Saturday, August 31, 2013

Can You Trust Sellers and/or Buyers?

Hello everyone and hopefully your year has been fantastic so far and you are looking forward to finishing 2013 on a strong note!  As always, I never throw theory at you, but rather the realities of real estate.

Let me give you a real example that happened not too long ago but it is not unique at all.  This happens time and time again when you attempt to facilitate a deal.  This is why I don't bother with these types of deal structures further.  The funny and serious side of this is that this type of scenario is captured time and time again in various books on the topic and the writer is clearly only writing based on theory and not on real experience.  The books make it sound so simple to facilitate as an intermediary and walk away with a huge profit with little to no effort.  The truth to the matter is no matter how you try to facilitate (and please remember, that there is plenty of effort here because you have to time the deal so that two contracts consummate at the same time, and not just one), the end Buyer and the Seller do not want you to make any more money than what they deem is reasonable.  This amount depends on the individual, but remember, ultimately, you have to satisfy two parties, and not just one in your negotiations.  This is a large and complicated task with many moving parts.  I write this not to dissuade you, but to make it clear that the books on this topic sugar-coat the reality of these situations and do not include the psychological factor that the Buyer and Seller are feeling, which ultimately influences their decisions.

Real Life Example:

I set up a deal where I knew the Seller was motivated.  I negotiated the Purchase Price at $2.5 million and at the same time I had an LOI from a Buyer for $2.75 million.  I then heard that the Buyer wanted to use their own Closing Agent, which would have created problems because my intention was to double close and get the deal done within 5 weeks of contract.  Why would this create problems?  Because "their" Closing Agent would note that my company did not own the properties that they were buying and that I was an intermediary that was double closing.  Don't ask me why this matters, but Buyers get frazzled in this kind of deal because when they find out you don't own the properties that you are flipping to them, until the day of Closing, they get upset.  Don't kid yourself in the vast quantities of trash written on the subject.  Buyers absolutely care about this point.  This is psychology and not anything real to do with the deal.  If we used our own Closing Agent, the situation would have been exactly the same but since they are representing my company, they would not highlight the point that we didn't own the properties until the day of Closing before we flipped them to the end Buyer.  This is the same information exactly, however, it's a question of what is highlighted and what is not.

Instead, we decided to skip the double closing and just show our fees on the contract to avoid any negative reaction from the end Buyer.  From past experience, I knew that neither the Seller or Buyer would accept us making $250,000 on this deal, so to attempt to make this deal work, I offered the Seller $37,500 more and the Buyer a $37,500 price reduction which effectively changed our fee from $250,000 to $175,000, so this is roughly 6% of sales price which I thought would be acceptable to both parties.  I was wrong.

The Buyer requested a phone call with Seller and I was hesitant to allow this before a contract was signed and I did not allow this.  I was led to believe that the Buyer just wanted to ask some basic general questions.  I knew better and waited until a signed contract was provided (it never came).  What happened instead was that the fellow who claimed to be representing the Seller was in fact an intermediary and there was actually a real estate broker representing the Seller!!  All this time I was led to believe this was an off-market deal with no licensed broker representation.  This was a blatant lie fed in my direction.  The individual who claimed to represent the Seller, once he learned the company that was interested in buying the package, looked up in the public records and found the name and phone number of the end Buyer and set up a phone call directly between Buyer and Seller without our involvement or our permission.  Now of course, once the end Buyer and Seller talked and we didn't have a signed contract, we had absolutely no control anymore.  We also learned that the Seller did not want to agree to pay our fees and actually he didn't want to pay ANY fees.  It's interesting to note that until the end Buyer and Seller talked, the Seller made no comment on our fees.  Once they got what they wanted (talking to the Buyer directly), they didn't need us any more and then told us exactly what they thought.  Funny isn't it?  No, it's not funny.  We spent several months on this deal and several potential Buyers fell through the cracks.

The moral of the story is don't trust any Buyer or Seller to do anything that represents honesty or integrity.  Sellers will LIE.  Buyers will LIE.  These people don't care about you or the number of hours you have put into any deal to work to a successful Closing.  They are concerned only about themselves and the outcome for themselves, just as you are focused on what's in it for you.  Cordially, and professionally, never forget these axioms.

Here's a simple addendum to a contract that you can put in your purchase contracts to protect yourself:

"Vesting to be determined at Closing."  Simply put, this means you reserve the right to determine the Buying entity at Closing.  This way if you are doing a double closing you don't advise anyone of the final Buying entity until the very last minute.  This protects yourself and it motivates the Seller to sign closing documents because by the time they learn the Buyer's name, the money for the purchase is already in escrow.  When you are asked why you are putting this clause, just tell them that you are consulting with your accountant and tax attorneys to determine the best way to buy the property(ies).  This puts the concern off of you and onto a professional third party and this should suffice to answer the query.

Contrary to popular belief and written Guru documentation, Sellers and Buyers always worry about how much money you will make in a deal.  They are very focused and concerned to maximize their gains and to minimize yours.  DON'T EVER FORGET THIS!!  This is the truth based on personal experience over and over again.  Don't believe the mounds of b.s. written on the topic.  If you don't heed my advice, you will learn the hard way that Mr. Alex was in fact telling the truth about this.

Until next time....Enjoy the rest of the Summer as Fall will be with us officially in about three weeks.

1 comment:

  1. Fern Ellis Thacker, Associate BrokerSeptember 3, 2013 at 3:36 PM

    Detroit a State of Financial Ruin

    Bankrupt: reduced to a state of financial ruin. By definition I find it hard to believe that Detroit is bankrupt. Dan Gilbert has Quicken Loans and thriving properties. The Illitch Empire has the Fox Theatre, Comerica Park, owns the Red Wings and has numerous parcels of land in the downtown everyone that has been the talk of the town lately. Roger Penske, another high-power mogul brings formula one racing to Belle Isle every year. There is so much hope and prosperity….we are far from financial ruin.
    Amongst the everyday person, could be the next Dan Gilbert or Mike Illitch. Detroit has so many talented people that consider it their hometown including Henry Ford, Thomas Edison, Ralph Bunche, John Dingell, Francis Ford Copola, Eminem, Stevie Wonder, Steve Ballmer, Albert Kahn, James Earl Jones, Diana Ross, Anita Baker, Bob Seger, Kid Rock and thousands more. These people have left lasting imprints for generations to come.
    It is time for Detroit to do the same. We must invest in this next generation to make the difference. The time is NOW to invest in our young people. We the people of Detroit cannot be ignored; we have plans for Detroit this is not the end but the beginning of our renaissance. We are all inspired by that positive energy that truly does exist. We are further inspired by our President’s lead for “Strong Cities, and Strong Communities”
    This is for those of us who still love Detroit
    Detroit needs new innovative industries and this would be fantastic for all Michigan. I’m reaching out to you who still love Detroit. The world cannot let Detroit become a ghost town. The first rule of business is to make your profit when you purchase not when you sell. Please contact me and let’s bring new innovative industries again to Detroit.
    I pledge to assist in any way possible to direct our collective energies to rebuild Detroit. Help Me!
    Thank you for letting me vent.
    Fern Ellis Thacker, Associate Broker
    StarVision, Special Purpose Real Estate, LLC