Sometimes, instead of pulling the trigger on a deal, you’d be much better off pulling the plug.
There are red flags you need to look for that can reveal when a property seems too good to be true. Depending on the specifics, issues such as contamination, structural problems, deferred maintenance, back taxes, accessibility issues, and more can all make a property an unviable investment.
First and foremost, do your due diligence when exploring a project.
If you’ve purchased the book, you’ve gotten access to my Due Diligence Checklist to help walk you through the process.
At its core, due diligence is the process of identifying any problems and determining whether they’re too significant to be able to execute your business plan.
The presence of one or more of these problems in a property, while a red flag, isn’t an automatic disqualification. You may be able to adjust your plan, secure a steeper discount, counterbalance the cost in some way, or otherwise make the deal work.
The important thing is that any obstacles fit within your plan and that the deal makes financial sense at the end of the day.
DEAL BREAKERS ON PROPERTIES
Problems with properties aren’t always deal breakers. In fact, problems should be expected with distressed real estate and are part of the reason you can get such outstanding prices in the first place.
A problem only becomes a problem when it’s financially unfeasible to fix.
One of the most significant issues that could be a potential deal breaker is with the title of the property. The title represents the legal structure and ownership of the property or the rights to the property. Owners, lien- holders, property tax assessors, federal taxes, equipment (solar panels, cell towers, water systems), tenants, and most certainly, lenders have potential claims to the title and, depending on the jurisdiction, certain rights and processes in which to force a foreclosure or “claim rights.” This part of the process should involve a professional, so I wont go into too much detail here, but you can find out more in Chapter 7 of my book.
DEBT AND TAXES
Another type of problem that can kill a deal is debt, whether it’s owed to lenders or to the state via taxes.
When a property owner owes money and can no longer ser- vice their debt, a ripple effect tends to occur. The owner stops spending money on building maintenance and improvements, which, over time, leads to more problems that need more maintenance. The property grows antiquated and, perhaps, damaged. Then a recession hits and breaks the camel’s back. The property owner decides to sell their building and rid themselves of the whole situation.
If you don’t do proper due diligence, you might unknowingly inherit that debt.
DAMAGE AND HAZARDS
Damage and environmental or health hazards can be another deal breaker—something too expensive and difficult to resolve. A building could have issues with mold, water leaks, electricity problems, outdated HVAC, structural problems, or any number of other problems that can be time consuming and costly to fix.
Issues such as hazardous construction materials can also be prohibitively expensive to handle.
Zoning issues are another category of problems that can stop a potential deal dead in its tracks. The first city in the United States to enact zoning codes was Euclid, Ohio. The city planners in Euclid envisioned how their area should be laid out and decided on certain rules, such as factories not being placed directly next to homes. This took place in the early 1900s when, understandably, they didn’t want smoke pouring out of a smokestack and into a hospital window. After Euclid, zoning codes became prevalent across the entire country, and they vary by geographic area.
Thoroughly researching a property and objectively weighing any red flags against your investment plan is the only way to minimize your risk and set yourself up for success. Maybe it would be exciting to own that beautiful old building, but as an investment property, it’s a business.
It’s dollars and cents on a balance sheet, and if those numbers don’t add up in your favor, you absolutely should not do the deal.
Don’t forget to snag a copy of my new book Catching Knives.
Packed with practical advice and personal anecdotes, this is your guidebook for embracing the next economic downturn and navigating the risk of distressed investing. With the right strategy, you can be one of the few who lean into hard times, make the most of them, and take advantage of once-in-a-generation opportunities.
LinkedIn: Jake Harris