{"id":164447,"date":"2024-01-10T17:50:32","date_gmt":"2024-01-11T00:50:32","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=164447"},"modified":"2024-01-19T08:41:49","modified_gmt":"2024-01-19T15:41:49","slug":"how-our-deal-broke-down-and-im-happy-about-it","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it","title":{"rendered":"How Our Deal Broke Down at the Last Minute\u2014And Why I&#8217;m Happy About It"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC9485606713\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019m really a pretty nice guy. I\u2019ve met hundreds of you in person and spoken to a few thousand more prospects\/investors by phone or on Zoom. So, hopefully, most of you agree.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But as I write this, I\u2019m a bit miffed. You see, our Wellings Capital team is like family. We love and care for each other. So, I hate to see anyone on our team taken advantage of. But it feels like that\u2019s what happened here.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Our team recently spent over five weeks heads-down on what should have been a straightforward&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/preferred-equity-can-improve-your-returns-in-this-environment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">preferred equity<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;investment. I did the due diligence trip in the fall. It was a beautiful&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/investing-in-mobile-homes\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mobile home<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;park, and we were eager to add it to our investment portfolio.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">We were supposed to close the deal two weeks after my trip. Ben, Troy, and I had visited the team\u2019s headquarters and felt we understood them quite well. We liked their team, their asset types, and their track record.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Here are some details on the asset and the proposed investment:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">The park had a significant waiting list (about 30 families), and homes typically sell within a day or two of placement by the operator.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Lot rents were about $175 below market rate in an above-average location.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">9% current pay cash flow to our fund, reserved for the first year.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">6% compounded annual upside takes the total coupon to 15%.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">2.5% origination fee, plus 1.5% exit fee.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">As a preferred equity investment, this opportunity provided investors with a meaningful equity shield in the first loss position. And the operator, a 26-year&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-fundamentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">CRE<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;veteran, would sign a personal guarantee.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">We finally got to the closing table. The operator had spent weeks complying with our stringent but reasonable requests. We wired the money to the closing attorney, anticipating signatures the next day. We even emailed our investors with the closing announcement.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Amazingly, on the morning of closing, the operator changed the terms of our deal. It wasn\u2019t a complete overhaul of terms, but this was unacceptable\u2014game over for us. We pulled the plug on the deal and got our funds back from the title company.<\/span><\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_659f3b2fb0ee9: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_659f3b2fb0ee9\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Do You See Why I Am a Little Ticked Off?&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">This was a massive time drain for our team members and a significant disappointment since we had been conversing with this firm for over a year since our first visit to their headquarters. And it kept us from working on other opportunities.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But it makes two simple points:&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">1. It\u2019s critical that you go to great lengths to perform appropriate due diligence before investing your hard-earned capital.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">2. Don\u2019t move forward with a questionable investment based on sunk time or money costs.&nbsp; &nbsp;<\/span><\/p>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Passive investments<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;can be a wonderful thing, but they can be a great source of frustration and loss if you link up with the wrong&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-guide-to-real-estate-syndication\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">syndicator<\/span><\/a><span data-preserver-spaces=\"true\">. It\u2019s worth it to do the heavy lifting on the front end.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I don\u2019t mean to sound arrogant. But we have reviewed and rejected hundreds of popular deals over the years. Many did quite well\u2014while the tide was rising.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/the-tide-is-out-for-investors-where-do-you-put-money-now\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Some have failed or are struggling in this receding tide<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">So Why Am I Still Happy?&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I have a lot of reasons to be happy, even amidst my irritation. Most notably, I\u2019m happy because I\u2019m satisfied that we did the right thing for investors and for ourselves (as fund managers). Because this deal could have gone okay, but it\u2019s more likely there would be more trouble with this operator ahead.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Are you a passive investor? I\u2019m encouraging you not to skimp on due diligence. Invest the time, and don\u2019t get emotionally married to any operator or deal.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And there are much better ways to speculate. I wouldn\u2019t do that in a real estate deal with projected returns in the teens or 20%-plus range. Why? Two reasons:&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">1. Tech, pharma, and angel investments can have upsides of 1,000% or more. The risk-adjusted returns in most deals may stink, but there are those rare opportunities that create massive wealth for the lucky speculator.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">2. Real estate is a hard asset with (hopefully) real projected cash flows. It is perfectly designed for investment (rather than speculation).&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Sadly, many syndicators have dragged unwitting investors into speculative deals. The assets aren\u2019t the problem. They were often solid properties with excellent cash flow potential. But the deal structure (overleveraging with risky debt, assuming rents would grow to the sky, etc.) is what got them into trouble.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These syndicators turned potential investments into risky speculations. And many of you could figure this out through appropriate due diligence\u2014either your own or through a trusted consultant.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is our hard-earned capital at stake. Don\u2019t flush it down the drain. Remember: $50,000 lost or gained today could make a big impact on your future and the inheritance you leave behind for those who follow you.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Plus, I don\u2019t want to see you ticked off for the next decade.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_59e23d3a51acf722d6dcfbba926cc2fd\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_efecf952c97a4783f4c17cf3b83f6279\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_688bc20085c2f7ab2a262d0589f3cee1 class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Lender Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/how-our-deal-broke-down-and-im-happy-about-it',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\n\n\n<p><em>Mr. Moore is a partner of Wellings Capital Management, LLC, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (\u201cPPM\u201d) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188 or email invest@wellingscapital.com. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Over my 26-year career, I&#8217;ve done plenty of good and bad deals. But this one, thankfully, broke down. Why am I so happy about it?<\/p>\n","protected":false},"author":214608,"featured_media":164450,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252,7119],"tags":[],"class_list":["post-164447","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/164447","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=164447"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/164447\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/164450"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=164447"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=164447"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=164447"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}