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As an investor, it's important to remove emotions from the deal-making process. Knowing when to walk away from a deal is an important skill to have to be able to scale your portfolio effectively. In this episode, we give you 3 reasons to stop negotiations to save yourself from future headaches - even if it means absorbing sunk costs.  --- Transcripts   Emil: Hey everybody, welcome back to another episode of The Remote Real Estate Investor. My name is Emil Shour and my co hosts today are,   Tom: Tom Schneider   Michael: and Michael Albaum.   Emil: And in today's episode we're going to be talking about deals that we've walked away from. So we've gotten into contract on a property but something came up during inspections or during escrow and we decided to walk away from the deal so we're gonna review what happened, the lessons learned and some insights that you can take away and use in your deals. So let's get into this episode.   Alright guys what's going on anything new in your personal real estate investing careers?   Tom: Yeah, I'll go first. So not a lot on the investing front just quite a bit of home renovation stuff so working on the homestead but you know, still using some of the fun mechanics or fun tools of the real estate investing trade like pulling money with a HELOC, but right now more just investing in myself investing in my personal house working on a kitchen remodel and some structural foundation stuff and busy on that front not a lot of the remote investing side right now.   Michael: What are you doing on the structural foundation stuff that sounds heavy?   Tom; Yeah, right. This is like one of my like, pieces of advice I give to people in the academy is like you know, stay away from foundation stuff, you know, it's a big red flag. Well fortunately, I am family friends with a concrete contractor, really reputable guy in the local area that I live in. So I just one of the corners of the houses started sinking a little bit I live in the hills, suburbs around San Francisco and one of the corner of the house dropped like two inches down. So when I'm like kicking a soccer ball with my son, you know, the ball just starts running down to the corner of the house and it's kind of thinking this is kind of an issue and we're planning to stay here for a little bit longer. So let's address that stuff.   So it's crazy they did these like 1415 foot holes in the ground to get to the bedrock and they fill it with concrete jack the house up a little bit left the house up a little bit and they are in the process of pouring the concrete into these gigantic holes that are the new piers that will be supporting the house.   Emil: I've never seen this process and this videos   Tom: Yeah, I mean just like you think of like piers you know, we're like going over a lake like these long metal you know, whatever piers it's like the same thing with the house they did they just jacket right into the bedrock like I was thinking they were gonna have to do all these like retaining walls and stuff like that along the side of the hill, but nope, just piers, giant holes in the ground, filling them up and jacking the house up. Yeah, I'll share some some videos in the show notes.   Michael: You should put a time capsule into the concrete so that way, when in 150 years, when it's to race, someone will find it.   Tom: That's a great idea. There's probably some time right now.   Michael: Yeah. So my friends were remodeling their bathroom and they took out down to the studs, and they found a beer can from 19 like 52. With that someone had put in the stud in the wall. I was like, Oh, you guys gotta leave something from 2020 now.   Tom: Yeah. I love it. Love it. Love it. Love it. So that's what I'm doing not real estate related, or investment related. I'm going to pass the hot potato off Emil. Go ahead. What's going on?   Emil: What is going on with me, I think I've been talking about property management changes. Luckily, those are both done. So in the property, new property manager as of last week, same with St. Louis. So very happy to have those behind us now. And in terms of acquisition, as you guys know, I recently started a business. So I'm on hiatus for buying right now just trying to save money and get on stable footing with the business before I go out and buy new stuff. So right now I'm on pause, just trying to get the business going.   Tom: Keeping me on the hot seat. So in starting a new business as a sole proprietor, very cool. Your ability to get traditional loans has probably changed a little bit or the requirements and what they're asking for Why don't you talk us through a little bit about that you're kind of plan coming, coming out of a W two job into this sole proprietorship and getting to the other side. So I'd love to hear your your thoughts on going through the process.   Emil: Yeah, it was actually the timing was good, because I had a cash out refi that I needed to finish before. Like, if anything happens, like changes in your employment during a refi, it can basically cancel the refi. So for anyone listening, if you're thinking about making a major, either switching jobs, going self employed, whatever it is, like, Wait till you do your refi or whatever to make that move. Just quick note.   So for me, I knew that yes, going out on my own, basically, conventional lending, they want two years of employment or two years of business history, so or business income. So right now, if I go out and try to get a conventional loan, they're basically not going to give me one because I just started a business, I have one month of income, not enough to show they want to see two years of, of tax returns under whatever you're doing either employment or self employment. So conventional financing has gone out the door, my wife might be able to do it instead of me.   So I've been getting all my loans in my name, maybe we can transfer it to my wife. But it actually segues fine, because I've been wanting to move into buying commercial multifamily. So five plus units where you don't get conventional lending anyway. So I don't think it should be too big of an issue, since they're looking at the property more than myself.   Tom: Yeah, makes sense.   Michael: It just makes it tough to buy non performing properties with commercial lending, right? Because if it's not performing, they're not gonna want a loan on it. So doing any kind of value add is is tough from that position   Emil: Really?   Michael: Well. Yeah. Because they're gonna underwrite the property's value based on its performance. And so if you want to add value to it, you know, it might be tough to do, you can buy it for whatever, the bank will lend on it. But then you've got to have the cash in reserve to go do that value add,   Emil: Right. That is a good point. I mean, when you say like non performing, it could be you have a let's call an eight unit building, and it's under market rent, but it's still cash flows, but you just know that you can improve and make a cash flow better, which is probably what I'd be going after anyway. Not like a vacant eight unit building.   Michael: Exactly. Yep. Yep. Yeah.   Emil: Okay, cool.   Tom: Completely unrelated. We've been playing around with different recording software for this episode. And I just had this pop up that just said, the recording looks and sounds so much better than what you see live. What? Do you think we look and sound bad?!   Random pop up that goldfish distracted.   Michael: That's a great.   Tom: Cool Emil. Very exciting stuff. And, yeah, dovetails Well, with that strategy change and the type of financing requirements.   Emil: Michael, you're sharing what's going on?   Michael: I still got that six unit under contract, they got to inspect it and found a couple issues that they want to correct it, they went and got bids for them. And they came out, like astronomically high. So I said, let me go get bids for this. And maybe I'll repair it myself. And they came in way cheaper, like many, many, many times cheaper than what they got bids for. So I'm going to take care of that work myself. And then we're going to get this seller, excuse me, the insurance company and lender to sign off it says, Hey, once this work is done, that will you'll basically lend on this thing and insure the building at that point in time. So once we get that we're gonna have the work done, and then we should be off to the races. That's super exciting. I'm going to get a Southern California condo that I own listed live on the market here this weekend, which would be very exciting. And then I'm also looking at doing some flipping inside of my Roth IRA. So I transferred some money over to a custodian couple weeks ago, and now I'm making offers on properties out in the Midwest to do some flipping. So keep Your fingers crossed for me Oh, see how it goes.     Emil: Alright, guys. So today's topic, shout out jack Crone in front of the podcast for this idea, which was a deal that you've walked away from. So I'm sure all of us have walked away from a deal. In fact, we've talked about it and we have what else this episode wouldn't be very good. So we've all walked away from a deal. And I'm sure for different reasons. And I think it'd be fun to just go over some stories. So who wants to kick us off?   Tom: Michael lead the way.   Emil: Michael?   Michael: Yeah, sure. I've walked away from numerous deals, I think everybody, if you're in this business long enough, and you haven't walked away from a deal, you likely have bought some bad deals. Because a lot of times you need to fire Ready, aim kind of approach and make an offer and then go do all your due diligence. On the back end, once you have something in contract, especially in hot markets, which I'm hearing a lot of people talk about, kind of we find ourselves in today is that, hey, by the time I get all my questions answered, the deal is gone. And so sometimes you got to offer first and then figure out all the stuff.   So for me, I offered on a property, it was actually going to be my primary residence, as I was looking to moving down to the central coast, I offered on it, and again, went and got our inspections done after the fact. And we were looking for something that we could rent out an additional space. So it was going to be kind of a house hack. And so it had kind of a separate on suite wing, if you will, that could have been closed off. And we said awesome, this looks great. Because it was more than we wanted to spend just for our living expenses. So better under contract, got an inspection done, and it had multiple offers on it. So we had to come in fairly strong. And the agent I was working with became friendly with the other agent. So they said, Okay, let's make this happen.   So got the inspection done. And there was a foundation issue, the floor was a little bit uneven. And we knew that going into it, but we didn't know how bad it was. So we paid for the inspection. And we paid for a foundation inspection and got the foundation contractor out as well to give us a bid and the bid to fix it was like $115,000. And keep in mind that that can't be financed, or we were not able to finance that. So if we were to pursue the deal, we would have had to bring that out of pocket in cash on to the deal itself.   And we just said you know, that doesn't make any sense based on the all in cost at that point in time. And based on the value of the property we didn't think it was it was worthwhile. So we cancelled the contract walked away. But it was funny because we actually ended up assigning the contract to my agents. He and I are really good friends. His name is also Mike.   He ended up wanting to buy the deal the property for his daughter who's in college to live in and with some of our roommates. So he bought it as a rental for his daughter and has been really enjoying it is slowly doing work. So it was something that needed to be addressed immediately. And that made sense for him. So I basically assigned the deal to him almost like a wholesale I didn't charge him anything cuz we're good friends, but he was super excited to get his hands on that deal. Because he was really excited about the property.   So walked away from it. He ended up paying me for the inspection because he's like, Yeah, I would have had what to go on anyhow, so ended up walking away for really no money out of pocket. But if I had to have walked away from the inspection cost 800 bucks, 1000 bucks, whatever it was, it's not a big deal to avoid $115,000 mistake or repair cost. So I think a lot of times people get concerned with how much money they've already put into the deal whether that's an appraisal or title and escrow fees or a loan application fee, and then they'd have throwing good money after bad and if the deal is bad. Don't be afraid to walk away. I'm not going to say in in totality, but in many instances, you will not have spent enough money to commit you to that deal.   I mean, even losing your earnest money deposit, I would like to talk about that another deal, but I walked away from my earnest money, a couple $1,000 because of an unforeseen issue that came up and we had to walk away from the deal. We just weren't comfortable proceeding. So just keep that in mind as you're looking at deals. And as you're thinking about the results of the inspections, and the results of your due diligence, think about if it's worth it to throw in the extra purchase costs of the property above and beyond what you've already spent.   Emil: Nice. So what was the big takeaway for you from that? One   Michael: Big takeaway is, I think, just do as many inspections as you need to feel comfortable with a lot of people I feel like it myself included, we don't want to uncover the scary stuff. Like if I don't see it, and no one can see me right now. But I'm holding on my hands or my eyes like a like an ostrich. If I stick my head in the ground, and I don't see it, it's not a problem.   That's not true. It absolutely you know, you need to face facts and face reality and uncover as much of the gross stuff as you can and don't fall in love with the deal. Because the more hair a deal has, as I say, in the industry, the harder it becomes to do. And the easier it should be to walk away because there's more hair on it. But oftentimes, we fall in love with deals and think, Oh, well, it'll be okay because and we make excuses for ourselves or for the property. When really we need to think more objectively.   And that's really hard to do, especially when it's your primary residence when you're going to be living there there's a little bit more emotion tied to it. And so for this primary residence we ultimately did buy I tried to remove emotion from the equation a bit more. And that has worked out for us much better.   Emil: It’s so hard when you're buying for yourself though cuz like, you know, as an investment, it's just it's numbers in Excel totally. versus when you're living there. You're like, oh, man, but we're so close to this I gotta be happy here, the yard it's impossible even like us as you know, investors who are supposed to be so objective, like when we walked into our home, I immediately just think about kid running around and our dog running around the backyard and stuff. It's It's so hard with a personal residence.   Michael: Yeah, it really really is.   Tom: Yeah, psychology, like they give you like, you could run to a situation where you just don't ever pull the trigger on your own occupied one. And if you don't give yourself a little bit more leeway than you would normally have the discipline on investing. So yeah, so true that psychology of the different owner occupied versus investment.   Emil: Totally.   Tom: Emil, do you want to go ahead on a deal that you walked away from?   Emil: Yeah, so I think the most recent one was September - October of last year before we ended up buying that triplex It was another triplex and this one had been listed on market for a while I think it was like two to three months I even think it was went under contract and then back on the market. And it had like two pictures It was like a picture of the front picture of the site and the owner refused to allow anyone to go in until they had a signed offer.   I think the property was 120k I think we offered 110 they accepted and then my agent went through walk the property sent me a bunch of videos of the walkthrough and you know I knew that this person is not posting pictures there's probably a reason like it's probably not going to be beautiful on the inside but man there were like so many issues. Like when issues come up my first thought isn't I need to run away it's like how can I now make this work if I like the area of I think you know there's still potential and I don't think it's like a massive massive headache right like yeah, those plaster coming off the off the brick which is not awesome, but it's very fixable. And just a couple other I think it was like a plate like taped to this a hole in the plaster it was you know, it was ugly in there.   Michael: Like a dinner plate?   Emil: like a paper plate over a hole in the plaster.   Tom: Was it a commemorative plate? It wasn't like a racecar driver or something.   Emil: It was a straight of white plate that you see at every picnic you go to so one of those.   Michael: Well at least they were using paper not plastic they're trying to be eco friendly.   Emil: That's right and at least you know it matched the white plaster wasn't like a red plate. So you know I ran the numbers again and I was like really conservative and we made a count like said look we can't do this deal unless I think I dropped it like 30 40k in price I was like look there's just tons of stuff we have to do here you know I have to account for whatever things we're gonna find in inspections and the seller refused which was funny because this property has been sitting on the market for a long time for very obvious reasons and so we decided to walk away it was just too many unknowns property just terrible in the on the inside and the seller was not willing to go lower to like make concessions for how much work was going to need to be done so walked away.   Michael: Isn't it funny when sellers like won't let you inside it and post pictures like dude do like not think we're gonna get inside the building and see this like it's just such a waste of everybody's time.   Emil: It's such a waste I made sure my agent could go in there and take video and send it to me before we paid for inspections and stuff. This is like you know you have to as remote investors obviously you want to go love to go check out every property but sometimes it's like alright, you know you have your person you boots on the ground who go look at for you send you videos, all that stuff. So   Tom: Do you guys stock the properties after after you watch away, like, you know, follow it and see what it does sell like most like stocking on whatever Facebook, someone that you?   Emil: I watched that one and it the listing just ended up expiring. Like I think I was probably the second or third person where it had fallen out of contract. So   Michael: I don't put a whole lot of attention on it. But if it drops significantly, you know, maybe there's still an opportunity there, like in Emil's case, and the seller said, Oh, they dropped the price 20 grand on the listing, you could circle back and say, Hey, you know, offer you taking us to 10,000 off and we can talk about this deal by feels much less of a sting for the seller, oh, they only got to drop their price 10 grand from where they are currently versus 40 or 50. From where they were previously.   Emil: Yep, I knew when I made the counteroffer, they were gonna say no, but I think is like the flip side. And I think we should talk about it later. But like, issues come up in most deals, and you shouldn't look to immediately walk like a lot of especially newbie investors, something will come up in the inspection or something will come up during escrow. And your first thought is like, Oh, we gotta walk away can't do this. And I think that's that's the wrong attitude to have, especially if you've done a couple it's, you know, that can work in your favor. Now you may get a better price, you may get concessions from the seller, and you find something busted, you ask the seller to fix it. And now you're discussing brand new, so it's not like you should walk away from every issue that comes up in escrow. So anyway, some for us.   Michael; I love it. Like you said, Emil, is you said how can I make this work? Right? And if you approach it with that lens, you can't lose? And you offer based on what makes sense for you and your investment goals. Yeah, and if the number doesn't work, okay, well, then on to the next one, and no harm no foul.   Emil: Right. It's not you should just be locked in on the deal and take no matter what and find ways to make it. But like something comes out, find another number that works and then negotiate like, don't just look to immediately walk away if something comes up. Yeah, especially the better the deal, the more problems there's probably going to be. So you have to you have to consider that. Tom, what about you, man?   Tom: I've gotten pretty deep into the negotiations, but I haven't crossed into earnest money paid walked away territory, you know, just within the upfront negotiation. So like, I've done some acquisitions earlier on on the MLS, and they were fairly smooth. And then in doing acquisitions, as well as dispositions on roofstock, it's been extra smooth, just because a lot of the diligence is already completed upfront with the listing price.   So when you listed there's already an inspection report in there, both on the sell side and the buy side, it's just been way pretty smooth. And I don't know, not a lot of risk in here. And I'd say with my strategy, I am not looking for these properties that have, you know, a lot of construction risk, that's just like not within my profile as an investor of doing a lot of value added stuff, I haven't I don't have a lot of experience of walking the way mid deal. And like I said, you know, there's some properties were going back and negotiation before we have, you know, ink on paper, and then you know, setting my hard number and then not getting to it are within a reasonable amount to budge up or down.   So I'd say I've been, you know, the closest I've been is it was a property where the roof was a little bit older, I knew that going in, there was a little bit of a discount on what the value was. And then when the appraisal came back, it ended up being like a much bigger discount relative to what it appraised that to what the purchase price was. So I was okay, you know, moving forward with that, and I did end up needing to replace the roof A year later, but it was, you know, within budget and expectation so I'd say you know, kind of based on the strategy that I have there's been less risk of stuff coming up you know, within the the diligence period as it relates to to the house.   Michael: You could just say Tom you don't put crappy deals under contract, we get it message received.   Tom: I don't deal with trash guys. I'm totally jinxing myself really badly for the next several transactions that I go through.   Michael; One person's trash is another person's treasure me and Emil are trash pandas over here.   Emil: Yeah that’s right, we're looking for the garbage.   Tom: I liked it guys, I like it. Lots of good stuff in there.   You know, the fun to talk about a little bit is being on the other side with with buyers trying to walk when you're selling now I had a friend who bought a property, and then he was selling it for whatever reason just to kind of reallocate, and a buyer was negotiating with him, you know, based on the inspection report saying, Oh, this roof, you know, has, you know, less than two years I want, you know, a $20,000 discount or something like that was kind of outrageous. And he just like accepted it. And I like Wish I could have like talked to him and like coached up a little bit before because he caved so quickly on these buyer demands.   So for those of you in the sell position, like know, the value of your house, and like the one who wins and these types of negotiations is the one who has the most information. So like, if you have a good idea on how much something costs to fix, like you should really anchor to that when you're on the buy side or on the sell side and making these type of negotiations because I saw my friend probably just like light $10,000 on fire because he wasn't like disciplined in seeing this request from the buyer, you know, to change the price and he just went with it right away and it like makes me sad to think about it's like man, why did you do that? Like we work so hard in this game and it's like on the sell. It's like he just kind of gave Get away. It was a bummer.   Michael; It reminds me so much of a guy I know that paid way too much and continually pays way too much for insurance and it's just constantly on fire and talk you through it.   Emil: And the episode comes full circle. I like it. I like it. I like it, your emails gonna ping you because there's a calendar up to date.   Michael: It is. Okay, good. It's funny, too, I think to just piggyback on that Tom, the person who wins the negotiation has the most information, but also coupled with the person who cares least Yeah. And so if your friend really didn't have to sell their property could be like, No, I'll just keep waiting. And so being in a position both on the buy side and the sales side to be able to come at it from a position of strength and not needing that deal. Either to sell it or to buy it gives you a lot more negotiation power in that you can just sit and wait for the next one. Both on again on the buy and the sell side.   Tom: Totally. I'm literally pulling up my calendar right now. Awesome. And Okay. All right. invites sent.   Michael: Perfect. And don't worry, I'm gonna accept.     Tom: I can't take this abuse anymore.   Emil: How many episodes we got to grill you on Tom? Come on.   Michael: I think it's three or four.   Tom: At least you guys are my accountability buddies. Accountability buddies. Michael, I love your strategy of the IRA flip fund.   Michael: Yeah, I think it's gonna be cool. So we'll have to see how it goes. I mean, everything sounds great on paper and in theory until you get punched in the face. So I'll have to Oh, yeah. I'll keep you guys posted the whole time.   Emil: Cool, guys. I think there's a good spot for us and this episode. Thank you guys for sharing your stories. Anyone who has questions by the way, we love answering you know, whatever topics you guys have on your mind. So reach out to Michael Tom and myself. Let us know what you want to hear. We're always happy to dive into our personal stories. With that we will catch you all on the next episode. Happy investing. Happy investing. Happy investing.