What I learned from my first unsuccessful apartment closing

Since the end of 2018, I have been fully immersed into learning the ins and outs of apartment investing. I have consumed vast amounts of content ranging from books, periodicals, newsletters, while also listening to over 1000’s of hours of podcasts and webinars. I have been to seminars, joined mastermind groups, and can confidently say I have one of the best mentors in the business. Also, during this time, I found and partnered with two likeminded individuals.  Our individual strengths and weakness allowed for us to equally balance the responsibilities of finding and eventually purchasing an apartment complex. With all that classroom training, we took to the streets to prospect, underwrite and ultimately make offers on properties that align with our underwriting standards and principles.  The road to find a property has not been an easy one in this market, nor will it ever be in any market. We have attempted to kiss many frogs in my market over the past year plus.  If you continue to read further, you are going to know that we must kiss many more.

In October, we got our first apartment under contract. We FINALLY did it, we had a multifamily apartment under contract.  The property aligned with our principles, met our criteria and most importantly it should be cash flowing from day one. We celebrated for a day. However, we knew we needed to hamper down and get the ball rolling. With the price tag on this apartment complex, we knew we could not privately fund it, so decided to go the syndication route.

After executing the purchase and sale agreement, we were ready to embark on the due diligence process. We contacted our real estate attorney, found a SEC attorney, and dialed up our lender. There are many learnings from the due diligence process that I feel deserve another post from me. Everything was going according to plan. The financials were in line. The owner did a fantastic job on rehabbing and maintaining the property. Check on physical due diligence. We let the lender know to continue to progress, as we had lead inspections and phase I reports lined up. All going great! Then we had to wait with bated breath for our appraisal.

As I mentioned earlier, we got this property under contract in October. We allowed ourselves ample time to close, but with the way the calendar fell there was multiple holidays in between the expected date of closing.  Due to the time of the year, there were numerous backlogs to finalize the appraisal.  And with all other aspects of the due diligence completed, all parties were anxiously awaiting this appraisal to come in.  We had to exercise each of our extensions that were allowed in our contract (PHEW). On a Friday afternoon, we finally received word from the lender that the appraisal was below the purchase price. WAIT!!! WHAT!!! How could this be? Our team uses a conservative approach in our underwriting. We knew for certain that the appraisal price would greater than the appraisal price.

We found out from the bank’s appraiser that the recent tax assessment would bring up the taxes by forty percent. Our loan amount was lower than expected. Due to this new tax assessment, it would increase the needed down payment amount. In between the increases in taxes and down payment, it would adversely affected all our numbers on the property. What looked to be an above average deal for us, now turned into an average deal.  With this hand we were dealt, we collectively knew that we couldn’t move forward any further. We must protect our investors and ourselves. If the appraisal was below the purchase price, we could terminate the contract without losing our earnest money deposit. We had to move forward and exercise this term in our contract to terminate the contract.

So here we are back at square one again. Should we chalk this up as FAIL? I say yes, because it is our First Attempt In Learning.  There are invaluable lessons we learned through this process.  First of which, Apartment Investing requires one to work as a cohesive team.  It is extremely difficult to try to tackle the entire project by yourself.  One must rely on his business partners to utilize their strengths and eat this elephant one bite at a time. Having a team together allows you to have a sound board and bounce ideas off one another. You can build from each other’s strengths and get to your goal quicker. Included in that team should be a mentor.  They are the experienced investor and provide invaluable guidance on each step of the process. Especially for someone who has not closed a commercial real estate deal.

Next, when syndicating deals, focusing on your capital raise is as important as underwriting the deal.  Apartment investing is a capital-intensive business and getting from verbal to actual commitment is important. You may think that you have money committed but that can quickly vanish once you get to the closing table.  You need to understand your investors and their criteria.  Not every investment is right for the individual, but always stay in contact with them.

Lastly, take a minute to call the local tax assessment office. Understand if the taxes today are the same as last year.  You do not want to run into situation like ours. Do even more due diligence than you thought you had to do. This will help forecast your expected numbers and improve your underwriting skills.

I cannot put a price tag on what I learned from this experience. I am a better investor today than I was yesterday. So, after what occurred, am I going to stop looking at properties, underwrite deals, and make offers! Absolutely NOT! I have a better understanding for what to expect on all properties I look at from here on out.  Hopefully the next time you read a post from me; it will be about a successful closing.