Moses Kagan on Real Estate

Walking away

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We walked from away from a deal yesterday and it still hurts.

This building looked like a winner for us: Huge units, high ceilings, incredibly cheap price, tenants who we thought we could buy out.

But there wasn’t any parking and the neighborhood was improving but not great.

There’s an art to evaluating these kinds of deals. You ┬átest all of your assumptions about costs and (eventual) rents. Maybe you spend more, make the units nicer and get higher rents. Maybe you try to save on the renovation, understanding this will cost you on the rents. But you have to do all of this model-flexing without pushing your assumptions beyond the realm of reality.

In this case, the fact that there wasn’t parking meant that, in our opinion, there was a cap to the rents we could charge, no matter how creative we got in making the units amazing. And, since our diligence uncovered a lot of problems with the building systems, there was no way to just cheap out and go for a low cost / low rent scenario.

There are deals out there, but it’s not like they come along every five minutes. So it hurts to let one go. But we deal in risk and reward, and you have to make sure that there’s enough upside in these things to make it worth the potential downsides. In this case, we had to let it go.

There’s a postscript here: Our biggest investors heartily congratulated us for our decision. We haven’t worked with them for very long, and I think it gave them comfort to know that we walk when things don’t make sense. Good to get further confirmation they’re the kind of people we want to work with.


Written by mjkagan

09/26/2012 at 7:25 am

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