As an investor you will look at hundreds, if not thousands, of deals in your career. This can be a daunting task. Furthermore, as you look at each deal, the marketing package will display the benefits of acquiring the asset; and, if you have been seeking a deal for an extended period of time, you be swayed to consider a deal that really is not the best deal for you. Therefore, when looking at an opportunity, consider these three reasons why what you may perceive as the best deal is often no deal at all.
Why is the seller selling the deal?
There is always a reason that somebody sells a real estate property. The three most common reasons are divorce, dissolution of a partnership, or death. However, there are other reasons and they are typically associated with the current property owners exit strategy – that is, the factor that has been identified that matches their criteria for selling. For some it may be a simple factor, such as they sell every single-tenant retail asset once the lease hits ten years so that they can trade into a longer lease. Or, they may have improved the cash flow on a value-add deal and they are ready to sell and take on a new investment project. However, there is also another reason that must be considered as well: The current property owner is selling because they have no more interest in the future value of the deal and want to exit. This may raise a red flag because they may have insight that the tenant will be leaving upon expiration of the lease term, or that they will be asking for a reduction in rent. Ideally, a Seller may just have a different strategy that you or risk tolerance or analysis and a sell would be a win-win for both parties.
Therefore, if you find a deal that looks too good to be true, such as a higher cap rate than the market supports, then understanding why the landlord is selling may be key to identifying if the deal is actually a good deal.
Do I fully understand the associated risks?
Every deal has some sort of risk associated with it, though some may have more than others. The amount of risk is often reflected in pricing – lower risk results in a more compressed cap rate, while higher risk equals a higher cap rate.
Although this may be an initial indicator, it is important that when analyzing a deal, you take into consideration all possible risks, even if they are not apparent at first glance. Take into consideration risks that you have encountered with other deals and see if there is uncertainty in the deal that you are assessing. Often, especially when looking at on-market properties, the underwriting and marketing package is in favor of the seller – that is, the broker is looking out for the best interest of the seller, trying to bring in the most potential buyers to view the deal. However, as an investor, you must re-evaluate the deal from the perspective of the buyer and assess every potential risk associated with the deal. If not, you could miss a risk that may cost you in the end.
Am I being patient?
In today’s market, there are thousands of deals available on a daily basis. Using platforms such as LoopNet, Crexi, and MLS services can provide investors insight into available assets and trends in the market. However, with the overwhelming number of available properties, investors may be eager to find a deal, believing that with such high inventory, there must be a good deal out there for them. This though, is not always the case. Depending on your investment goals, out of the thousands of deals on the market there may be zero that make sense for your strategy. Therefore, it often requires investors to say “no” to multiple deals before finding the right one for them. When making such a large investment, it is necessary to remain patient through the process. An impulsive decision could result in major financial loss.
Assess each deal and ensure that it is in-fact, the right deal for you.
Ask why the seller is selling, understand all associated risks, and be patient – these are three key ideas to implement in every real estate opportunity. Completing such detailed due diligence on every opportunity can ensure that you are acquiring the best asset for your investment strategy, not just the supposed best deal on the market. Because, at the end of the day, every investor has a different strategy and objective, and therefore there is no best deal for everyone.
For a similar reading see here Why There Is No Simple Formula For Investing In Real Estate. Also read How Using The IRR Metric Can Be A Big Mistake.