Once you’ve landed on a good multifamily deal, it is hard to manage your expectations. Even though you know, in theory, that your chances of closing the deal are remote, it is devastating when something goes wrong and you are compelled to walk away. But the good news is that every deal that doesn’t work is a learning experience, giving you additional knowledge and skills to identify red flags early on and establish some guiding principles moving forward.
One of my Deal Desk students brought us a 100-unit in a warm coastal area of the US. Despite having a gut feeling that the deal wasn’t a good idea, I pursued the opportunity. In the end, we did have to walk away—but I learned five important lessons in the process.
LESSON #1: A WRINKLE IN TIME
The owner of the apartment building was dealing with a terminal illness and seeking to unload the property in just 21 days. This kind of accelerated timeline did not align with the multifamily process we’ve developed—a process which typically takes 45 to 60 days beyond due diligence for a grand total of 2½ to 3 months.
But in my desire to support a student, we moved forward with the deal. The very short deadline forced us into a new relationship with a hard money lender we hadn’t worked with before. I was also uncomfortable with the very large deposit they required, the fact that there were no extensions built into the contract, and the highly unusual deadlines at 7pm EST—rather than the traditional cutoff of midnight.
These were all contributing factors in our eventual decision to walk away from the deal, but had we held firm to our process in the first place, we could have saved ourselves—and the seller—a lot of time and trouble by refusing to stray from our standard timetable.
LESSON #2: CRIME & PUNISHMENT
Another reason we ultimately ended this deal had to do with violent crime. The day before the expiration of due diligence, one of our lenders discovered an incidence in the area that we had not uncovered, and while hard money lenders are less concerned about violent crime statistics, it IS an issue for conventional lenders like Fannie Mae and Freddie Mac.
As a result, pulling the crime report is now at the top of our list of ‘things to do’ when we look at investing in a new multifamily property. Even if the violence occurred three years prior, it can have a significant impact on your financing.
LESSON #3: NO EXIT
Considerations around how that incidence of violent crime might affect financing led to yet another risk factor—uncertainty about our exit from the hard money loan. If you are at all familiar with these short-term loans, you know that you do NOT want to go over the term of the loan. In fact, you want to get out of a hard money loan and into agency debt as soon as possible.
The potential inability to secure agency debt due to previous violence in the area made the deal more of a gamble than we had anticipated and provided us with yet another reason to bail out.
LESSON #4: DO I MAKE MYSELF CLEAR?
Last but not least, this deal was out of the ordinary for us in terms of property type. The plan was to convert the class C property from market-level rents into HUD or Section 8 Housing. I have experience with Section 8, and it’s just not my preference.
Had we been clear about the types of properties we do and do not want to own, we could have avoided a lot of pain for everyone involved. Instead, we developed an emotional attachment to the deal and invested a great deal of effort in trying to make it work—which made it even more demoralizing when we had to terminate the contract.
LESSON #5: THE GOOD GUT
At the end of the day, the overarching lesson here is to listen to your gut. As the deal developed, I ignored a lot of warning signs in an effort to get this deal done for my student. Had I followed my instincts, we would have abandoned ship much sooner.
Though the entire experience was a disappointment, it is a huge accomplishment to get a deal under contract in the first place. And now we have a more clearly defined set of criteria around what compromises we will and will not make to support a student in securing their first multifamily deal.
By sticking to our timeline, scrutinizing the crime report on a property, weighing the risk of securing agency debt, and establishing clear criteria around the multifamily portfolio we want to own, we can make better choices moving forward.