The deal size problem


Here’s something true about real estate: It is much easier to find highly profitable small deals than highly profitable large deals.

Why is this true? Well, the smaller the deal, the more likely it is that the owner and /or listing broker are inexperienced / inept. Those kinds of decision-makers frequent screw up the management and sale of assets, creating opportunities for large profits.

On the other hand, larger assets tend to be controlled by sophisticated players who do a good job extracting close to maximum value, whether from on-going operations or from sale processes.

My business is all about deploying capital into profitable opportunities. Can you see the problem I face?

I am constantly tempted to reach down into smaller opportunities where I can see the potential for out-sized profits, at least on a percentage basis.

And yet it is extremely inefficient to deploy capital in such small chunks… you need to do a ton of deals to equal the capital deployed in one big one.

So, I constantly look for big deals to do and face some pressure to try to live with worse numbers, because doing big deals is very efficient from a capital allocation perspective.

What’s the solution? There isn’t one. I will continue to try to grab the absolute best smaller opportunities while getting involved in only those larger deals where the numbers work (even if they don’t work as well as the numbers on the smaller ones).

That kind of discipline is, I think, what separates someone who wants to have a long career doing this from someone who wants to make some very large heads-I-win-tails-my-investors-lose bets, cross his fingers, and pray.