7 Blunders When Making Offers on Investment Property

Discover 7 blunders when making offers on investment property and how to avoid them. They waste time and money as well as cause unnecessary complications. Far too many investors make these 7 offer making mistakes and this training will help you from falling into these traps.

Blunder #1: Not Working Directly with the Seller

The first blunder when making offers on investment property is not working directly with the seller. Working directly with the seller is a crucial strategy in commercial real estate. It means bypassing the intermediaries like real estate agents and communicating directly with the property owner. Here’s why it matters:

1. Best Deals: The most lucrative investment properties are often off-market deals. These opportunities aren’t typically listed on the MLS (Multiple Listing Service), LoopNet, or Crixi. Instead, they’re found by going directly to the property owner. At Commercial Property Advisors, we excel in this approach. Our students have secured deals that stand out in today’s market because they chose to market direct to seller.
2. No Middleman: When you work directly with the seller, there’s no real estate agent involved. You communicate with the seller via texts, calls, or emails, negotiating and building rapport. By cutting out the middleman the seller avoids commissions and you can create a more personalized experience and negotiate better deals.
3. Understand Seller Motivations: The third reason why working directly with the seller is important is that it allows you to understand their motivations for selling. And when you understand the seller’s motivation, you can tailor your offer to meet their needs. For example, say the seller’s property requires significant repairs, or they’re looking to avoid capital gains taxes upon selling. By communicating directly, you uncover these details and can then structure your offer accordingly.
4. Creative Financing: Once you understand those motivations, you can negotiate the best deal terms possible, which also opens up possibilities for seller financing. What if you have limited funds or damaged credit? If you know the seller’s motivation and why they want to sell, you can devise a creative solution and create a win-win deal.

Blunder #2: Not Doing Your Homework

Another common blunder when making an offer is failing to do thorough research on the seller’s needs, the property, and the market. Why is this important? Because you only get one chance to make a first impression. Whether you’re approaching property owners directly or working through agents, it’s crucial to be well-prepared. Property owners will be curious about who you are, your credibility, and whether you can deliver on your promises. Therefore, setting a positive first impression is essential. How do you do that? By understanding the seller’s motivations, property details, and market conditions.

• Understanding Seller Needs: Insight into the seller’s motivation allows you to tailor your offer to meet the seller’s needs. For instance, if they want to sell but also retain some income from the property, it’s an opportunity for creative financing solutions like a master lease or seller financing.
• Property Details: You need to understand the property itself. If your research indicates that market rents are higher than the current charge, there’s potential for increased income. By recognizing value-add opportunities, you will have a better idea of what you can offer the seller.
• Market Knowledge: Thirdly, know the market. What if the area is on the decline? Naturally, your offer would be affected. When making an offer, it’s important to consider the property’s position within the market, alongside broader market trends—such as employment rates, rent levels, vacancy rates, and more.

Not doing your homework is a huge mistake because understanding the seller’s motivations, property details, and market conditions is the key to buying investment property and avoiding potential pitfalls down the line.

Blunder #3: Letting Your Emotions Get in the Way

The third blunder is allowing emotions to cloud your judgment. Never fall in love with the property, fall in love with the numbers. Here’s why it’s crucial to keep emotions in check when making offers on investment property:

Nightmare vs Goldmine

As a coach I handle student deals daily and it’s evident that when emotions rise, intelligence falls, which leads to poor decision-making when making offers.

Take this example: students often present me with what appears to be a bad deal. They’ll argue, “But Peter, owning this property is my dream.” To which I respond, “If you purchase it, it will turn into a nightmare because your emotions are clouding your judgment.” This property does not generate positive cash flow, nor does it have any potential for appreciation.

Or they might say, “But Peter, this property is lakefront; it’s a gold mine.” However, when we examine the numbers, what does it cash flow? “Oh Peter, it’s negative $3,000 a month.” Exactly. It’s not a gold mine.

Stay Objective

Allowing emotions to dictate your offers is a huge mistake. There’s simply no place for it in commercial real estate investing. We won’t tolerate it, and neither should you. Stay objective, analyze the data, and make rational decisions based on the numbers rather than emotions.

Blunder #4: Not Knowing Your Contract

Understanding the contract is critical when making offers and commercial real estate contracts differ significantly from those used in residential transactions. Commercial contracts often contain complex clauses because your investment property is essentially a business. These clauses use technical language and require careful scrutiny.

1. No Gray Areas: At Commercial Property Advisors, we follow a strict rule: no gray areas in contracts. If you encounter unfamiliar terms or clauses, or if anything is unclear, pause and get clarification. Whether it’s your attorney, us, or the real estate broker, ensure you understand every aspect of the contract before signing on the dotted line.
2. Legally Binding: Remember, signing a contract is a legally binding agreement. Even if you have representation (an attorney or agent), YOU are ultimately responsible. Failing to grasp the clauses and obligations in the contract can lead to potential legal ramifications, financial loss, missed deals, and damaged seller confidence. A complete understanding of the contract is essential—don’t risk losing out due to uncertainty.

Blunder #5: Missing Contract Contingencies

Contract contingencies serve as safeguards for buyers when making real estate offers. Whether you’re dealing with a multifamily investment, or other commercial property, these clauses protect you. The following 4 contingencies are essential and should be in every contract:

1. Inspection Contingency: You have 30 days to inspect the property thoroughly. If you find any issues, you can terminate the contract. This contingency ensures you can assess the property’s condition without risk.
2. Finance Contingency: This clause allows 30 to 45 days to secure an acceptable loan. If you can’t find suitable financing, you can exit the contract.
3. Title Contingency: The contract hinges on receiving a clean title at closing. A clean title means no liens or legal disputes. This clause protects you from hidden ownership issues.
4. Appraisal Contingency: If the property doesn’t appraise for the purchase price, you can back out of the contract. This ensures you’re not overpaying based on market value.

With all four of these contingencies, if you terminate the contract you can get your earnest money back. The reason I emphasize these four is that they are often omitted in contracts, especially when you manage the process alone or with a real estate broker or agent.

Caveat Emptor

The reason these 4 contingencies are essential is because of caveat emptor—a Latin term meaning “let the buyer beware.” In commercial real estate, this principle reminds buyers to exercise due diligence when making an offer on a property. Unlike residential transactions, commercial buyers have limited consumer protection laws. Sellers of single-family homes must disclose property faults, but commercial property owners aren’t bound by the same rules. I have a training that will break it down and help you understand the importance of caveat emptor when making offers on commercial real estate. You can watch it here: Caveat Emptor

Specific Performance

Missing contract contingencies can lead to legal consequences. In fact, you can be sued for what is called specific performance. Imagine you don’t have a finance contingency in your contract. Later, you realize you can’t secure a loan due to high interest rates or lender rejection. The seller can sue you for specific performance, demanding you fulfill the contract. It’s in almost every contract and it’s yet another reason why you need to understand your contract and have the right contingencies in place.

Blunder #6: Unrealistic Contingencies

Mistake number six involves setting unrealistic contingencies. Remember, contract contingencies are safeguards against potential issues, such as the inability to secure a loan or identifying numerous repairs and allow you to get out of the contract and reclaim your earnest money. However, unrealistic contingencies can put you at risk of losing your hard-earned earnest money deposit to the seller and missing out on a profitable investment property.

Here are the 2 most common unrealistic contingencies in commercial real estate contracts:

• 7-Day Inspection Contingency: Setting an unrealistic 7-day inspection contingency for a 40-unit investment property is unrealistic. Inspecting a commercial property thoroughly requires 30 business days, which allows time to hire experts, review reports, assess viability with your coach, and renegotiate with the seller. Don’t let a seller or broker rush the inspection. If they do, you are being set up for failure.
• 30 Day Closing: A 30-day closing isn’t achievable, especially in commercial real estate. Loan processes alone take longer. Aim for a more practical 60 to 90 days between contract signing and closing.

Again, realistic timelines and conditions will allow sufficient time for due diligence, inspections, and financing approvals. By setting achievable contingencies, you can protect yourself while maintaining credibility and trust in the deal.

Blunder #7: Not Having a Fully Executed Contract

Finally, blunder number seven is not having all parties involved sign a contract and it can jeopardize the entire transaction. It seems so simple but here are 2 common blunders:

• Multiple Owners on Title: Imagine a property owned by a large family—uncles, aunts, brothers, and sisters. If only one owner signs, your contract isn’t legally binding contract. Without all signatures, the transaction will collapse at the closing table.
• Inheritance or LLCs: Whether it’s an inheritance or an LLC, all correct signatures are essential. Don’t assume anything. Ask the seller directly: Are you the sole owner? Are there other owners? Are you authorized to sign the purchase contract?

Remember, a fully executed contract means a smooth transaction. Whether dealing with multiple owners, an inheritance situation, or an LLC entity, before proceeding with an offer, ensure that all relevant parties sign the contract. Don’t let missing signatures become a costly blunder.

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