When purchasing a new property, it is always advisable to intend to close without requesting any credits. Sometimes things arise during the inspection process that cannot be resolved or would make it a terrible deal. Yet, there is power in the ability to say no, even when you are incentivized to say yes.
There are several reasons you may not be able to move forward with the deal, although you should take steps beforehand to minimize any potential surprises. It’s essential that you do everything possible to ensure it’s as close to a sealed deal as possible beforehand.
This list of items you should review before signing an offer:
1.) Verify Square Footage (measure units)
2.) Verify Unit Mix
3.) Physically walk as many units as you initially can
4.) Rent Roll
5.) 12-month Profit & Loss
6.) Create your 12-month budget vetted by our manager
7.) CAPEX estimates vetted with a contractor
8.) Delinquency Report
9.) Insurance Quote
10.) New Property Tax Amount
Usually, if you have the above before an offer is sent, it weeds out many potential issues during the escrow process. Once you have it under contract, there are typically two main reasons why the deal may not go through. Either something comes out during the inspection process, or there are title issues. As for the title, there could be a lien against the property, but if it’s not significant, it may simply be an instance where the seller pays for it, and you can move forward. At times, it can be substantial enough to kill the deal. You always have an out to get a full deposit for any title issues.
The Main Reasons for Deal Cancellation
The main reason for canceling, though, is if something comes up during the physical inspection. If it’s something small, then you should have enough wiggle room to absorb it. If it’s significant, as in one deal we worked on, we discovered during inspections that the units were 25% smaller than initially advertised by the seller. That’s how measuring the units became part of our pre-offer due diligence. Luckily for that deal, though, we ended up getting a discount for the seller’s mistake, which helped close the deal.
At other times, the damage can be so immense that it doesn’t even make sense to pursue a credit. It’s a good idea to get accurate estimates from your contractor beforehand. The issue is usually before a contract is signed. You may not receive all the due diligence documents, have limited access to the property, and will not pay for the thorough inspection until you have it under contract. Therefore, some things will only become known when you delve into them. However, try to budget for surprises that could come up. At times, the surprises are just too big. You might try to get credit if something significant wasn’t disclosed or easily visible, such as plumbing, electrical, roof, foundation, or sewer issues. If you had grossly underestimated the work, then usually, it’ll just be a pass. However, this is a place you never want to get to.
Make Sure It’s a Deal Before Spending the Effort
Ultimately, you do everything you can to make sure it’s a deal before investing any more time or expense. It can negatively affect the relationship with the broker, and they may be less inclined to bring you future deals. Additionally, having an experienced manager on your team will help identify any red flags. Ultimately, if you go through the process thoroughly and communicate professionally, you should be able to maintain a strong relationship with both the broker and the seller.