How to Avoid Deal Cancellation
When purchasing a new property, we always intend to close without asking for any credits. Sometimes things arise during the inspection process that cannot be resolved or would make it a terrible deal. We feel as though we are fiduciaries of our investor's capital before they even give us the money. Yet, there is power in the ability to say no, even when we are incentivized to say yes.
There are a handful of reasons we may not move forward on the deal, although we do whatever we can beforehand to make sure we do not encounter surprises. These days, a part of our deposit goes hard on day one. So, therefore, this is why it's important we do everything we can to make sure it’s as close as possible to a sealed deal beforehand.
This list of items we review before signing an offer:
1.) Verify Square Footage (measure units)
2.) Verify Unit Mix
3.) Walk as many units as you initially can
4.) Rent Roll
5.) 12-month Profit & Loss
6.) Create our 12-month budget vetted by our manager
7.) CAPEX estimates vetted with a contractor
8.) Delinquency Report
9.) Insurance Quote
9.) New Property Tax Amount
10.) Physically walk as many units as available initially
Usually, if we have the above before an offer is sent, it weeds out many potential issues during the escrow process. Once we have it under contract, there are usually two main reasons why the deal may not work. Either something comes out during the inspection process, or there are title issues. As for the title, there could be a lien against the property, but if it's not significant, it could just be an instance where the seller pays for it, and we move forward. At times it could be significant where it kills the deal. We always have out to get a full deposit for any title issues.
The Main Reasons for Deal Cancellation
The main reason why we would cancel, though, is if something comes up in the physical inspection. If it's something small, then we will have enough wiggle room to absorb it. If it's significant like our meridian deal, we discovered in the inspections that units were 25% smaller than initially advertised by the seller. That's how measuring the units became part of our pre-offer due diligence. Luckily for that deal, though, we ended getting some discount for that mistake by the seller that helped get the deal closed.
Other times the damage can be so immense that it just doesn't even make sense to get a credit. We try our best to get pretty good estimates from our contractor beforehand. The issue is usually before a contract is signed. We do not get all the due diligence documents, limited access to the property, and do not pay for the thorough inspection until we have it under contract. So, some things will just not be known until we dig into them. However, we try to budget for surprises that could come up. At times the surprises are just too big. We might try to get credit if something significant wasn't disclosed or easily seen, like plumbing, electrical, roof, foundation, or sewer. If we had grossly underestimated the work, then usually, it'll just be a pass. However, this is a place we never want to get to.
Make Sure It’s a Deal Before Spending the Effort
Ultimately, we do everything we can to make sure it's a deal before investing any more time or expense. It can negatively affect the relationship with the broker, and they may be less inclined to bring us future deals. We need to do what's been for our investors and us. Ultimately if we go through the process thoroughly and communicate things well, the result should be ok and we are better off in the long run.