Navigating Through the Challenges of Real Estate Deals
As a passive investor, it’s more important now than ever to invest with the right operators. By “right” I mean operators who know what they’re doing.
They should be transparent about their experience and success (and mistakes!), and have the discipline to pass on a deal, even though it’s been very difficult to find one.
In today’s article, I want to share with you a story that happened to us that highlights the importance of choosing operators who are serious about every step of the acquisition process.
Recently, we came across a property that, at first glance, seemed like a great deal.
The property was attractive, in a nice location, and promised attractive returns.
It was also being offered at a price that was 40% below what other comparable properties recently sold at. And it was near our other Atlanta properties, which meant we could leverage our economies of scale.
However, as we delved deeper into due diligence, several red flags emerged, turning our initial excitement into a lesson on the importance of thorough due diligence in real estate deals.
Square Footage Discrepancy
The first major issue we encountered was a significant discrepancy in the square footage.
As part of our due diligence, we had our construction team measure the floor plans. We found that they were 200-300 sq ft smaller than advertised not only to us but to the residents.
When you add the smaller floor plans, the property is smaller by roughly 19,400 sq ft. That’s a huge difference and would need to be accounted for in the price in order to move forward.
Plumbing Issues
The property also had plumbing issues that needed to be addressed. Polybutylene is a type of pipe that was used in the 1980’s-2000’s and is known for its consistent ability to fail. We knew that there were polybutylene pipes in the walls of some of the units.
What we did not know is if the replacements were done correctly or how many units were affected. We had to go in, dig into walls, and check every unit to find the issues.
We were told that 23 units needed plumbing replacements. After hiring a licensed inspector and bringing a plumbing company on site, we found that there were in fact 26 units, and 2 main lines affected.
We also found that all of the replacements were not done up to code. This would cost roughly $1000 per unit to fix.
These costs equated to $269,000 alone. Because we didn’t budget for this, we would need to further reduce the price by that amount in order to make the deal work.
Deferred Maintenance
Our investigation also uncovered some deferred maintenance.
While there are often older HVACs on older properties, we found the vast majority of the systems were 20+ years old. There were some problems with retaining walls, concrete work as well as some older hot water heaters.
These were financial burdens that we subtracted from the price we were willing to pay, but they were also hazards that could affect the safety of the tenants.
Negotiating with Discipline
Armed with this knowledge, we approached the seller with a request for a price reduction totaling over a million dollars, adjusting our offer to reflect the property's true condition and the investment required to bring it up to standard.
Unfortunately, the seller was not willing to meet our terms, leading us to walk away from the deal that we really liked and looked good on paper – a difficult but necessary decision.
As tempting as it may be to overlook red flags in the pursuit of high returns, the real skill lies in knowing when to hold back and when to move forward.
That’s what separates the right operators from the ones that you shouldn’t invest with. That’s what you should look for in your operators.
Anyone can find a deal, but it’s up to you to decide whether or not that person is trustworthy and capable enough to protect your hard-earned money.
If you want to learn more about Nighthawk Equity and our operators, schedule a call.
