I was recently speaking with a friend and they mentioned a real estate deal they are currently working on and the many challenges they are having with it.
This particular deal is a commercial property they have under contract through the bank because it is a foreclosure.
However, the lessons and principles of purchasing remain the same no matter how you are purchasing a property, either through the conventional purchase process or the foreclosure process.
1) Get Up-Front Investor Commitment
My friend has multiple partners who are willing to do a joint venture on this deal. Although I don’t have all the details, my sense is that one or more of the partners are getting cold feet just before closing.
The lesson here is to make sure you have all potential partners sign a “Letter of Intent” at the beginning of a deal negotiation.
This sounds like a good idea, but the reality is a Letter of Intent is not a very strong legal document.
My recommendation would be to have the partners “show me the money”!
In other words sign the letter of intent AND give me your share of the down payment with specific instructions to a lawyer that the money can only be used for the purchase of an agreed property.
This would drastically reduce the chance of your potential partners backing out from the deal just prior to closing. Be sure to talk to your lawyer regarding how to structure this properly.
2) Keep Trying For An Extension
Another issue my friend is having is that the bank is not willing to extend the conditions on financing.
Why would the bank not agree to an extension? It turns out they discovered there is a back up offer on the property.
Since my friends are unable to know what is in the back up offer they can only guess. The new offer is likely either for more money or it has fewer conditions which the bank feels can be met more easily (or perhaps it’s a combination of both).
So what can they do?
It’s difficult to know exactly because they don’t know the contents of the new offer. So what I have suggested is that they ask for an extension on financing and in exchange offer an additional non-refundable deposit.
This should satisfy the bank if their concern was that they didn’t think my friend was going to be able to waive their conditions.
If the bank still refuses to extend the finance condition, then my friend should assume that the new offer is for more money. Again, they could ask for an extension and increase the purchase price by whatever amount they feel the property is actually worth.
This is a sort of “penalty” for not being able to waive their conditions on time. However, if they think the deal is worth it, this could be a way to save the deal.
3) Have Multiple Money Sources
This brings me to the question of “Why can’t they waive the financing condition” on time?
I’ve been taught and it was recently reinforced by my new “Rich Dad” that you borrow money when you don’t need it.
When you put yourself in the position of having to borrow money to close a deal, then you have lost the control of financing and the bank controls your destiny.
When using the bank’s money for the purchase of a property, will the bank allow you to be creative? Absolutely not, especially in today’s market.
should be looking for money
before they need it
And they should have
That way, you won’t miss great opportunities when they present themselves.
And it can also allow you to become more creative with the purchase of the property because the bank may not be involved initially.
I have heard Robert Kiyosaki say that we should all be trying to position ourselves with as much cash as possible (or access to cash) so that we are able to take advantage of some of the great deals which will be coming our way.
The more cash available to you, the less dependent you will be on the bank.
In the end, if my friends are unable to purchase this property, I’m sure they will be very disappointed but I know they will find more deals in the future.
The lessons they’ve learned on this deal will become extremely valuable when they’re ready to make their next offer.
What lessons have you learned when financing deals?
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