312: Knowing When to Walk Away From a Deal

SHOW NOTES FOR EPISODE 312: KNOWING WHEN TO WALK AWAY FROM A DEAL

One of the hardest things you will do as an investor is to walk away from a deal. Whether you work for weeks trying to put a deal together or just have a passing interest in a property, walking away from a potentially good deal is not an easy thing to do. In this episode, Bill shares a first hand experience where he walked away from a deal and how some of the best deals you will ever make are the ones that you don’t get involved in.

• I want to share a personal experience, as I promised on this podcast, to share the good, the bad and the ugly
• By sharing my experiences, hopefully learn from my experiences
• Recently, had a 61-unit apartment building in Indy under contract Let me give you the steps
• Got a call from a broker I didn’t know about an off-market property
  • He got my name from a colleague who is a podcast listener
  • Bright aggressive young man
  • Asked for T-12s and current rent roll
• Property had a lot of the right stuff
  • Only one block from my 22-unit
  • Know the area and market well
  • Know the potential tenant base and challenges of the area
  • On-site property management team
    • Negotiated free office space (now one of the challenges with less than 70 units is that is not usually cost-effective to have onsite management)
    • They did an impressive turn-around in less than one year
  • Did some research and it looked promising
    • Initially asking $2.1
    • Negotiated down to $1.75
    • Found out he bought for $1.2
  • Signed contract
    • Made sure there were plenty of contingencies
  • Needed extensions
    • For docs
    • For inspection
  • Got great deal through the selling broker
    • Non-recourse
    • 36%
    • 2 years interest only

• RED FLAGS
  • Incorrect age of building – 1970 and should have been 1946
    • If it wasn’t so well-built that might have been a deal-killer
  • Current owner had property for less than a year. Flip?? (not uncommon) Or did he know something that made him want to unload the property?
  • Information was not that forth-coming
  • Simple docs took a long time
  • Could get detailed financials prior to 2018

One of the hardest things you will do as an investor is to walk away from a deal. Whether you work for weeks trying to put a deal together or just have a passing interest in a property, walking away from a potentially good deal is not an easy thing to do. Some of the best deals you will ever make are the ones that you don’t get involved in. Recovering from a bad property will not only cost you money, but it will also be the focus of your business for several weeks and permit you from moving forward. Having the knowledge and discipline to walk away when a deal no longer makes sense for you can make all the difference in your business.

Don’t get me wrong; there are great deals to be had out there. There are many cases in which a seller may simply try to get out of the property. They are essentially willing to accept any reasonable deal that comes there way. The first step in determining whether or not you should walk away from a deal is finding out the seller’s motivation. In some cases, this can be as easy as knowing that the seller is in foreclosure and wants to avoid tarnishing their credit report. In other cases, there could be a potential divorce, out of state job relocation or family issues that influence their decision. Whatever the reason may be; if you are buying a property you need to understand every detail as to why a seller may be selling.

What you want to pay for a property and what you can pay is often not the same thing. You can track a property for months or spend time researching a property that is going to auction, but this alone doesn’t give you the inside track to obtain it. You need to go into every negotiation with a number based on real data. If their number exceeds yours, you need to walk away, regardless of how much you love the location or anything else about the property. Once you go over your designated number, even a little bit, there is no telling where you may end up.

It is also critical to know the assumptions you make on the purchase are realistic. You can plug in any numbers to make the deal look the way you like, but all this is doing is getting you in trouble if you take ownership of the property. You can assume that you will receive $1,000 a month rent on the property with some upgrades, but if the area is only yielding $700 a month, you expectations aren’t realistic. The same goes for your rehab budget, end sales price or length of transaction. The more realistic with dates and figures you are, the more profitable the deal will be. If you find that your assumptions on the property are off, you can always walk away, regardless of how much time you may have invested or how deep in the process you are.

You can only do so much to make a seller see things your way. Whether you are working with a lender on a bank owned property or a traditional seller with equity, you need them to agree to the deal. The facts and figures of the deal may be in your favor, but you need to make the seller see that. There is nothing you can do if they won’t budge. You can certainly revisit this down the road, but you can’t dedicate all of your day to a seller with unrealistic expectations. Sellers may have an attachment to the property or see some value that you don’t, but this doesn’t mean it is right. Working with some sellers is always going to be difficult, but if it reaches the point that you are banging your head against a wall, it is time to move on.

The time in which it takes to close is a significant factor in how attractive a deal is. If you make an offer at a tax lien auction, you may not be able to get into the property for months if the seller is in foreclosure. This will not only have an impact on the value, but it will impact your desire to take ownership. If you find this out before you buy, but like everything else associated with the deal, you have a decision to make. Are you willing to wait, or are there other deals that warrant your attention? The decision is yours alone, but you need to know exactly what you are getting into before you buy.

Not every deal will be a home run. If you see that things have changed since your initial inspection, you need to reevaluate the deal and the property to see if the numbers still work. If not, you should walk away without regret. It is not always easy to do, but it is the best thing for your business.

This show was sponsored by CBRE

CBRE has the loan for your next refinance, acquisition, or value-add project!  CBRE is the #1 Agency Lender and their loans offer great features such as non-recourse debt, which, unlike most banks, means your exposure is limited to the property only and not your personal assets. They also offer up to 80% leverage and interest-only periods, which can help you maximize your cashflow or pull out more equity. CBRE’s loans also offer the markets most competitive rates.  In addition to traditional mortgages, their short-term bridge loan platform provides access to competitive financing for your rehab, renovation and value-add projects that might need a little TLC before you get a permanent mortgage.

CBRE is offering Old Dawg listeners a $3,500 credit towards closing costs. That’s right!  $3,500 off your closing costs! You can lock-in the credit and receive an instant quote by visiting www.cbquote.com/podcast.

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com