Although there are numerous reasons why a commercial real estate may go sour, there are still steps you can take to try and recover the deal.
There are several reasons why deals fall through. Below, are some of the most common reasons why even some of the most promising deals fall through, and what you can do in order to try and save the deal.
Lost Financing
This is perhaps the most common, as often buyers are relying on bank mortgages or private lenders to help them leverage a deal. Sometimes it’s a matter of not being able to raise enough money. Occasionally a lower appraisal for the value of the property in combination with a seller unwilling to lower the price to fall in line with the appraised price is at fault.
As a seller, you can avoid sudden surprises by ensuring you ask the borrower for documentation that proves their ability to pay. These include the buyer’s personal or LLC financial statements, credit rating and credit history, and a commitment letter from the lender detailing the payment amount. You should also consider placing mortgage or purchase contingencies in the contract of sale.
As a buyer, it’s critical that you have all the numbers when determining whether or not the deal is right for you -and that includes calculating several scenarios. It’s also a smart idea to have several sources of financing lined up, so if one falls through, you don’t have to go through the whole vetting process from the beginning.
Sudden Changes In Federal, State, Or Local Laws
Navigating the waters of federal, state, or local laws can be difficult enough. However, when the purchase or sale of a property depends on a new law being enacted or an older law being abolished, expectations can be quickly be dashed.
Between environmental regulations, land-use restrictions, easements, tax abatements, deed and zoning restrictions, and a host of other laws, there is plenty of opportunities for things to go wrong.
Although sometimes changes in laws or unavoidable, thorough due diligence can help anticipate potential roadblocks.
Partnerships (Public-Private or Private) disagreeing or dissolving
Disagreements on how the property should be used, how much leverage to use on a property, changes in investment goals, or personality conflicts are some of the reasons why partnerships between private individuals or a corporate entity may back out of a deal.
Partnerships between a developer and the government are even trickier to navigate, since the vision of what the government or civil parties would like to create may not always match up with what a developer feels is feasible. It’s not uncommon for a developer to jump through endless political hoops only to find out that an economic turn or public opposition turn a project from promising to unworkable.
With private partnerships, sellers will want to examine the track record of the partnership to see if there is a history of successful deals. Partners who have closed a number of deals are more likely to follow through on a deal than those who are newly formed. Public-private partnerships are much more complicated; as a developer, in addition to ensuring you partner with an experienced investor before you enter his arena, you will need to make sure you have a thorough understanding of the political underpinnings of the local market.
Not Bringing In Experienced Professionals
Occasionally a buyer or seller attempts to handle a deal without bringing in experienced professionals. Bringing in the lawyer you used to file your divorce won’t cut it. An experienced commercial real estate broker not only has inside connections on the best properties, but they are also knowledgeable about financing, can point out potential due diligence pitfalls, and much more.
A team of experienced professionals will include a broker, lawyer, accountant, and a mortgage broker or private lender.
Another important factor in ensuring deals go through is making sure you have the skills needed to be a successful negotiator.
Prepare Beforehand
Negotiating a successful deal requires you to be intimately aware of the other party’s needs and interests. Make sure you know why the other side is investing in your property or choosing to sell. Not only does this require a detailed investigation of the buyer or seller, but it also means you’ll need to listen carefully to what is said, and what is left out.
Even informal conversations can yield a wealth of useful information.
Once you have an understanding of the other party’s goals, you should sit down and plan out your response to a variety of scenarios. How will you respond if part of the financing falls through for your buyer? Are you willing to accept a lower price? If so, how low are you willing to go? What points in the contract are you willing to be flexible on, and which ones are absolute?
Preparing beforehand makes it easier to stay calm and collected when difficulties arise and prevent you from making poor decisions because you feel pressured time-wise or financially. As a bonus, it makes it easier to sympathize with the other side since most of us have been where they are at one time or another. And when you keep emotions out of the deal, you are much more likely to succeed.
