Contracts & Loans

I’ve only been in the workforce for 6 years, mostly in the startup scene. I stay in the industry because I love being around intelligent people and founders, and of course a variety of clients — I want to learn as much as possible and apply it to my own business. So far I’ve sold to: seniors living on social security, multi-millionaires, software banks, and subprime borrowers.

Here’s what I’ve learnt: the person willing to walk away almost always wins.

Something tells me it’s to do with confidence & intelligence. The person who has the intelligence to know when a deal is bad, and the confidence to voice their concern or know backup options, has less to lose when saying no.

I stress to all my clients: be willing to walk away. In a future post, I’ll write about one of the scarier things in REI: ‘Specific Performance.’ Specific performance is a clause that dictates all parties have the intention of moving forward; non-performance can be prosecuted. Your broker can sue you for specific performance if you walk away before the closing of a large deal — assholes lol.

A couple of weeks ago, I touched on what could go wrong in a RE transaction by focusing on agents and deals, today I’ll focus on contracts & loans. Contracts & loans have less to do with emotions, but still have plenty of dynamic variables.

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(1) The contract

Retaining your own CRE attorney should be a strict requirement whenever you begin making offers. Your attorney is going to be expensive, but better a $50k fee than a $5M mistake.

Most contracts are boiler plate, but they’re generated by either: buyer, or seller. These are 2 separate sides of a coin, each wanting to advocate for her position. Although it hasn’t happened to me (yet), I’ve come across situations where a contract was super airtight in favor of one side. Usually, it’s a sign that the other side didn’t consult with a better attorney, or negotiate, before signing.

Here are the most important contingencies in a contract:

(a) Financing - bank approving the loan, buyer has right to withdraw

(b) Title - property title must be clear (no liens), right to withdraw

(c) Due diligence - property/financials review/audit, right to withdraw

(d) Inspection & appraisal - 3rd party conducts physical review, right to withdraw

The above are the minimum things that need to be kosher for the buyer to successfully purchase the property. Whenever a contract is written more in the favor of one side, they’ll try to dictate when contingencies expire. For example, it’s tough to complete a due diligence process in less than 90 days — but a seller may force a 30 day expiration if she’s trying to speed up the process to avoid extra scrutiny of her profit & loss. Sneaky sneaky.

(2) The loan

I try to be friends with commercial lenders. I’m spending their money to get rich — and they want to keep giving me more! Can’t find many friends like that haha :)

The CRE lending space is a lot larger than I initially thought, even the federal government has programs to help businesses purchase their spaces with friendly terms; like an FHA loan for homebuyers. With the good, comes the bad — there are also a lot of shady hard money lenders out there.

I’m not trying to knock on hard money, maybe just a little. But hey, they exist to provide a need in a market that is underserved: borrowers with crap investing history or properties that other banks won’t finance. My issue comes in when hard money lenders account for the risks they’re taking by charging exorbitant, almost usury, rates in hopes to recoup their funds from a shitty deal.

A lot of first time CRE buyers don’t understand their options, and often make the mistake of signing up with hard money lenders that charge: adjustable rates that kick in with high interest, balloon payments, full recourse loans with contingencies to call the loan entirely if criteria sets aren’t met. Things can get sticky very fast when using a hard money lender — I completely avoid them, even if I know a deal is good and I need money fast; it’s just not worth the heartache & stress.

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Everything in life comes with both the good & the bad. What we don’t often hear about with success stories are the multitudes of failed dreams and destroyed lives that stem from making the wrong decisions. Of course the successful real estate investor will preach her courses & mission on their successful youtube channel — failed investors don’t do that.