I recently sold a two unit property in Long Beach for one of my bank clients. This was an REO. Unfortunately, when it was assigned to me, I had no clue what I was getting myself into…..
Overall, this was the most challenging REO home I’ve ever sold. Upon initial glance, it was excellent. I was quite excited when I first took a look at the home. A property in “Long Beach” could go either way–some areas are very nice, some areas are rough and marked with high crime. This home ended up being less than 1 mile from the beach in a beautiful little neighborhood, and it was across the street from a church.
The property was a two unit, according to bank records; a fact which I confirmed with the county prior to driving out there. I could see that there were in fact two units and that they were enclosed with a small white picket fence.
Cash For Keys
In late September 2012 I drove down to Long Beach to check on the property. I always approach with caution because I never know who is going to open the door or what their temperament will be towards me. There was a car parked in the driveway and lots of personal property scattered throughout the front yard.
I went up to the front door, when I knocked, the door popped open unintentionally, as it was not properly shut. I could see an elderly woman sitting in a wheelchair just inside. Speaking loudly, I introduced myself from the front porch. At first she just ignored me, so I tried again, this time even louder. She looked over, but then went about what she was doing, not even coming over to shut the door. I asked if the owner of the home was there and she replied “Get the f*** out!” So I left my standard cash for keys letters on the front door of each unit and in the mailbox.
I waited 48 hours to see if anyone called me but no one ever did. I drove back down and it felt like deja vu. Same car still in dive way, knocked on front door, which opened on its own again. Same woman there in same wheelchair. Only this time, as soon as the woman noticed who was there, she called for someone else. A man came running out; which backed me up nearly to the front gate.
I could tell immediately he was agitated. I started to introduce myself and get into my usual spiel but was interrupted by “Get the f*** out of here and don’t come back!” That was all I needed to hear, I dropped the letters on the ground, got in my truck and never looked back. These folks clearly wanted to do things the hard way. I called legal on the way home and let them know they would have to evict.
As I had previously stated, this was a two unit property, so each unit would need to be evicted. The legal process ran its course and based on the way answers were filed by the tenants, we were set to lock out the back unit first. The lock out was set for December 13, 77 days after my first encounter with the tenants. I arrived with my locksmith to meet the sheriff on December 13. The tenants were very mad, they had called lots of friends and even the “Occupy Long Beach” group (you know that waste of space “Occupy Wall Street”? The Long Beach folks started their own group).
Within minutes there were 30-40 people there protesting. The sheriffs called for back up and had a total of 22 officers and 12 vehicles on site. They were filming it and streaming it to the internet, accusing my team and the sheriff’s of conspiring to help the bank commit fraud against them. It was a circus and the guy who screamed at me a few months ago even got arrested.
During this lock out, we realized how the owners (the guy who was arrested) were running the property. They had illegally converted both 2 car garages into living space and built a 3rd unit that was a 1 bedroom, 1 bathroom with a kitchen and living room. The owners were living in this bootleg unit and the front unit. They had also been renting the LEGAL unit in the back house (the 2 bedroom, 2 bathroom home above the illegally converted garage) to a family for $1600/mo and never paid on the mortgage, so they were robbing this family. They also had never told the family that the home was foreclosed and that the lock out was coming. Disappointed by their behavior, I called my contact at the bank and got them to agree to pay the family $5,000. They were not obligated to, but the bank did it because it was the right thing to do.
Unfortunately, as this was a two unit property, the owners were able to just move to the front unit, which had not been locked out yet. We would have to wait for legal to get the front unit locked out to remove them from the property. We got the lock out of the front unit scheduled for January 5 and arrived as scheduled. For some reason, the sheriff’s department only sent 1 car with 2 officers. When we walked up, occupy long beach showed up again. We were just out manned. The sheriff pulled me aside and said “look man, we cannot do this today. We are not prepared for this, we will have to reschedule.”
Not being able to lock out a unit without a willing and able sheriff, we left and waited for it to be rescheduled, which we finally got done on January 18. This time, the sheriff showed up in force with more than 20 sheriff’s and 10 Long Beach Police officers. Only this time, there was no occupy long beach crowd. Just the people inside. The sheriff’s busted in and the same guy who was arrested the first time went ballistic. We was arrested again. Finally, we got everyone out and the home secure!
The biggest problem we now had was that the occupants had not moved out a single piece of personal property. They left everything they owned in our house. The law requires that you leave their stuff undisturbed for 18 days after a lock out before you can get rid of it. During that time, you are supposed to allow the occupants to come get their stuff. I called many times to get a hold of them but they just kept putting me off. I would get responses like “we are going to get it but we do not have anywhere to go” or “we do not have enough money for a truck” or “my back hurts”.
Each time I was careful to let them know that on the 19th day, I could legally hold an auction and sell their stuff. The 19th day rolled around, still not a thing had been moved out. I called the bank to see what they wanted to do. You don’t want to sell their stuff, have them get mad and then break in and vandalize the place. So we kept trying to get them to reclaim their property. The excuses kept coming. So I was forced to get an auction set up. The bank was willing to wait and wait and wait to try to do the right thing. I finally had the auction set for early March. Thats right, March. The bank had given them more than 45 days to get their stuff out, and even agreed to pay for a rental truck. The night before the auction the owners broke back into the home to steal their stuff.
They drilled all the locks, broke some windows, and destroyed the place. They took everything of value and left anything they didn’t feel like moving. They left the place in shambles. Nevertheless, at least we were finally set to start getting this thing on the market.
Preparing The Home For Sale
Due to the disgruntled owners, the property was in very rough shape. Based on my observations, we would be looking a few thousand to get all the trash out and the home cleaned. We would have to replace the broken windows, re-secure all the locks, and install smoke/carbon monoxide detectors.
Then there was the decision on rehab and repairs. What do to? The home had an illegal conversion that the city was already aware of due to the high profile nature of the eviction. The city would require that the illegal unit be demoed and built back as 2 garages. This work alone would cost $8-10k but the home would not be finance-able without it.
The rest of the units were also in pretty rough shape. Both homes needed paint inside and out, there was no AC, all 3 bathrooms needed to be redone, the kitchen in the front house needed to be redone, both homes needed full appliance replacement, plus there were many other minor repairs needed. My contractors were looking at $40-50k worth of repairs, including the garage renovations. This is not to mention all the termite damage, which was coming in at $12k.
I recommended doing the garage repairs only. This would allow us to sell to any investors who were willing to rehab the property, not just the cash buyers. However, they elected to pass, not wanting to spend the money, so we cleaned it out and would sell it as is, to a cash buyer.
Determining The List Price
I had already ordered a third party BPO and appraisal. For homes worth more than $500k, this bank requires 2 BPOs and an appraisal to establish value. These could be done while the property was being cleaned out. The 3rd party BPO came in at $639,900 as-is and $649,900 repaired. I knew immediately we had gotten a bad BPO on the sheer fact that the difference in as-is versus repaired value was only $10k. With $50-75k in repairs, this had to be wrong. The appraisal came in at a straight as is $620,000. I also felt this was too high. I did my BPO and felt it was worth $599,900 as is or $649,900 repaired.
The bank decided to list it at the appraised value of $619,900, despite my cautions that there is no way to get that much out of a cash buyer.
Marketing The Home For Sale
I had my for sale sign up for the weeks it takes the bank to set a list price, as I typically do. This is what I call pre-marketing. Having a professional For Sale sign up for a few weeks on a home that is not in the MLS creates a lot of buzz. By the time we hit the market I had a list of 5-10 potential buyers to go along with my usual investor list.
I called all the prospects who contacted me during pre-marketing and let them know the price. All of them wanted to see the home. After several showings with them, 100% of them felt it was over priced and needed too much work. I was hoping that my investors would gobble this up; it was a two unit and in rough condition, it seemed perfect. Unfortunately, all of my investors passed as it was priced too high for their return requirements and they did not want to ruffle feathers with lowball offers.
I was pushing hard on the marketing; passing out flyers in the surrounding neighborhood, my usual online web presence of more than 25 websites, MLS presence, broker open houses and public open houses. I was able to drum up 5 offers. 3 were cash and 2 had loans. The loans were obviously higher, coming in at $599,000 and $625,000 respectively. I got on the phone with the brokers and the plan in both situations was that the buyer would repair the garages (as would be a condition for loan funding) prior to close of escrow on their own dime. The bank would not allow them to do this; the bank has to shoulder all the liability of the buyers and their contractors as its still the banks home during escrow. We left these loan offers on the back burner.
I turned my attention to the cash offers. The cash offers were at $480,000, $520,000 and $550,000 respectively. I let the $480,000 buyer know that the bank was not interested in their offer and that I had offers more than $100,000 higher than that (but really I was thinking, “What do you think is going on here? Did UNICEF get into the distressed real estate business?”). The buyer at $520,000 was one of my buyers; a savvy local investor who really knew his stuff. Based on required returns I could understand where he was in value but let him know that he was just simply too low. I was able to get him up to $550,000 but that would be his best and final; a figure that would not get him the home.
So I was down to my last option the $550,000 cash buyer. I was very candid with the broker, they were just too low. I let him know where I was with the loan offers and he understood that at $550,000 the bank would have to make the garage repairs and sell it to the loan buyers at $625,000. He went to his buyer and explained my side. The buyer came up to $585,000. A figure I thought the bank would act on; but nothing happened. I followed up daily with the bank on the $585,000 cash offer, but they would not accept it. They seemed content with doing nothing. The cash buyer was leaving the country in 10 days, so we had 10 days to get a deal.
The buyer, the buyers broker and I had a meeting at the home. I showed them several comps that justified my value and after much pushing, got them to agree to come up to $595,000 as-is all cash. They said they would only allow 48 hours for the bank to accept or they would move on to another property.
I called my contact at the bank and explained the new offer. We were now basically right at the mark I said it was worth as-is. Yes there was a higher offer but it had a loan and was juiced. The bank would have to pay $8,500 for the garage and $12k for the termites. That brought the $625k gross down to a little over $600k. The small $5-6k discount for a cash buyer was more than worth it. The bank accepted and escrow was opened and set for the quickest close imaginable.
Home Sale Specs
This property was listed for 51 days until the bank accepted the all cash offer described above. This is a marketing time frame was slower than what I would like to see and did not compare well with the distressed portfolio I manage, which has an average marketing time of 39 days. I attribute this long marketing time due to listing the property too high, a caution I always give sellers when taking listings.
This escrow was closed in 7 days! This is a very short escrow, even for a cash buyer. As a frame of reference, the portfolio I manage has an average escrow length of 35 days.
I consider this a very successful REO transaction, when you factor in everything. It was an excellent experience, and I can now say I have seen it all. With this under my belt, I feel confident I can handle anything the distressed market throws my way.
List Your Home For Sale
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You may also reach me directly, Scott Mehlman, at 310-430-6361. I am the managing broker of our office and I look forward to exceeding your real estate needs.
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