5 Reasons to Walk Away From a Deal
By Paul Esajian on February 20, 2019
All real estate deals are not created equally. In fact, it is often said that no two deals are the same. Just when you think you have things figured out, the real estate business throws you a curveball. How you deal with the unexpected often defines your business.
It is always easier walking away from a suspect deal prior to getting to involved rather than scrambling weeks into the project. What many investors, old and new, fail to grasp is that it is ok to walk away from a deal. There are a handful of scenarios where it makes sense to hold off rather than fight an uphill battle for months on a property. Even if you are slow, taking on a bad deal is not the cure for an ailing business. Here are five signs that you should walk away from any deal.
- Seller Pushing Too Hard to Close. We have all heard the expression “if something looks too good to be true it usually is.” This is almost always the case when it comes to a real estate transaction. If you have a seller, wholesaler, real estate agent or fellow investor pushing too hard to close you need to take a step back and examine why. There will be times when there are legitimate time sensitive matters but for the most part a pushy seller is trying to close before you change your mind. They don’t want you to discover the truth about the property, the title or the numbers. Most professional investors understand that even slam dunk deals require some degree of due diligence. Never be pushed to make a decision, or outlay capital, without doing your homework on the property. If the seller is giving you the hard sell to sign the contract asap you need to ask yourself why.
- Numbers Don’t Make Sense. Everything in real estate revolves around numbers. There will be times when you fall in love with a property location, layout or neighborhood and desperately want to make it work. You bend and adjust the numbers to make the property more appealing. Hopefully, at some point you realize that there is simply too much that needs to go right in order to make a profit and you walk away. If the numbers don’t jump off the page at you, there are simply too many other properties out there. There is nothing wrong with making a small profit on a property and moving on. However, if you need the best-case scenario on multiple property items it just does make good investing sense. You will end up spending weeks, if not months, on a property only to be disappointed with your bottom line. Your starting, and ending, point on any transaction must be the numbers. If the numbers are questionable you need to move on.
- Limited Exit Strategies. You never want to put all your eggs in one basket. By having minimal exit strategies, you can easily box yourself into a corner. Every investor should have an idea of what they want to do with the property prior to taking ownership. However, experienced investors know that there is always the chance of a snag or a pitfall along the way. You may want to do a quick, easy flip but it may not work out that way. You may stumble across a problem with the property that adds to the budget and causes you to shoot for the high end of the market. You may not be able to sell for the price you anticipated, and you are forced to think about renting for a year or two. Any and all options with the property should be put on the table before making an offer. Most of the time things will go your way, but you need to protect yourself if they don’t. The more property options you have the less likely you will box yourself into a corner.
- Risk vs. Reward. There is something in business called opportunity cost. It is essentially the loss of potential gain when an alternate path is chosen. As we stated, there is nothing wrong with making a small profit on a deal than moving on. However, the risk must always be in proportion to the return. Outlaying large sums of capital only to net a few percentage points doesn’t make sound fiscal sense. What typically ends up happening is if you wait a little bit a better opportunity will come along. Instead of having all your money tied up in a project, you will be able to capitalize on the opportunity.
- Lack of Knowledge/ Experience. There is a fine line between taking a leap of faith and knowing what you don’t know. Taking action is great, but you also need to know your limitations. The hard truth is that rehabbing real estate is hard. Not everyone will dive into a property and walk away with significant profits. If you do not know what you are doing, there is the chance that you can lose money. You are much better off partnering with someone that has experience until you learn the ropes. The alternative is trying to learn a business that investors who have been in business for years still struggle with at times. Taking action is great but pick and choose your battles.
There is nothing wrong with walking away from a deal. If you don’t think you can turn a profit, sometimes the best move is walking away and waiting for the next one.