I operate with a militaristic mentality. If there's one skill you learn as an infantryman, it would be to persist and proceed. When you see an obstacle that has stopped others, chances are you can muscle through it. Some real estate deals are obstacle courses, and its the persistence that gets the deal done.
There was a property in the hottest area of downtown Newark that was sitting on the market for years. A three-story commercial building, begging to be redeveloped as apartments over a retail space. It was priced so ridiculously low, and sat for so long, I had largely ignored the deal. While walking through another property listed by the same broker, he mentioned that property was still available and was the best deal on the market.
The property was a foreclosed building being sold by a receiver on behalf of Wells Fargo. I submitted an offer, and we reached a price fairly quickly. However, the bank's contract was a nightmare. It was being presented with a quitclaim deed, the first red flag. The bank was only offering seven days of diligence. I signed the contract and got to work immediately. As soon as I began my diligence, the deal was already dead. There was a fork in title from five decades prior, and there would be a major exception on the title policy. Impossible to finance. I wanted to buy the property in cash, and run it without much in terms of capital improvement, and at worst, lose the property after cash flowing for a few years. My attorney shut me down faster than you could imagine. Dead.
The property went back to market and sat for a few more months. I decided to take a crack at it with another attorney. We went to contract again, this time with a slightly lower price. But this time around, there was no diligence. I put up a $25,000 deposit, which I knew I wouldn't be getting back. I was promptly slammed by an ongoing freight train. After signing the contract, the lawyer representing the bank emailed me a link to all the documentation pertaining to the foreclosure.
Typically, foreclosed properties are sold at the auction, but this property was being sold through receivership. About two thousand pages into the legal thicket, I found the motion appointing the receiver. The reason the bank did that was that during the foreclosure they had located an underground oil tank. Upon further investigation, while to soil borings indicated that the tank was not leaking, the bank found perchloride contamination, likely resulting from the operation of a dry cleaner in the area. The bank didn't want to go to auction with the property due to the risk they they would end up with the property and become liable for the cleanup.
Now I was in a bind. The $25,000 was gone, and I could either close and assume the risk of a contaminated property with clouded title, or I could walk. The estimate for a cleanup started at $50,000, with the possibility of going into the hundreds of thousands.
The bank was represented by McCarter and English, the oldest, and one of the most well-regarded white shoe firms in the state. In my frustration, I called the attorney directly (a big no-no, and he shouldn't have answered the call). I told him that if he wouldn't let me out of the contract, or cover the remediation, I would report the contamination to the state, and no buyer would ever touch it. He threatened me, with the claim that I had signed an NDA in the contract. I snapped back that the contamination was of public record already as it was in the court docket, and that his NDA would be useless. He hung up the phone on me.
Under an hour later, he called my attorney and granted me the cost of the cleanup in a price reduction. While that cost was only the starting point, it was either lose $25,000 right away or push onwards and try to close the deal, and potentially fail to close losing $25,000 later. Over the next month I spent countless hours with environmental engineers, and it paid off. Not only was the contamination likely generated by an off-site operation, making the cleanup the responsibility of a third party, the actual contamination levels were below the state thresholds to require a cleanup. Score.
We closed the deal, and I was left with clouded title, and the old owner still occupying the ground floor. They claimed that they were victims of mortgage fraud, and had never signed the loan with Wells Fargo. I believe them, but nonetheless, I moved forwards with eviction. In the back of my mind, I wondered how a title defect that arose fifty years ago precluded me from financing the property, but somehow just ten years ago someone was able to finance the property with a major bank. There was a missing deed somewhere, and I knew that someone had found it before me, so I took a trip down to the hall of records to see what I could find. What I call my fishing expedition.
Patrick, a regular guy who worked at the county hall of records showed me how to search for deeds. I got to work. The dark record room was filled with title searchers and had a silent library vibe. A veteran title searcher saw me blundering with the books of title and offered to give me a hand. Working together, within fifteen minutes, we located the missing deed. Now I had clear title, and clear environmental.
The rest is really history. I got through zoning and planning and began my development. Pre-development, the building was worth at least three time what I had paid for it. I got construction financing, and began the project. We are three months from completion and I have an as-leased appraisal for over three times my basis in the project.
What's the moral of the story? The hairier the deal, the bigger the profit. And don't give up. Take prudent risks, and put in the legwork. I also got a solid reputation in the market as the guy who screwed up properties, and I've gotten a ton of deal flow on that basis. My next clouded title saga will be the next post.