When you make an offer on a building, what you’re really saying to the owner is: “Please give me the exclusive right to consider buying your building at this price for the next 21 (or 30 or 60) days.”
For an owner to accept, she needs to be ok with your price and, crucially, as confident as she can be that you have the intention and ability to deliver your price. Otherwise, she has to worry that you’re going to tie-up her building, waste her time, and then not have the dough to close.
In order to give the owner confidence, the listing broker will usually insist on seeing “proof of funds” from the buyer.
The proof of funds is typically a bank statement or something similar showing liquid assets (cash, stocks or bonds) at least equal to the amount of cash the buyer requires to close the transaction. In other words, if you’re offering $1MM for the building with 30% down, the listing broker is going to want to see at least $300k in liquid assets before allowing the seller to accept the offer.
The above is totally fine for rich people, but it creates some real hassle for money managers like me. Why?
I use other peoples’ money to make deals. In order to get the ability to use that money, I usually need to offer a preferred return on it. I say something like “If you give me your money, then I will give you a 5% (or 6% or 7%, whatever) return on the money for the time I have it (plus upside, obviously), before I get to take any of the profits.”
Can you see how this creates a problem for me?
If I get $2.5MM committed on a fund, I have zero interest in calling it down from the investors until I have something to buy. Otherwise, I’m sitting there with $2.5MM in a 0% checking account and accruing $10,416 / month in preferred return (assuming a 5% pref) which I will owe my investors before I see a dime of profits.
So, because I refuse to call money down until I’m confident I’m going to close on a deal, I always end up in these annoying conversations with listing brokers, where I need to convince them that I actually have the money and they think I’m full of it.
What’s especially annoying about this problem is that, of all the potential buyers with whom they might go under contract, I’m nearly always the one most likely to close on the terms I’m offering, because:
- I’ve done a million deals, so I know before I make an offer what I’m going to do with the building and how much it’s going to cost;
- Because I’m going to renovate, I don’t care that much about the physical condition of the building (so I’m not going to ask for a price reduction because the light switches don’t work); and
- Because I do so many deals in such a small area, I try as hard as I possibly can not to chip price, ever… because getting a reputation for doing this is a sure way not to be able to do any more deals going forward
Compared to your typical lawyer or doctor who has $2.5MM sitting there in cash and does a deal every 2-3 years, I’m far, far more likely to actually close.
The good news is that, because we close almost every single time, over time, more and more brokers are seeing that we’re serious. And the second time around, they trust that we’re going to do what we say we’re going to do.
(Obligatory legalese: This post is not a solicitation of investment or an offer to sell any security.)