When Can You Walk Away From An Apartment Deal?
Just because you have an apartment deal under contract does not mean it’s a done deal. In fact, you begin the real work after putting the building under contract. You need to ensure that your dream property does not come with any hidden surprises that may cost you extra money. This is why you need to pay close attention to the property during the due diligence period. Remember that until the contracts have been signed and delivered, you’re not legally bound to the deal. Investing in apartments is a large investment that you should make a sober decision into it without any external pressure. You’re likely to uncover things you didn’t know and the seller never mentioned.
Below are tips to help you know if it is time to walk away from an apartment deal.
Set Your Rules for Trading
If you want to be successful in real estate investment, you need to have a set of written trading rules to guide you. The trading rules depict when to enter a trade and when to walk away, whether at a profit or loss. This rules will help you remain focused even when you get an apartment deal and your emotions are running high. Such rules will include:
- Cash on Cash Return: Have a minimum cash on cash return on an apartment deal
- Overall Return: What minimum overall return will you need?
- The condition of The Property: How much renovation requirement of an apartment building can you tolerate?
- Size and Location of the Property: What size of apartment do you consider and in which location.
These are the main trading rules that you should have in place to help you focus on the right deals for you. You will be able to tell whether to stay in an apartment deal or renegotiate it. Don’t neglect trading rules because they are vital.
Develop a Good Financial Model
Your trading rules will only remain relevant if you model them. Develop a deal analyzer that will help you identify the key metrics of the deal. In the model, input values may include loan terms, renovation fees, purchasing price and closing costs. In the model, you also need to consider your exit strategy and assumptions. Having a good financial model will help you have projections that will determine the viability of the apartment deal.
Re-Evaluating the Deal throughout Due Diligence Process
Perform thorough due diligence continually before the closing of the deal. Check for any new information that may in any way affect the apartment deal. Look for any structural or tenant issues that may affect the deal. You may discover that the apartment is in a much worse condition than you were told before. Or only a few tenants are paying their rent. This is some of the important things that will make you consider renegotiating the apartment deal or walk away.
Determine If You Should Re-Negotiate the Apartment Deal or Walk Away
When using your financial model, you must have an estimated repair cost. However, if the actual repair cost on the apartment building goes beyond double your estimated amount, it may affect your returns significantly. If the returns go below the minimum you require as per your trading rules, then you definitely need to re-evaluate the deal. The seller should either agree to renegotiate the terms of the deal or you walk away. You need to do all of these before the expiry of your due diligence period.