Most “surprises” that brokers come across when closing a deal are things that nobody bothered (or knew) to surface early - the types of things you’d expect to be fine after due diligence is completed.
Any CRE broker that has done more than a handful of deals has lived this reality: the deal that everyone thinks is squeaky clean can have bodies buried in the field.
I’ll set the scene.
Your deal is on cruise control. Escrow is opened, the buyer’s deposit is in, due diligence is delivered, no material questions or concerns have arisen from the buyer. In fact, the buyer is excited. The seller is relaxed. The attorneys are working towards closing.
Then, out of nowhere, something “comes up.” These issues can be countless in nature but off the top of my head, here are a few common deal killers:
The deal doesn’t die because the issue exists. It dies because the issue shows up at the worst possible time, with the least amount of runway to generate a solution, and when everyone is already emotionally committed to a version of the deal that no longer exists.
There is a difference between a problem and a surprise, and the difference is massive.
It didn’t take me long in the business to realize one persistent truth: I can solve almost any problem in a transaction when I have the time to resolve it. I can’t solve catastrophes.
Every deal has risk. Risk is not the problem. The problem is when risk stays hidden long enough, it becomes a last-minute surprise.
Surprises trigger three things simultaneously:
Most “hard” deals aren’t hard because they’re complicated. They’re hard because a major issue was discovered too late to handle calmly or with enough time to plan for solution. Human nature tells us that panic will kick in. Your odds of getting into the end zone just became a longshot.
Give me 60 days and I can work through almost anything. Give me 6 hours and we’re not working to solve a problem in a thoughtful and strategic manner; we’re in full-blown crisis management mode.
Surprises aren’t random. They’re usually caused by one of four failures or conditions:
This boils down to one party not recognizing what is most important to the other.
A simple example of this would be a seller signing a lease extension which caps expense recoveries because his/her expenses haven’t moved meaningfully in 20 years and, therefore, not recognizing the economic impact the cap will have on the new owner after the property taxes are reassessed. No big deal for the current owner. Massive deal for the new owner. The seller presents this new extension as more long-term security for the buyer thinking he just did a great thing. The buyer will fail to see the benefit and most likely ask for a price reduction.
Now you are faced with mismatched expectations - the worst spot in which a broker can find themselves.
This falls under the “This is what I thought was best so that’s what I did to help you” category. It sounds so dumb, but I’ve seen it happen several times and it led to a price reduction every time.
One last thought on this example: When I’ve seen this happen, it usually stemmed from the seller having a long-term relationship with the tenant and wanting to protect or do them a favor. It’s a very noble stance, but while helping the tenant they were subsequently shooting themselves in the foot. Unsophisticated ownership decisions.
Sometimes it’s intentional, but that is basically fraud, and fraud is rare. It is not always malicious, just sometimes these surprises are buried or unknown.
Owners don’t wake up thinking, “How can I kill my own deal today?” or “How can I screw this guy over?”
They wake up thinking, “That’s not a big deal,” or “That’s how it’s always been,” or “We’ll deal with it later.”
The issue isn’t that something exists. The issue is that it wasn’t identified early enough to price it, protect against it, or plan around it.
An example of this I encountered several years ago was an owner granting himself an easement over the driveway of his front parcel for ingress and egress for the benefit of his back parcel. He first sold the front parcel to a third party (subject to said easement). A couple years later, a buyer showed up and went under contract to buy the front parcel from the new owner. That same buyer then entered into a contract to purchase the back parcel from its owner (the same guy that sold the front parcel). At the time of sale, the front parcel was storing their trash receptacles on the rear parcel (the owner of the rear parcel was cool with it since he was the guy that sold them the front parcel and the back parcel was only being used as an excess parking lot).
No big deal, just move the trash to the driveway on the front parcel, right? Wrong. The easement granted to the back lot precluded any permanent objects being placed on the entirety of the driveway.
It didn’t take long for the new buyer to realize he was in the driver’s seat. All the leverage was in the hands of the buyer even though he could unilaterally solve the problem after he closed the purchase of both parcels (knowing you can leverage an issue that each individual seller has which won’t be an issue for you at all after closing is a really nice position to be in if you can find it). The oversight cost the owner of the rear parcel millions of dollars in value. The owner of the front parcel wasn’t going to take the hit. He would have sued the owner of the rear parcel for revoking the trash storage and not addressing the problem before agreeing to sell. The owner of the back lot had no choice but to agree to a lower price. Brutal.
Most buyers handle due diligence in one of two ways: 1) like they’re cramming for a final; or 2) trust the word of the broker / seller.
Neither are advisable.
When due diligence is rushed, the buyer doesn’t truly learn all aspects of the investment he/she is making. Important items are not understood or, worse, totally unseen. Missed items become problems later when (if) they are discovered.
I don’t think I need to explain why trusting the word of the seller and/or broker can lead to problems.
“This tenant is really hard to get a hold of, but he pays his rent like clockwork. You can see that in my tenant ledger. You don’t really need an estoppel from every tenant. Everything is good.”
Everything is good. Famous last words. Caveat emptor.
One additional note: Unless you are a highly seasoned professional investor, I implore you to involve a qualified attorney in your transaction for PSA negotiation, due diligence (especially lease review and title matters such as CC&R and survey review), suggesting policy endorsements, loan document review, and closing documents.
I have lost count of the total negative value impact and number of people who brought self-inflicted pain upon themselves by refusing to pay an attorney. Penny-wise and pound-foolish.
This is the big one. I’ve said it a million times. Let’s look at three separate Jack in the Box properties (for example). Each one has the same annual rent, increases, lease term, lease guarantor, and location quality. To the untrained eye, they have the same value.
Nope.
A single sentence, or even a single word (inserted or omitted) can make all the difference in the world. If you don’t know what you are looking for, you will most likely make a mistake.
If you haven’t read 1,000 leases and watched the ramifications of every single lease provision play out another 1,000 times, do not travel this pathway alone. Hire a pro like an attorney who specializes in lease negotiations [hit me for the best rec in the biz] or a superstar leasing broker, and do it early in the process.
Waiting will lead to panic. Your deposit could be at risk after you finally decide to have your buddy read the lease.
Any lease that you have to live with for more than 5 years (+/-) should be scrutinized as if you will have to live with it forever. A bad lease isn’t just an ownership inconvenience, it is a nightmare.
Sure, a bad lease can adversely impact value and cash flow. That’s terrible. It can also impact optionality, marketability, and your quality of life. Just when you thought you bought a passive deal that will give you that coveted "mailbox money” you find out you actually bought a job.
Read every word of your leases. Even better, have an experienced attorney read every word of your leases at the same time as you read them. Compare notes. Live to fight another day.
Here’s the good news: In almost every situation, the “problem” isn’t really that bad. The solution usually comes down to keeping a cool head, diagnosing the most adverse impact the issue could present, pricing that risk, and then presenting it to the other side in a reasoned and quantifiable manner.
Timing kills deals in more ways than one. Having a big issue show up late in the game feels like administering triage on the battlefield. It feels catastrophic because nobody has time to normalize or solve the "emergency."
The most valuable thing you can give a client isn’t perfection, it’s certainty. Certainty is what keeps deals moving.
I have seen so many brokers try to bury problems and hope they are never discovered. That tactic never works. The better pathway is to look for all the ways the deal can go off the rails, then present and discuss each and every one of them with your client.
Deliver bad news first - always.
Not only will you gain trust, you will increase your probability of success. Any subsequent “issue” that may arise will not be perceived as a catastrophe, it will merely be seen as a speed bump in the process which is being shepherded by the trusted advisor (you).
Do Not Be Afraid To Ask The Questions To Which You Don’t Really Want Answers.
I can’t stress this enough. I watch people that should know better ignore asking obvious questions because the real answer kills the deal. These people actually think that playing ostrich and burying their head in the sand will lead to a positive outcome.
Sure, your super duper email campaign and pretty marketing brochure will certainly supersede the prescriptive easement claim from the adjacent property owner. The only place you are heading with that strategy is to a lawsuit and to your bank to withdraw $50,000 to pay the deductible for your company’s E&O policy. What a complete waste of time.
This is where the best separate themselves from the rest.
They separate themselves by being the person who reduces surprises early and in a manner that provides the free will and optionality to walk away from a deal they know will not be worth their time or energy.
That means building a simple but unwavering habit: dig in early and ask the tough questions.
Change your mindset from “I’m afraid to ask questions where the answer may kill my deal” to “I aggressively and persistently ask questions which will give me the answers I need to make the decision to continue on or walk away.”
Think of it this way: your job is to get to “no” as fast as possible. If there is a “no” anywhere in the process, I want to know about it as soon as possible. Avoiding hearing a strong “no” to get an uncommitted “maybe” is fool’s gold. You are kidding yourself.
Pursue clarity tenaciously.
Because the truth is: Problems don’t kill deals. Surprises do.
