Are You a Dealmaker, or a Tirekicker?
There are generally two types of players in this game:
1) Dealmakers, and
Tirekickers look at dozens of properties and talk a great game, but don't really know enough to take decisive action. Dealmakers know how to close the gap between the offered and asking price and successfully close deals.
A Tirekicker has little knowledge of the market or what he is looking for. A Dealmaker knows where to invest because he has researched the market, knows what to look for, and doesn't waste time looking at properties that do not fit his criteria.
A Tirekicker has not established lender relationships or developed a business plan and asks every seller for 100% financing. A Dealmaker has existing lender relationships, can bid an all-cash price, or can assume existing loans.
A Tirekicker figures he can manage the property cheaper - not by improving the operation, but by cutting corners. The Dealmaker knows exactly how he will manage and improve the property and anticipates the costs.
A Tirekicker analyzes a property based solely on the most recent annual operating statement. A Dealmaker will examine the trend of operations over several years, eliminate anomalies, and integrate the information with overall market trends.
A Tirekicker will capitalize the net operating income at a "market" rate for valuation. A Dealmaker will be more aggressive and use a rate that reflects their own return and loan requirements
A Tirekicker will base the valuation on the operations as stated. The Dealmaker will use a normalized, forward-looking projection that reflects his operation of the property and the effects of an improvement plan.
A Tirekicker attempts to make one deal structure fit every situation (e.g., seller financing). A Dealmaker finds the seller's most pressing need and structures the offer accordingly.
How to Spot a Tirekicker.
It is often an intuitive judgment, but in most cases, you can size up tirekickers by how they approach the deal. They make low-ball offers before they even look at the property. Or they fill the offer with weasel clauses and a laundry list of contingencies. They have no bank references or track record that indicates they can perform. Tirekickers are often unsure of themselves, and it shows.
How to spot Dealmakers
True dealmakers are easy to spot. A true dealmaker knows his financial capacity in cash and credit; he has criteria for property type, market, and minimum return requirements. He uses the tools of financial measurement to quickly evaluate the property, then formulates a game plan and deal structure that allow him to achieve his goals.
He doesn't grind the seller for the last dime of price concessions because he knows that the real proof of the deal is in the ability to make the plan a reality.
Interestingly, years of experience does not automatically mean a buyer is a dealmaker, nor is a new investor a guaranteed tirekicker. The determining factor is the extent of the investor's preparation. In a nutshell, the dealmaker has taken the time to think things through.
He has a firm grasp of his financial capacity and knows what, where, and when he wants to invest. He has a business plan that addresses those criteria, and taken the time to form lender relationships. In short, he is ready to act when the opportunity appears.
An Example of Dealmaking
The seller was offering a "B" property in a good market at a reasonable price. Within the first couple of weeks it was on the market, there were five written offers. Two were low-ball, contingency-laden offers from pure tirekickers. The remaining three offers were very close in price, but widely divergent in terms.
The first buyer had not seen the property, wanted the seller to finance 90% of the price, and asked for the names of available managers in the market.
The second buyer did a property inspection and seemed financially qualified, but wanted the seller to wait until he could put his current property on the market, find a buyer, and complete a 1031 exchange.
The third buyer performed a personal site inspection, then made an all cash offer. His terms included a thirty-day inspection period and closing within thirty days after acceptance of the property condition, with no contingencies other than clear title and survey. The property fit his investment criteria for location, size and management requirements. He based the valuation on the current rent roll and normalized operations under his ownership, and used the pre-closing period to form an improvement plan to increase income.
As you may have guessed, the third buyer is the one who got the deal. This is a shining example of a dealmaker at work.
Four basic steps to structuring great deals
If you want to build significant wealth in commercial real estate, you have to take the time to think things through. Great commercial real estate deals don't just happen; they are created by dealmakers, those who have taken the time to develop a strategy to accomplish their investment goals. What does such a strategy look like? It's simpler than you might think.
Get your personal financial house in order. Orient your financial affairs to serve your purpose. Only then, can you be ready to act when opportunity appears.
Form your criteria for property type, size, and location. As the saying goes, if you don't know what you're looking for, you won't find it. Observe the local market and identify opportunities within your capacity.
Once you've identified a potential deal, learn how to accurately value a property based on its condition, your return requirements, and your borrowing power. Decide whether a deal is good based on fact, not emotions or the opinion of the moment.
And finally, learn how to structure deals and make offers too good to refuse. Act decisively, and then reap the profits.