You Get A Deal Under Contract with NO MONEY! Now What?

You did the networking, called the brokers, and trained on taking down multifamily deals. After doing all that work, a broker sends you a deal that seems to add up. In fact, it’s a great deal, but you don’t have the money raised. What do you do next?

This is the part when most people starting as real estate entrepreneurs freeze up. They become great at looking for deals, but come up a little short when it comes to raising capital from potential investors. They are afraid to pull the trigger because they don’t have any commitments. So they quit chasing the deal because they are afraid of locking it up.

There are two reasons why this happens:

1) Having a strong, negotiated deal is undervalued

Finding a good deal in today’s market is like finding a needle in a haystack. I personally look at over 100 deals before I find one that makes sense. So when you have a verbal agreement from the broker after you do a thorough and conservative underwriting, you have something of value. Even if you are unable to close on that deal yourself, there are many syndicators that would like to help you take that deal down. But like I said, you need to make sure your underwriting is solid and you know what you are doing.

2) Not watching for opportunity

Something that comes up on my podcast time and time again is being in the right mindset. Our brains are designed to present us with opportunities even when we are not looking out for them. The big mistake is not seizing the opportunities when they present themselves. If you take advantage of a chance meeting with a big investor, they could very well be the partner on your next deal. This is not the time to be timid. You need to be ready to explain your model and what makes you stand out from the others that do what you do. As a rule, if an opportunity presents itself, grab it.

Let’s say you are able to get over the two excuses, you now need to perform a “Worst Case Scenario” analysis. This is where everything turns bad. Maybe occupancy dropped because the seller put his family in each of the units to drive up occupancy or the boiler dies the first month after you buy the deal. You want to go through any and all scenarios. Ultimately, you are trying to find ways to kill the deal.

For example, let’s say you found a 20 unit building. You run the numbers and make an offer. The seller countered and you came up a bit. The seller accepts. And you still have a great deal. Now, you need about $300,000 for the down payment to close and you only have a soft commitment of $75,000 from your parents.

You put together an LOI and send it in with all the terms of the deal. Knowing that it will take up to another week to call investors for the deal. At the same time, you can also consider selling the deal to someone that may want to buy it from you. Meaning, you can wholesale the deal. I would keep this as a backup plan in case your investors don’t come through.

You start calling everyone you know that can line you up with potential investors: property managers, brokers, attorneys - really anyone that could put you in touch with others that buy multifamily real estate. You may want to even call your local Real Estate Investor Association to see if they have a group that does multifamily.

In the meantime, you get a signed LOI back. Now, you have 7 days to submit a purchase agreement. Typically, it takes another 5 days to go to review, but you can use this time to continue making the calls and get in front of investors.

Now you have 30 days to work on your due diligence. If you put a clause in your agreement that says the clock doesn't start ticking until they submit all the info, you may have a little more time, but let’s say you have another two weeks to keep the calls going.

If you think about it, since you submitted the LOI, you have almost an entire month to raise the capital needed or even sell the contract. The most difficult part of this exercise is the amount of calls and the “no’s” you will get. But if you have a good deal, and you are talking to actual real estate people, they will put the money up.

The very worst case you can do is exercise the termination clause before the due diligence expires. This allows you to you to terminate the agreement for ANY reason before the due diligence period expires. I don't like recommending this as if you do this too many times, you will get a reputation and nobody will want to sell anything to you. The broker community is very small and they talk. If you waste their time, they will not give you any deals. When I put down an LOI, I intend on closing that deal. I recommend you adopt that same mindset.

If you get a great deal even after you perform your worst case analysis, there is a very good chance you will raise the money you need to close. If you don’t, you can find a buyer for the contract or maybe they will even want to partner with you. If none of that pans out, you can execute the due diligence termination clause.