Ask Marco: Buying and Selling in a “C” Class Neighborhood; Getting back a Builder Deposit.

Maduri writes in and he says, hi Marco, I’d love your show and look forward to new episodes. I find the Ask Marco Set particularly insightful. Hope you can help me with this. I purchased a fixer upper in Detroit on the east side in a C class neighborhood.

And remember I kind of grade neighborhoods As a’s Bs, C’s, and D’s and D’s are kind of like the worst of the worst. They’re, you know, what I’ll refer to as war zone type neighborhoods. Purchased it for $40,000. We did extensive rehab, or in other words, rehabilitation and spent over $50,000, new kitchen bath flooring, mechanicals, et cetera. I tried selling it on the MLS after renovation, but there were no takers. I priced it on par with the market. So I went ahead and placed the tenant in for $1,300, which I have a comment about $1,300. I have tried marketing it as a turnkey rental to buyers, subscribed to some mailing lists, paid $1,000 to market it via this site. Still note takers, couple of interested folks bargained down the price and after agreeing to a price and sending them a purchase contract, they backed out.

I have now have it up on Zillow for sale by owner. I am not looking to hold it long term. What other options do I have to sell it? I am assuming I need to reach out to investors in the area. I have posted it on Facebook, et cetera. I’m located on the West coast and did all of this remotely. Congratulations, by the way, you know, a lot of people don’t think they can do stuff like this, but you can if you have the right team. Any words of advice, what do companies like Nora do to help promote turnkey sales? What do you do when inventory sits and doesn’t sell? Okay, Madi, interesting situation and good question. And the reason this resonated with me is because when I first started investing, essentially full-time back in 2003 and really into 2004, Detroit is where I cut my teeth.

And so I was doing all kinds of stuff there. I was buying distressed properties, fixing them up, flipping them, buying distressed properties, fixing them up and holding them. And I dabbled with different areas, but I started in what were essentially C-Class neighborhoods because it was cheaper and I thought cheaper was better because it was something I could afford. But the reality is, as I discovered, the hard way is that cheaper is not necessarily better and often isn’t. And the reason for that is because when you’re in these cheaper neighborhoods, you’re not getting a better deal. And it doesn’t mean that you’re gonna have a great investment or rental just because it’s more affordable to you. You have to put things in perspective and you have to understand that there’s a reason why these areas are cheaper. There’s little to no retail market there. If there was, there would be a lot of sales activity and a lot of buyers.

And, and the fact that you have a lot of buyers means that there’s higher demand, which tends to push the prices in the area up and you just have, you know, more quote expensive properties. But that also has to happen in areas that are more desirable or highly desirable. So those two things go hand in hand. The more desirable a neighborhood, the more demand there is for that neighborhood. Therefore, there are more buyers, which tends to increase the number of sales and sales volume and upward pressure on price. So they go hand in hand. And this is why I think you’re experiencing some of what you’re experiencing in these C class neighborhoods. And my guess is that as a C class neighborhood, it’s probably a cc minus on the grand scheme of things if you want to be more granular. So let’s begin by making the comment not to pick on Detroit.

I’ve said this many times, but Detroit is not necessarily the most attractive of markets. Yeah, there’s a lot of people that live there, even in the city, not just outside of eight Mile Road where you know, you enter into the suburbs, which are certainly more desirable. But Detroit in general hasn’t been for a long time a strong retail sales market. Yes, there are sales, there are definitely pockets and areas within the city of Detroit that are very nice, very, very nice and very desirable, but they’re certainly peppered around within the city and not necessarily representing the entire city. A lot of Detroit is, it is what it is. Okay? So Detroit is not a great strong retail sales market. The sales you’re gonna experience within the city of Detroit by people who live there are gonna be a small percentage. A lot of the sales that happen within the city of Detroit often happen from buyers outside the city, which means that they are other investors.

So they are also gonna be looking for deals. They’re gonna want either distressed assets to fix up or they’re gonna want a discount on a property that has little deferred maintenance and that’s in a good saleable, clean, functional condition. So you’ve gotta keep that in mind. It’s easy to get into that market. But always remember, and I’ve said this many times, real estate is essentially easy to buy and harder to sell. It’s either hard to sell or harder to sell. It’s easy to buy. ’cause If you’re willing to pay almost any price, you could buy almost anything you want. So keep that in mind. But I think your biggest issue that you’re fighting with right here is the type of neighborhood, the desirability of the neighborhood. You’re grading at a c yourself. So that’s gonna come with, you know, its own set of challenges. And by nature, a C class neighborhood does not have a lot of retail buyers.

Therefore, a lot of retail sales, there’s gonna be a lot of investor activity, but they’re not gonna pay market value. They’re not gonna pay full price. It’s pretty rare. I think that’s the greatest issue you’re dealing with at the moment. So having said that, real estate is easy to buy and harder to sell. You’ve gotta look at your exit strategies. What are your potential exit strategies? Well, one, you can discount the price to make it more attractive to buyers and, but you know, you’re gonna take a loss, not necessarily a loss. You’re reducing your profit margin. So you’ve gotta keep that in mind. Second, just wait it out. Do anything and everything you can to sell and market this property on the MLS on Zillow. If you’re gonna sell it through a real estate brokerage and list it on the MLS, you have to make sure you negotiate an agreement that is non-exclusive, meaning that you have the right to market and sell it yourself without using or needing the brokerage.

That way you don’t pay them a commission. If you bring the buyer and you find the buyer, now you can pay them a fee to help you sell the property if you want them to help you with the purchase agreement and the paperwork or handling title and escrow. But you gotta obviously make that clear right up front. So discount it, wait it out, list it and post it anywhere and everywhere you can, whether it be Facebook, local groups forgot the other websites that are out there, there’s, there’s websites that are FSBO websites for sale by owner. I know you don’t want to keep it long term, but you could consider doing a seller financed deal, which means that you will sell it with a down payment and carry the financing for a period of time, whether it be six months, a year or two years.

And then, you know, the the way you would structure that deal is they would have to purchase it outright after a certain period of time. And if they don’t, they are essentially gonna lose the property, lose the deposit they gave you, and they’ll have to move out. So in a situation like that, you have both a purchase and sale agreement and a lease agreement, unless you do flat out seller financing where you hold the property either in your name or your company’s name or you transfer title, but you have an agreement in place where you can essentially foreclose on the property. It’s gonna be labeled differently in different states as far as the paperwork, it could be a deed of trust, it could be a mortgage document, could be a contract for deed. However you structure it, you can set it up where you sell the property, but you have the right to take title back, should they default kind of like a foreclosure or of course you can just keep it as a rental and move on.

Just do another deal for yourself in a better area, better neighborhood that’s more conducive, I guess. But just better as a flip rental area so you can build it and then sell it and flip it to an investor or even a, a retail sale. You could flip it to a homeowner sometimes those are the best deals for flipping profits because retail buyers are typically gonna pay the highest price. They’re not gonna negotiate you down like an investor, but given the numbers, you bought it for 40,000, you put in 50,000, you’re into it for about 90,000. If you’re renting it for 1300 a month, that is phenomenal. The rent to price ratio on that is probably 1.3% or more. I mean, you’re well above that 1% target that so many investors try to achieve. And even that today is hard to achieve. You know, a lot of times in more desirable neighborhoods, you’re getting a 0.8% or 0.9% rent to price ratio.

If you can hit that 1%, fantastic, but you’re well over that, you’re probably closer to 1.4%. Now you know that, that’s fantastic. But keep in mind, you, you know, the flip side of that coin is that you’re not in the best of areas or the best of neighborhoods. So that’s kind of the give and the take. Your cash flow and your cash on cash return are gonna look pretty darn good. They are gonna be good, but you’re not gonna be in an area that’s gonna give you strong appreciation potential. It might, you know, it just depends on the supply and demand dynamics of that market. If they are out of line, if demand is strong in that neighborhood and in that area and there’s very little supply, as long as there’s sales activity, it will push prices up. So I guess this is a lesson to be learned for you.

And I guess anybody else that’s listening to this, you know, don’t think that buying cheap property is the smart thing to do or the way to go. You definitely want to invest in the best possible areas and neighborhoods that will generate the greatest returns and allow you to fulfill your exit strategy. If your exit strategy is to flip it, make sure that you go into an area or a neighborhood that has strong retail sales and buyer demand. Because if you don’t have buyer demand, you won’t have an exit and you have to have the exit if your goal and strategy is to flip the property. Alright, mad, I hope that helps. Good luck with the property. You, you have some great numbers on there. It’s just not necessarily in the best area to be flipping. Next question, I think this one dates back a little bit, but it’s Tanya, I believe it’s Tanya.

Tanya. Tanya. Hey Marco. I’m a big fan of your show. Thank you so much for your, all your education and great advice and real estate investments. So I’m a little tardy in getting back to you on this one. So hopefully it’s not too late, but it’s still a good lesson for those who are listening. I discovered your podcast browsing and I have not missed an episode since then. I loved the topics and the choice of your guests is superb exclamation mark. I am a real estate agent in Colorado and I am in a tricky situation with one of my clients right now. We got under contract with the builder for a new construction home, paid an earnest money deposit of $25,000. As we went through the process, we realized that there is a lot more money than we thought. I’m not sure what you meant by that.

There is a lot more money than we thought maybe that was required. Okay, that would make sense. And my client decided to terminate the contract with the builder and we reached out to them to get the earnest money back. They told us that the earnest money is hard after my client got the approval from their mortgage company. So what that means by it getting hard is that it is non-refundable. It goes from a soft deposit to a hard deposit. My point is that my client is not sure if he can fulfill all the conditions in the pre-approval. I would like to get your opinion in on this scenario and see if there is any way that he can get his earnest money deposit back. Do you have an attorney in Colorado that can help my client with this issue? Have you done any episode about working with builders, thanking you in advance?

I don’t think I have an attorney in Colorado. Really not a market that we’ve done very much in very, very little and this goes back many years ago, so no, I can’t say I have an attorney there. I can certainly check with my team, but I don’t think we do. Have you done an episode about working with builders? Actually, it’s funny you mentioned that because it wasn’t too long ago, I wanna say a month ago, but it wasn’t that long ago that I talked about this, you know, dealing with builders and earnest money deposits because there’s been an issue with several builders in Florida, and I thought when I started reading your question, this was another one of those Florida builder issues. So you might have a situation here where there is little you can do to get your deposit back. You’re gonna have to read the contract, the purchase agreement, and definitely dissect that and read it very, very carefully.

What we’re talking about here is essentially what falls under contract law. And if it, it’s very specific in there that the earnest money deposit becomes hard and non-refundable after certain conditions are met, then you really don’t have much of a leg to stand on. Definitely consider the section about the contingency for financing because that might be an out call it a weasel clause if you will, because often if you don’t qualify for financing, the fact that you can show or prove to the builder, and this usually will come from your mortgage lender, that you don’t qualify for financing, that’s usually enough for you to get out of a contract. There’s usually a time stipulation on that, so you’re gonna have to see, you know, if you’re within that timeframe. But a lot of this is gonna fall under contract law, and that means it’s gonna be, in most cases, pretty black and white.

But some other things to consider is negotiating with the builder. Sometimes they’ll either want to negotiate with you or be open to it. And I think there’s two reasons why they might do this, aside from, you know, feeling bad or having some sympathy for your client. One is, this has been true in years past in many over many years in Florida, but buyers will contract for properties that take six to 12 months to build sometimes longer. And in a growing area, the properties are appreciating. In fact, the builders will often bump their prices up every month or every quarter. And so they’re selling them for more and more. And essentially what they’re doing is they are increasing the purchase price and or value of those properties. So buyers that come in after the fact are gonna be paying a little bit more each and every time those, those prices go up.

Sometimes it’s just from sales, some from appreciation, but many times it’s because the buyers or the builders are bumping the price up. So the buyers are paying a little bit more each and every month or quarter that goes by. So if that’s the case, if your client locked into a price six months ago, three months ago, and now the builder is selling that same model or that same lot and model for a higher price, it could be 5,000, 10,000, $20,000 more, maybe more, who knows, they might be open to letting your buyer out because now they can turn around and sell that property to another home buyer for more, for 10, 20, $30,000 more. So it just means more profit for them and they really had nothing to lose by releasing your buyer and then turning around the next day and selling it for more.

So the builder keeps the appreciation on that property, it’s just more profit margin for them. The other thing to consider in negotiating with the builder is that you might say, Hey, you know, my client doesn’t qualify anymore and we just have to move on. You know, can you cut them some slack, return their deposit, less a fee, a thousand bucks, $2,000, you know, just some sort of admin fee or processing fee, whatever it may be, just so they, you know, make a little something on it. They can still turn it around and resell it right away, especially in a high demand area or an appreciating market. But you know, that might be a way for you to say, Hey, you know what? Just allow my client to get out of the contract. You can sell it tomorrow and you know, we’ll compensate you with a couple thousand dollars or whatever, you know, your client wants to agree to outside of that, you may want to just spend a few hundred dollars and talk to a real estate attorney.

Tell them what you told me in your question here and then just see if the attorney, you know, has any other advice. Or maybe they can represent you in talking to the builder and seeing if they can negotiate something to get you out of it. But yeah, that could be a tough situation that you’re in. Often when it comes to earnest money deposits and, you know, waiving conditions on that, it’s sometimes best to wait till the very last minute, like the day before the condition for that earnest money deposit and just double check with the lender that all the conditions can be met. Well, that would include your, obviously your clients. So anyway, I hope that helps and hopefully you got out of it by the time you hear this episode. Last. I don’t know if this is really a question, probably more just some interesting information and insight from one of our listeners, Chad, who wrote in, after listening to one of the episodes I did not long ago called Money and Morons, it’s actually the title of a book.

It’s not just, you know, me coming up with a title and calling people morons, but Chad wrote in and said, Marco, I always enjoy your podcasts and enjoyed your discussion with Paul DRA as well. And that was the episode I did a, a few months ago called Money and Morons. I agree with all your points I was just left wanting when discussing Americans not being taught to invest and save. What is generally glossed over in this topic is why Americans don’t save. Of course, we consume, consume, consume, but why we consume as a population instead of save is what you briefing hit on what your briefing hit on, I guess is what you meant to say. The dollar has become worthless year over year. Once we removed ourselves from the gold standard, the incentives to invest are missing. Once we work and receive US dollars, it immediately begins to melt like an ice cube, even in a savings account.

People feel this and intuitively spend it. Well, it is still worth something I realized finally much too late in life. The reason real estate is so powerful besides tax benefits, et cetera, is because once we came off the gold standard, it was the one asset regular people could use to save their hard-earned money and not lose value over time. I argue real estate would’ve been much cheaper if Americans could save and not lose to inflation. I have about three years until I retire and can access a lump sum of cash and will be calling on your team to put it to work. I have one property in Anaheim I purchased and rented on my own, but want to invest out of this crazy state. Thank you for all you do and the information you provide us. Regular wage earners. Thank you ever so much for writing in Chad.

This is spot on and yes, there’s so much to unpack in what you just wrote, you know, from everything from the gold standard and the effects of inflation and the benefits of real estate being an asset that protects you against inflation and allows you to deal with, you know, the changes in the devaluation of the dollar and the increase in prices such as commodities, the sticks, bricks, copper and concrete that go into properties, et cetera, et cetera. So you’re, you’re right about all this. You’re right about the inflation. And this was really not so much a question as it was just, you know, expressing your thoughts and concerns about saving money as, as a population and whatnot. But I have to agree with you, real estate is a powerful asset class to hold. You know, it, it is a long-term. Inflation hedge, it generates cashflow over time, generates wealth through the equity growth in the property and last but not least, you know, there are the tax benefits. So all good stuff.

But anyway, I appreciate you writing in and for anybody else listening, of course, if you have a question about real estate investing or finance or anything else, just go to the website, passiverealestateinvesting.com, click the   Ask Marco button, just shoot it over and I, you know, will look at it, read it and try to answer it. I appreciate it all. If you haven’t already subscribed, remember to subscribe to the show that way you never miss an episode every week. And that is it. I appreciate you taking the time today. Thank you for listening. I’ll see you all on our next episode.