Fool Me Once

In the last post I mentioned the hard work and persistence it took to get into our first deal. The countless hours studying, on the phone with brokers, analyzing, searching etc. Every day was a mental push to get that first offer accepted. We heard time and time again, much like anything in life, that it can take 20+ offers to finally get one accepted so we knew we needed to get to work and get to work fast in order to get into the game. 

We were working on our first deal during the second half of 2023, and to get you up to speed on how the commercial market was at that time… SLOW and DRY. The market had just gone on a crazy run from 2020-2022 and prices were higher than ever before, sellers were taking advantage of the low interest rates and jacking up their prices to nonsensical numbers. A lot of buyers got into the market at that time with variable rate debt. Variable rate debt means that the interest rate for your loan is set at the current rate for a set period of time, then adjusts to the current interest rate after a set period of time, typically one year. Then, the rate adjusts every year after that to the current rates. In this case, the rates in 2023 were 2-5 times what they were during this insane run. As you can imagine, you could get in some real trouble if your rate jumps that high that quickly. Essentially buyers bought property that was way overvalued, with very slim margins because the rates were so low, then when the rate on their loan adjusted, the project began to lose money so they couldn’t sell.

Back to the story… The market in Q3 and Q4 of 2023 was slow, next to no inventory. A big reason for this, aside from what I just mentioned, is that a lot of owners who bought during the market cycle overpaid and were now upside down. That, and those that were in a good position didn’t want to sell a property at a 2% interest rate and move that money into property at a 6% interest rate. So we weren’t working with much, but it caused Matt and I to get creative. We tried, tried and tried again but no luck. We sent dozens of offers, and were beat out several times, but through our persistence and leveraging the on market properties to get to the off market, we found an off-market deal that nobody knew about!!

We sent in an offer quite a bit below what the Seller was asking, he didn’t budge, then we took a deeper dive into the area and the numbers of the property and decided to offer a bit more. We got a counter and accepted! We had a signed letter of intent! We were pumped! We had the seller send over all the financial information to make sure it aligned with the marketing materials, then we crunched the numbers. We found out a few things very quickly. Unsophisticated sellers, while they want to sell their property, aren’t willing to do the work that is necessary, so you have to take what you can get and decide if you want to continue with the contract or not based on the limited resources provided. This property was in Kansas City, Kansas in what looked like a solid neighborhood. We had never been to the market, everything we learned about the city up to that point was online and talking to the network we had developed. 

After some due diligence, we decided to move forward, but before we signed the contract we needed to see the property. We booked a trip out to get a lay of the land and take a look at the property we were potentially going to buy. We land in Kansas City, and let me tell you, it is much bigger than we thought. The city is spread across the Kansas and Missouri border and there was a lot we needed to learn in just a couple of days. So we drove around the city for countless hours checking different neighborhoods and verifying the information we had been hearing from property managers, lenders, brokers, etc. Then it was time to check out our property! We were so pumped, the closer we got the more we liked the neighborhood and side of town it was on. As we arrived, we noticed this 22-unit property was a bit run down, but in a nice location, the curb appeal can be fixed, so we were still excited. Once we walked around a bit we finally met the seller and broker and walked some of the units.

In Property Management, you say this a lot. “Wow, I don’t have any clue how people could live this way.” After seeing the inside of these units, that was the only thing running through my head… But again, nothing a good renovation couldn't fix. From there, we checked all of the HVAC systems, hallways, laundry rooms etc. We got a good sense that this was going to take a huge renovation, and maybe we were naive, but we were up for the challenge. The last appointment of the day was the roofer. He drove up, got out of the car, looked up at the 2 roofs for about 2.3 seconds, and said… “I ain’t gettin up there…” 

He told us, the roofs were moments away from caving in and he wouldn’t be surprised if it didn’t make it through the winter. Matt and I had seen what he was talking about as we drove up, but didn’t know the severity of the concaving roofs. He told us, “Yea, that’s gonna cost you about $150K-$200K for the 2 roof replacements, I wouldn’t touch this place with a 10 foot pole.” As you can probably guess by now, Matt and I both were a bit shocked, but… due to our angst of getting that first deal and “can do” attitude, also knowing that the first deal is the most important thing we would do in our business, we were still on board to at least throw in a counter offer based on what we found. 

We immediately went back to the seller and asked for a $300K reduction in price. I know this sounds wild, but with everything we saw, that was more than fair to ask for given the purchase price we had originally agreed to. His property was dilapidated and he didn’t disclose a damn thing and we were not happy with him lying to us about the condition of the place. It was a terrible piece of real estate right next to a liquor store, which we have now added to our “do not buy” criteria. Needless to say, he was upset and offended by our offer and declined, but we honestly thought we were still overpaying at that point. 

We were gut punched… After all the hard work we put in, we were going to have to start over and that was not a fun plane ride home. Did it stop us? No chance, we got right back up and got to work on a new project the next morning, which is what we knew needed to be done with the limited opportunities we had. Next time, we’re going to dive into a bidding war between 6 groups for a perfect 8-unit deal in Tucson Arizona.