If you are indeed a newbie in this sport of Real Estate Investing, you might be wondering why anyone would ever sell for 60 cents on the dollar, and at times for less. The circular logic goes like this:
If it makes money, then why do people sell cheap; And if people sell cheap, then it must not make money. This circular logic can indeed confuse you into thinking that if something is being sold, and if there’s a deal to be had, then it must be a bad deal – if it were good, then people wouldn’t sell.
Here’s an excerpt from an e-mail I received recently:
“…I am skeptical going into any purchase deal because I wonder why the current owner is selling the property. Why would anybody sell a property that is netting them positive returns? I naturally assume there is something wrong with the property and get discouraged. I know I wouldn’t be selling a property if it was providing positive cash flow…”
Well – I know I struggled with this. It was truly difficult for me to wrap my brain around the notion that it could ever be a good thing for the seller to sell the property for less than what it’s worth, less than what he paid for it, or even sell…I mean, I always try to be a “win-win” kind of guy, and for the longest time I just could not see how asking someone to take a bath was either fair or moral, and if not, how do I ever get a deal… And then, one day – I got it…
WHY DO PEOPLE SELL CHEAP – VENDING MACHINE WISDOM
I am what you call a serial entrepreneur. I fail a lot, but I am always trying new things…
Well, in my infinite wisdom I decided about 6 years ago that it would be a good idea to own 5 table-top mechanical vending machines. These were relatively inexpensive to own and operate, and I thought that I would place one at our music school, and the rest at the area businesses. I had a Sam’s Club membership where I thought I could get the few candy bars and snacks to put into the machines, and with a spread of 1 quarter per snack I figured I’d be retired within three or four years…
Note to self – when finished writing this article, blow it up, print it, and put it up on the wall next to your bed. You need to keep your wisdom in check Ben!
I ended up placing four out of the five machines, but about two years after I started in my vending endeavor, I took the machines back to the place I bought them and practically gave them away. Let me repeat that – I practically gave them away.
No, it wasn’t because they made no money – they made some. In fact, the ROI was not any worse than the high-flying paper markets of the time, but I still gave them away, and was as happy as a clam on the beach at tide-time to do so!
This was about 4 years ago. My twins had just been born. I was just coming back from doing a vending run which required me to lift one of the machines, which I did and felt nothing unusual at the time.
Friends, I found out a few days later that I had blown out a disc in my spine, and that the numbness was caused by the liquid spilling on top of the sciatica nerve in my leg.
Two weeks later the vending machines were gone!
What can I say? This was not a happy time. Not only did it physically hurt, but it hurt emotionally – failing is never fun. And it certainly felt like a big failure. In retrospect, though, this experience reinforced some things I already knew and taught me something new about business and real estate:
1. Plan to Get Paid on Day One
First – never get into a business proposition that doesn’t pay for itself on day one. Yes, it’s OK to buy undermanaged assets and improve them. But, buying into a big fat donut hoping to tern it into a pile of gold is not investing; it’s speculating. Do not do it!
In the case of my vending machines, it would have been smart of me to get placement contracts before buying the machines. Translation to Real Estate – no flipping, no developing, no raw land, and no deals requiring re-zoning, etc. Big money can be made in all of the above, but big money can be lost. I Buy Cash Flow – period!
Do not go for home runs. Pound them consistently down the middle instead. You’ll thank me later 🙂
2. Do Not Rely on Your Body to Stay Healthy
Do I need to elaborate on this? I thought not.
3. Why Do People Sell Cheap – Because They Need To!
Sometimes we just need to be done – you know what I mean? Call it giving up or don’t, but sometimes we just need to be done. When that time comes, it’s no longer about the money; there are bigger problems than money that need solved. Thus –
Why do people sell cheap:
1.Because they are divorcing and the judge ordered it
2.Because they had to declare bankruptcy due to medical or other bills and judge orders the sale (I bought one this way)
3.Because they are now too old and tired to manage
4.Because their partner wants out and they have no money to buy the partner’s stake (I bought one this way)
5.Because they need to pay for their daughter’s wedding and there is equity in the building
6.Because they mismanaged the building and now they don’t have the money to perform the necessary repairs
7.Because their original plan included the sale of the building
8.Because they are ready for an 8-plex and they will roll the profits from the sale of the 4-plex (I bought one this way)
9.Because their job is relocating them to a different city
10.Because they get married to a girl in another state and move
11.etc. You get the point I hope.
When I closed on my new 10-plex in February of this year, my seller ended up taking a loss. He and his wife went in to sign the closing papers while we waited in the vestibule of the attorney’s office. When they came out, he looked me in the eye and shook my hand, and I know what he felt…
Sometimes we just need to be done! When that happens we will welcome a solution. I did, and so did he. I was grateful to get anything at all for those vending machines – I would have given them back for free. He was grateful knowing that he will never have to collect rents again…it was not about the money for either one of us!
I believe that success in Real Estate Investing is a function of our capacity to recognize and be able to solve people’s problems. While a lowball offer is not the best solution for most sellers, there are definitely instances when the seller will practically beg you to lowball and gladly take a loss on the sale…
Can you find one owner whom you can help this year?