Commercial Deal or NO Deal

The number one dilemma facing commercial real estate investors today is whether to do the deal or NOT do the deal. When do you go for it and when do you walk away? Let’s face it, it’s easy to find bad deals and a lot tougher to find the good ones. So, how do you know you have a good deal? What does it look like? And how do you know when you should walk away? Find out the answers to these questions as we play… Commercial Deal or NO Deal:

 

 

Deal #1:

• The property is in a good neighborhood
• The property is distressed
• Seller financing is available
• The seller is motivated
• Needs Gut Renovation

Pros: Seller financing is available which can be a good thing, and it’s probably available because the property is distressed. There is big profit potential in a situation like this.

Cons: Gut renovation means that it’s down to the studs. All we have are the electrical and plumbing.

Deal or NO Deal?

As a coach I would say that this is a NO deal. The reason why is because it needs a gut renovation. There is no flooring, appliances, no finished lighting, nothing is finished. As a beginner investor this deal is too risky for two reasons: the contractor can rip you off and you can run out of money. These happen all to often, so for me this is a no deal.

 

Deal #2:

• The property is in a good neighborhood
• 100% occupied
• Rents are below market
• The property is in good condition
• Seller not motivated to sell

Pros: It’s a stable property with rent up-side potential.

Cons: No seller motivation.

Deal or NO Deal?

This is a deal! The reason why is the four positive aspects of this deal outweigh the seller’s lack of motivation. You may argue that if the seller is unwilling to sell and won’t call back or engage with you it isn’t worth the effort. But guess what? Commercial real estate is a relationship-based business. So, your job is to nurture your relationship with this seller who’s not motivated. We do it all the time. Sometimes it takes three months, sometimes even a year. But when you have all four of these components with this property, it can be life changing. So, don’t give up.

 

Deal #3:

• You’ve had your eye on this property for a long time
• It has a double-digit cash on cash return
• It has high cashflow
• There has been high property management turnover
• In a 12% cap rate area

Pros:  It’s finally available and on paper it has a high return on investment.

Cons: Difficulty keeping property management and is in a high cap rate area.

Deal or NO Deal?

As a beginning investor, this is a NO deal because the property is in a 12% cap rate area. This is not a 12% cap rate deal, it’s a 12% cap rate area. The higher the cap rate on an area, most likely the worse the area is. The high cap rate area indicates it’s likely a high crime and low-income neighborhood. This is an area that as a beginner you should avoid because it will be difficult to collect the rents. What I want you to realize is that you can fix the property, but you can’t fix an area. So even though you’ve been watching this property forever, and you’re excited that this deal is finally on the market, you need take that emotion out of the business and pay attention to the deal. The truth is the higher the emotions go the lower the intelligence goes. So, two reasons why this is a bad deal. Number one is because it’s in an area where you will not be able to collect rent. And secondly, you’re getting emotional about the deal and it’s clouding your judgement.

 

Deal #4:

• Out of state owner
• The owner did not keep financial records
• One third of the units are vacant
• There’s no loan on the property and it’s owned free and clear
• You can’t get reasonable lender terms – 4 banks have said no already

Pros: An out of state owner is more likely to be motivated, especially when the property is suffering.

Cons: No financial records, in fact the owner kept them in a shoe box which indicates the property has been mismanaged. It also has a high vacancy rate. These two factors have ruled out conventional financing for the deal.

Deal or NO Deal?

As your coach, I would say that this one is a deal. It really is! When you have a willing seller and a willing buyer, we can create beautiful deals. Let me explain. This owner is out of the state, and obviously distressed. The great thing is he doesn’t have a loan on the property and since you’ve been unable to get a loan from the bank, he is able to 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 willing seller and a willing buyer, you can create beautiful deals together and that’s what this could be for you.