Let’s face it, it’s easy to find bad deals, but a lot tougher to find good ones. So, how do you know you have a good deal? What does it look like? When do you go for it and when do you walk away? Find out the answers to these questions and more in these 4 examples deals.
Deal #1: Risky Reno
Details of the Deal:
- The property is distressed but in a good neighborhood.
- It needs a major renovation.
- The seller is motivated.
- Seller financing is available.
Pros: Seller financing is available, probably because the property is distressed. This deal has a lot of profit potential.
Cons: The major renovation means the building is down to the studs.
Do the Deal or Walk Away?
As your coach I would recommend walking away from this deal because it needs a total gut renovation. As a beginner investor this deal is too risky for two reasons:
- The contractor can rip you off.
- You can run out of money.
These two things happen all too often, and for a beginner this can be devasting. For this one my advice is to walk away.
Deal #2: Stable with Rent Upside Potential
Details of the Deal:
- The property is in a good neighborhood and in good condition.
- It’s 100% occupied.
- Rents are below market.
- However, the seller is not motivated to sell.
Pros: It’s a stable property with great rent up-side potential.
Cons: No seller motivation.
Do the Deal or Walk Away?
Go for it! This is a great deal! The four positive aspects of this deal outweigh the seller’s lack of motivation. You might wonder how to get this deal if the seller is unwilling to sell. Well, guess what? Commercial real estate is a relationship-based business and it’s your job to nurture your relationship with this seller who’s not motivated.
I do this all the time. Sometimes it takes three months, sometimes even a year. But the four pros of this property are too good to pass up. When you have all four of these components it can be life changing. So, don’t give up.
Deal #3: High Cap Rate Area
Details of the Deal:
- You’ve been watching this property for a long time.
- It has a double-digit cash on cash return and high cashflow.
- It’s in a 12% cap rate area.
- There has been high property management turnover.
Pros: On paper it has a high return on investment and it’s finally on the market.
Cons: It’s in a high cap rate area and has a high turnover of property managers.
Do the Deal or Walk Away?
As a beginner investor, you would walk away from this deal because the property is in high cap rate area. This is not a 12% cap rate deal, it’s a 12% cap rate area. The high cap rate area indicates it’s probably a high crime, low-income neighborhood. This is an area that as a beginner you should avoid because it will be difficult to collect the rents. This is an important lesson to heed: you can fix a property, but you can’t fix an area.
Now, you’ve been watching this property forever so you’re excited that this deal is finally available, however you need to remove the emotion out of this business and pay attention to the deal. The higher the emotions go, the lower the intelligence goes.
There are two reasons to walk away from this deal:
- It’s in an area where you will not be able to collect rent.
- You are getting emotional about the deal and it’s clouding your judgement.
Deal #4: Out of State Owner with Distressed Property
Details of the Deal:
- Out of state owner.
- One third of the units are vacant.
- No financial records available.
- The property is owned free and clear – it has no loan against it.
- Unable to get reasonable lender terms.
Pros: The out of state owner is more motivated, especially since the property is distressed.
Cons: There are no reliable financial records which indicates the property has been mismanaged and it has a high vacancy rate. This means conventional financing for the deal is not an option.
Do the Deal or Walk Away?
As your coach, I would say that this one is a deal. It really is! When you have a motivated seller and a willing buyer, we can create creative deals. The great thing about this out of state owner of a distressed property is that he doesn’t have a loan on the property. Since conventional financing isn’t an option, the owner can be the bank for you. It’s called creative financing and we’re one of the best out there at putting together these types of deals. Again, when you have a motivated seller and a willing buyer, you can create beautiful deals and that’s what this could be for you.
