I just went through the painful process of terminating a deal I had under contract

A deal I had been working on since October 2023

Here’s the good news:

After a week of thinking about it, I feel certain I made the right decision

And the bad news:

I lit some money on fire that I will never see again

But, that is the cost of doing business, I guess!

Today, I am sharing a few lessons I learned through this process

So I don’t make them again, and maybe you can avoid them too

Lets get into it

5 Lessons I Wish I Knew Earlier

1: Walk Every Unit You Can, Confirm Bed, Bath, Rough SF, etc.

Just because it says a unit is a certain unit type on a rent roll, does not mean it is actually a certain unit type

We’ve all read the stories

But it is different when it happens to you

In my case, the seller was considering lofts as extra bedrooms

So it seemed on paper, those units were rented under market

So I did a market study and underwrote them to what a 2 bedroom should be getting in the market

When I walked the building during the inspection, I realized they weren’t actually 2 bed units

They were more like 1 bed dens

This can happen in many different ways

Stay diligent

Trust nothing in due diligence

Confirm everything

2: Do NOT feel bad for asking questions In due diligence

Depending on the seller and broker, they may become disgruntled with information requests

And if you are like me, you don’t enjoy annoying people

But in this instance, it doesn’t matter

Yes, batch your questions together and have etiquette, but be certain to ask EVERY question you need during due diligence

It sounds silly as I write this, but deal fatigue is real

When people keep saying no or creating issues, you sometimes lie down and forget about a report you wanted

In my case, I wanted to see a delinquency report

A couple days went by, no report

I asked again

A week goes by and I hear they are working on it but not sure they can provide

Turns out, there were 2 units with pending evictions

On a small deal, that is BIG

I wouldn’t have found that out if I just let that request go

Stay diligent!

3: Diligently Check The Roof Before Due Diligence

Duhhhh

Yea, I know. I screwed this one up

On my initial tour of the property, I noticed the roof would need work

Possibly needing to be replaced soon

But for some reason, that thought didn’t make it into my underwriting

So when I got into due diligence and had a roofer come out, I learned it would cost $32,000 and it needed to be done now

Oh - that’s a big problem!

If I would have reserved just $20,000 in my initial underwriting, I may have been able to eat the difference and make the deal work

But not the whole $32,000 on a sub $3mm deal

Lesson learned!

4: Set CLEAR expectations for the attorney

In my case, it was a loan assumption with an agency lender

I mentioned to my attorney I would handle all the legal aspects of the loan assumption (as there is no negotiation, it is what it is)

Well, the lender attorney reached out directly to my attorney

So my attorney began to work on it

I quickly got wind of this and shut it down, but I was billed handsomely for the 5 hours of work done

I could have saved a nice chunk of change if I would have been extremely clear - DO NOT work on anything lender related

Lesson learned!

5: Ask for a price reduction if warranted

Also obvious!

When you ask for a price reduction, the seller and the broker will try and make you feel bad

“That’s a bad move, it will hurt your integrity”

Reality is, if you handle yourself professionally, asking for a price reduction will not harm your integrity

Communicate what has changed from before and after due diligence, and make the ask clear

Your integrity will not be harmed if you are truthful

And remember, they want the deal to close

They don’t care about your investment

They care about what ends up in their pocket

Not everyone is bad

But everyone IS looking out for themself in a transaction

Summary

Real estate investing is hard, especially In this environment

Stay patient and stick to your guns my friends

Thanks for reading - until next week,

Jake