4 Critical Steps When Your Real Estate Deal Goes Bad
Two weeks ago I sat down to write an article about what to do when things go bad…and believe me, in real estate things can go bad quickly and worse even quicker. Of course, that is an open-ended scenario because there are so many ways to be involved in the real estate business and there are so many moving parts. I wasn’t really sure how to tackle such a topic. And then I read Marty Boardman’s post titled How to Lose a Million Dollars From Real Estate this past week on the BiggerPockets blog and realized that the scenarios don’t really matter. Some issues will be minor and some will be major. In the end, it is how you deal with them that will make the difference.
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Get Laser Focused…Quickly!
Regardless of what is happening in your business when you find yourself up against the preverbal wall, the most important thing you can do is become laser focused on the task at hand. In every scenario, there are key steps to take regardless of situation.
- Stop…don’t say THAT.
- Create an action plan.
- Focus on critical needs to fix the opportunity.
- Evaluate to prevent future occurrences.
Before I go any further I want to point out one thing on the above list. I mention the word “opportunity”. I am not sure where I learned this and I am sure a reader can point it out to me, but early in my business career I was taught that there are no problems only opportunities. I was taught that we can either shrink from opportunity or rise to meet it – the choice would always be mine. I have always remembered that and each time I am faced with a little adversity, a little challenge, I tell myself this is another opportunity to rise up and succeed.
One of the biggest mistakes that real estate professionals make when they come across opportunities is the tendency to look for blame and then let their voice run loose. Heck, I think that might be one of the biggest mistakes for many people not just real estate investors, but we all have to realize that the time for evaluation and telling someone what you may really think will come after we have first dealt with our opportunity at hand. To put this in real estate terms, consider this.
In Real Estate It Is Best To Hold Your Tongue Than Speak Your Mind
Raise your hand if you have dealt with a scenario where you have a property sold only to find out at the last minute there is a closing issue? The issue might be that the appraisal has come in low, the borrower did not provide documents or information, your buyer makes a new demand or they will not close. The issues and scenarios seem endless and yet our response to each should always be the same. Check that – let me be a little clearer. The steps we take should always be the same. I have heard countless stories from investors where a deal did not get closed and often, though not always, the investor had an opportunity to save the deal and their reaction was out of order. The deal was killed the instant they began a tirade letting the other party know every little phrase, word, moniker, label, what have you that the investors could think of to describe the other side. Just as quickly as they had a chance to craft a plan to get the deal done, the plan and the deal were gone.
In many cases it will take brutal honesty to get a deal across the finish line and remove opportunities for the deal to fall apart and I don’t mean brutal honesty like telling the other party what you really think of them! There have been many scenarios in the past where I have bit my tongue and swallowed my words to be sure that a deal closes. My first reaction has to be calm and collected even though my mind may be doing mental gymnastics, I have to take the steps to focus on exactly what needs to be done in order for my deal to close. I can blow up later if that is what makes me feel better, but my first priority is closing. More often than not, the only way we get there is if we exhibit calm and allow ourselves to think of the best response and the best plan that gets us paid.
What Is Your Plan For Closing?
I think this is the easy part. Provided that the other side is not asking for something crazy or presenting a scenario where you make no money, the best thing you can do is create specific steps to get to closing. In every opportunity, there are specific steps you can take and they might require some quick thinking on your part or providing additional information or access to someone on your team and they might even require access to your pocket book, but if you can live with the final outcome, you need to figure those steps out.
There have been many scenarios when we have had to provide additional comps to a lender so they can show the appraiser what we were thinking when we priced a property. We have not hesitated to make one of our work crews or contractors available to an inspector so they could review a repair that we had made and we have even renegotiated a point in a contract, even a price, if that was necessary to get a deal to closing.
We have even faced bigger opportunities like disappearing buyers! Even in scenarios like that the steps are the same. We can stomp around the office or the house and scream and shout or we can move immediately to find another buyer. Was there another interested buyer? Was there a back up offer? I always tell everyone around me that in every scenario they need to save the drama for another day and take the steps to get to closing even if that means going back to start.
Learning To Focus On What Is Most Important
With every opportunity there will be things that will be very important and then there will be things that are not. To give you an example, we recently had a deal start to unravel and the buyer was not happy. Small things were getting in the way, but with each small opportunity the anxiety of the buyer grew. Now it may sound like everything is exactly backwards with this reaction, but I knew from the conversation that each little opportunity needed to be dealt with, but the buyers anxiety was the challenge to closing. The anxiety came from having never been in this scenario before. They were using retirement funds and getting financing against the deal. It is so funny how many people make it sounds so easy to use a self-directed IRA to purchase real estate. It’s real easy right up until you are the person spending your money and you have questions!
These types of transactions are often ones where the most care needs to be taken to ensure that the buyer is protected. In this case, the lender was taking some extra steps to ensure that the buyer was in a very good situation and was working with the custodian to make sure everything was titled correctly and the tax status of the IRA was not in jeopardy. The buyer was understandably agitated at having so many phone calls and questions and often not really being able to do anything except allow the deal to work through the process.
I spent an hour on the phone with the buyer one Friday evening just talking about anything under the sun. I allowed them to ask me questions and I explained to them that everything being done was for their protection and assured them that even though the contract closing date was passed, we were not in any hurry. What mattered most was that they were comfortable and secure. I would think that anyone in my situation would have done the same thing, but so often I hear stories of sellers getting impatient and telling the buyer to get it closed or move on. I hear stories of ranting and raving about whose fault the delay is and that only heightens a buyers’ anxiety. Sometimes the solution and the most critical steps have nothing to do with the process or the deal and everything to do with your response.
Looking Back to Look Forward
This is usually everyone's favorite step! Finally getting a chance to blast someone for a mistake or a response or for putting your through the ringer in the first place. But what if the person to go through the ringer is you? What if you created the whole mess in the first place? Maybe you entered into a contract with a buyer before they were pre-approved. Maybe you hired a new low-cost contractor who brought in a super cheap bid, but the inspector ripped the rehab apart? The what-ifs and different scenarios could go on forever, but the fourth step of the process is just as critical as the first.
If you find yourself making the same dumb mistakes over and over – in anything you do – then you are not doing a very good job of evaluating. It is really important to look back and locate all the things you’ve done wrong, all the actions that led to an opportunity, all of the chances to make corrections and evaluate how to do things differently the next time. Included in this process is confronting others involved in the transaction with ways you expect them to perform differently next time as well. It is not so much about assigning blame as it is about honestly addressing any issues that can be addressed.
The funny thing about this topic is that learning to deal with adversity and overcoming opportunities is something that takes time or most of us. Brutal honesty is also something that many will find difficult. As I said in last weeks post, the easiest person to fool is our self. I have always been very calm and clear headed when under pressure and I have learned from my mistakes…And There Have Been A Lot Of Them!
That is probably why I liked Marty’s post so much and wanted to write about the way you should approach every opportunity. Marty, like many of us right along with him, could have given up and crawled into a corner. Instead he shares a great story of self-reflection and growth and some great advice on how to prepare as an investor. I can guarantee you, without even asking him, that when he is faced with an opportunity today, he is able to look back on his past, think clearly and formulate a plan knowing that there will be plenty of time for evaluating in the future. When you have “been there and done that” it just gets easier to see the critical steps to take when an opportunity challenges you.