It is said that real estate investing is a mental game.
But what does that really mean? It means having the discipline of investing and managing projects overcome your emotions. It’s been said that most decisions are made emotionally, and the logic to support the decision is then brought to the forefront to bring justify the emotional decision.
On today’s show we are talking about deal momentum.
Let’s say that you have your eye on a property that you think has potential. The initial analysis looks favourable. You manage to get it under contract with all the usual due diligence conditions.
You have a term sheet from the lender and you have several investors who like the deal.
You have completed your due diligence and everything seems ready to go. But late in the game a week before closing an issue arises on title.
In addition, just one week before closing you’re starting to see signs regarding your property manager that are alarming. You don’t live in the same city, and you don’t have time in the next week to fly and recruit a new property manager to replace the one you’ve got.
The title issue will not affect your use of the property but might affect the salability of the property in the future.
You have spent two months working on the project. You have spent money on appraisals, phase 1 environmental, legal fees reviewing documents, and countless hours putting the whole deal together. In one week time you will get all of those fees reimbursed and you’ll earn The acquisition fee that you put in the offering memorandum with your investors.
Most purchase contracts include a clause that is an open condition requiring the transfer of marketable title. That condition does not expire right up until the time of closing. Even though you have waived conditions, the title condition remains in full force and effect.
If you had known the issues with title and the issues within your team at the start of the project, you probably would have chosen not to proceed with the deal.
But here you are, a week before closing and all systems are go.
This is clearly a case of deal momentum.
I remember watching the launch of a NASA rocket. The countdown was well underway and 10 seconds before launch mission control scrubbed the launch.
Every single project requires a continuous risk assessment. In the case of a space launch the consequences are clear.
Like a rocket once fully launched, a project becomes like a one way street. There is no backing up. You can only go forward.
But when you have a deal that runs into problems, the correct solution is to stop, inform all the stake holders of the issue and then negotiate accordingly with the seller. They’re the one with the problem. By taking the more conservative stance, you are letting your stakeholders know that you take their money seriously, that you won’t skip steps and take risks with their capital.
They will respect you for it. It builds trust.
That doesn’t mean the deal is dead. It means that there are some problems that must be resolved before you can move forward. If there is an issue with title, perhaps it can be cleared up prior to closing. If it’s a problem for you, then it could be a problem for virtually any buyer. The problem is not a buyer problem. The seller owns the problem and they have significant incentive to resolve it prior to closing. After closing, your negotiating leverage has evaporated.
Now I’ve outlined an fictitious example here. Deal momentum comes in many shapes and sizes. As a deal sponsor, you have the same responsibility as the launch director for a rocket. That doesn’t mean the entire mission is scrubbed. It means not today. It means we need to make the deal safer.
If real estate is a mental game, be mindful of deal momentum.