When is it OK to retrade a deal?
To retrade or not to retrade price and terms during a real estate deal? That is the question. Generally, it is ok if the impact on price is large enough to make a significant dent in your full-term IRR. In other words, if you're working on a $20,000,000 asset and a $50,000 problem arises during due diligence, it is unwise to retrade the whole deal because $50,000 should have almost no impact on the IRR over the hold period. Instead, you stand to significantly impact your reputation with the seller, the broker(s), and others that are part of the deal. As a multifamily real estate agent I have found that when an issue is large enough during a due diligence period, the seller steps up and gets the problem taken care of or adjusts the price accordingly because they know it is a large enough issue that any buyer will face the same problem. Choose your battles wisely and keep the big picture in mind. Those who don't sweat the small stuff get rewarded with more opportunities from brokers and sellers.
I’ll give you two examples. Let's say you're working on a $20 million transaction and a $500,000 problem comes up. It’s something that the buyer didn't know about, the seller didn't even know about it before going into contract, but it was uncovered during DD. Maybe it's a title issue or whatever. When something that large comes up, I don’t usually have any problems with those as a broker because the seller knows that's a big enough problem that any buyer is going to have an issue with so he's got to get it corrected. It gets negotiated out, and we close on the deal, no problem. It's when I have a $20,000 problem or maybe even as much as a $100,000 problem on that same $20 million asset. He loses focus on the IRR and the cash on cash return. A $100,000 issue on a $20 million deal doesn't even show up on an IRR over a ten-year hold or a five-year hold. People go to battle to absolute nausea over it and it's ridiculous. Number two, and most important of all, if you get anything from reading this, is it kills your reputation. When you go to battle over something like this, as a broker, I’m not showing you any more deals. You made me look bad, you embarrassed me, and the seller's going to get upset. The seller's thinking this dude just came to me with a $20,000 issue on a $20 million deal, are you kidding me? And of course, the buyer's thinking it's only $20,000, what's the big deal? And it’s a battle of egos and not about the financial sense of things. They're losing the big picture and they're losing deals. Elite investors just power through such issues. They see this as an opportunity to show everyone that he’s capable of closing regardless of the issues that come up. Word like that spreads and brokers will bring him more deals because of it. The whole point of this is to get investors to understand how to build a good reputation. You have to keep the long game in mind. I know that $20,000 is a lot of money if someone just plopped it on your desk, but it's not in the grand scheme of things when it comes to investing and IRR and cash on cash. And it kills your reputation. Brokers want you to make them look good so they can get more listings. If you help them do that they will bring you every single one of those listings before anyone else even knows about it.
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