months, 3 months of going . . . this was actually a short sale deal, and everything was done supposedly correctly and we’re getting ready to close. We went through all the things that had got messed up and had it all resolved, so you’re excited, you tell your lender, “Everything’s good. We’re closing tomorrow. Your money will start earning interest. We’re ready to go.” Literally at the closing, the deal fell apart. The bank pulled out of the deal at the closing.
John: Wow.
Michael: You want to talk about being in a lonely place; I was at a lonely place. This was a complete surprise to me, and I had to basically go back to my lender and tell him. I don’t know what his reaction’s going to be. I was actually scared, I was fearful. We talk a lot about fear and the mindset, and things like that. I did what a responsible investor should do, which is immediately go find thee lender and let them know what happened. Your lender may be okay with it, they may react not-so-okay with it.
This lender was a little pissed, to be quite honest, and used a few words that left me feeling not-so-good. The bottom line is that that lender still does business with me today. I was able to restore his confidence and go and close additional properties later, with his money.
What I learned from this and what you need to learn from this is when you are interviewing, or when you go to do business with a lender, it’s very important . . . now I want you to pay attention here, because it’s very important that you prepare them for things that can happened. What I learned from that was being in that position and being in that state of mind, and not being able to sleep that night, just freaking out about how I was going to prepare for this.
Anytime I’m working with someone and we’re using money of theirs, we explain to them, “This is the real estate business and the deals we are working on are bank-owned stuff, short sale, probate stuff, all deals that can be somewhat difficult to close.” Although we have a very good track record, we want to say, “Are you okay if we go 30 days and we get ready to close and the deal falls apart? I need you to be . . .”
If they said, “No. If I know that’s part of it and I know that’s what can happen . . .” then it’s much easier when that deal does fall apart to go back and say, “Hey, Joe. Hey, Paul. Hey, Kevin, we did everything we could. We just could not save this deal. However, I’ve got this other deal coming in real soon. Your money is set aside for that deal.” It’s important to prepare and be proactive in explaining to them what could potentially happen. Obviously, you want the deal to work too, you’re going to do everything you can, you’re going to fight.
Let me tell you, I’ve had some fights and saved some deals that could have very easily fallen apart, but I don’t necessarily have to share all that stuff with my lender through the process. Why put them through the pain? You’ve already set them up to let them know deals could fall apart, and I don’t believe in stressing out my lenders during that process. That’s what they pay us for. That’s why they lend us their money, so they can sit back and collect their interest, or if they’re an equity partner, what have you.
That’s really the lesson you want to take out of this – it’s to prepare. Let them know what could happen, so that in the end if it does happen, it’s much easier to explain it to them.
John: Just so the people watching can understand the process of private money, it is getting money lent to you, they don’t write a check to Michael LaCava, correct?
Michael: No, they don’t. This could really be another whole series of videos, which we will do, so you folks can really understand how to raise money and get into deals. No, never. Anyone that says they want to write a check to your name, just respectfully decline. As a matter of fact, that’s happened to me. I had a lender I was talking to, interviewing actually. I was referred from a creditable source, an attorney; that’s always good. If an attorney can refer you to a client to lend you money, that’s usually coming from a credible source.
The gentlemen just wanted to basically say . . “Okay. Great. I’ve got $100,000. Who would I make the check out to?” I was just like, “That’s pretty cool, right? I appreciate that kind of respect, but let me explain to you how the process works.”
The lender will never write a check out to your name, so don’t accept a check. Don’t even be tempted to accept the check. As much as you would want that check and you’d probably be a good steward of that money, you just don’t want to do that. Typically how it works, is say you’re my lender and we sit down and you say, “Great, Mike. I’ve got a couple hundred thousand dollars. Let me know what I need to do when the time comes.”
Basically, I don’t require any documentations saying that you’re going to allow me to borrow $200,000, because at the end of the day, if you want to get out of that, you’re going to get out of it. To me, we shake hands on it, you commit to me. You’re going to lend me $200,000. Whether I get deals pending or deals on the way, now I know I can put that $200,000 to work.
When we identify a property and we send it off to our attorney, during that title search period and process, we identify you as our lender, and at that point, we make the connection so that you work with our attorney and you never send that check to me, Michael LaCava, Mike at Holden Reality, or Mike at House Flipping School.
The check will go to the closing attorney who will hold the money in escrow, so that the day of the closing, then that $200,000 then goes to the seller of the property. We never touch it. That’s really the best and cleanest way to handle anybody else’s money. You should talk to your attorney or the attorneys that you are working with and really let them direct you as well, in your particular state-wherever you may be. That’s how we do it here.
John: That’s called . . . they’ll wire the money into what’s called an [inaudible: 07:10] account, correct?
Michael: That is correct. In most cases, they’re wired. I do have some lenders that are old school; they go and get the check and they deliver the check. I said, “That’s fine if that’s the way they want to do it.” They haven’t disappointed me yet, and they’ve been there every time with the funds to close.
John: Excellent. There’s another story about one of Mike’s disappointments. In the next segment, we’ll get into another story and learn a little bit more about the real estate here at House Flipping School. Thank you very much.
Michael: Thank you.
