Step 7: Close the Deal

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome everybody to show number 124, the Insider's Edge to Real Estate Investing. This is your host, James Nelson. I am principal and head of Tri State Investment Sales at Avis and Young. Thank you as always for joining. I really, really appreciate it. Your ratings, your comments, that's what helps others find this show. So thank you. We are in the midst of a 12 part series where we're talking about the 10 step for developing the Insider's Edge to Real Estate Investing to help you outperform the market. And that is the title of the book that I'm working on with Rachel Hartman, my writing partner. She's amazing. She has helped pen content for Fortune 500 companies and is a regular contributor for the US News & World Report. And together we are writing this book. The anticipated launch is at the end of January and yes, some of you have been asking where can I sign up for pre sales? We're getting very, very close to Announ where you can reserve your copy. Always feel free to check in@JamesNelson.com that's where not only can you find an exclusive video series which also gives you some background on the content of what we're doing here, but also the show notes for this book and excuse me, for this podcast, as well as some helpful links there. And that's also where we will begin to take pre orders, hopefully very shortly. So today we are talking about closing the deal. So yes, once you close the deal, there's still going to be a couple more steps left. We're not only taking you through the closing process, but then how to reposition the assets. So today we're going to be talking about the process of forming that offer, the differences between offers, letter of intents, all the due diligence that goes into making the offer and making sure that you can perform. And then we're also going to talk about working with a transactional attorney, what to look for there. So a lot of helpful steps here. And then finally after you've closed on your transaction, we're going to be talking about some of the things you can do to get the word out there and let others know what you're doing which can help you find your next transaction. So I think you're going to get a lot out of this show. We're going to take a brief word from our sponsor and then we'll get right into that discussion about Step seven Closing the deal. Thank you. A Different approach to Putting our Clients First Avis and Young's Tri State Investment Sales Group sells multifamily office retail development and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and and teamwork. We share core values of hard work, integrity and expertise. We put our clients first, providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter LinkedIn and Instagram amesnelsonnyc to learn more. Hi everyone. So I'm back here with my co host Rachel Hartman and wow, we are making incredible progress. We are already. We're on our seventh step. I know, Rachel, we're not running a recovery program here, but we're getting people, we're showing them step by step how to gain the inside edge to real estate investing. And step number seven, we're at closing the deal. So we're already getting to the point where by now you've learned how to go find that opportunity, how to reposition it, how to raise the capital and now we're going to be talking about closing. But Rachel, for our audience who maybe they haven't, maybe they missed a couple of these steps, maybe you could give them a quick overview. But anyone listening, I would highly encourage you all if you're just tuning in, go back to that first episode we did together, which was really my story. And then an introduction into why real estate. And then, you know, Rachel, tell them what else they've missed out. If they're just joining now, yes, I'm happy to.

And as you mentioned, James, we're giving the guide to real estate investing. So yes, it's step by step. It's not a recovery program, but it's that detailed. Go to resource. Basically everything you need to know to get into this game and you know, get rolling on it. We like James said, we started out with his story. We talked about why you might want to invest in real estate. We looked at the different property types. You know, there can be so Many when you get started. And James does an excellent job in that episode of helping us put those into four main categories. And he also offers advice on where you might want to start, which property type might be good for beginning investors. So listen to that one. We looked at the importance of building a team. This is not a solo sport. You have people involved from day one. So James gives all sorts of tips on how you can start building your network and bringing in team members that might be with you for literally years or decades. We moved on to look at step three, which is spotting the gems. It's all about finding those great opportunities. So where are properties where you can really add value, and how do you find them? After you find a property, you definitely want to walk through it. We laid that out in step four. And it's more than just walking through a building. You need to know what questions to ask, who you might bring along, and then all sorts of ways that you can reimagine the space. So what to really think about as you're moving through that walkthrough. Then we dived into some of those financial basics that come into play. The importance of underwriting, how you determine real value. We looked at raising capital. We also brought in a special guest, Derek Eakin, who gives an amazing presentation on sources and uses just all sorts of terms that you want to know when you go through those steps. So. So that brings us to today, which is actually a really exciting step of the process because it's what a lot of these previous ones leads up to. So we're talking about closing the deal. Here's where that property you've been looking at turns from being something you're considering to an actual investment. So I'd love to talk through how we can or what goes on in that process and the key terms. James, if you want to start us off by actually talking about the importance of every deal, does every deal matter and why or why not?

Yeah, it really does, Rachel, and it's a great way to kick off the discussion because, you know, the most important thing you have in this business is your reputation. And, you know, even in a, you know, huge market like New York, it's a small world and people talk. I'm just coming back from a conference, and I saw a lot of my friends in the brokerage world, and, you know, we catch up. Hey, you know, what are you seeing out there? Who's active, who's bidding? And, you know, if you go out and you spin broker's wheels and you don't perform, not Only are you making, you know, a bad name for yourself, but you're also making that broker, you know, look bad in front of their client if you can't deliver. So it's so important to, you know, it's the old adage of, you know, you know, do what you say, say what you do. I might have messed that one up. But you, you know, you get the idea, which is when you say that you're going to deliver, you really need to be able to come through. And a lot of this, you know, and I love how these steps, they, they all build on each other. But when we talked about that episode of building the right team and having everything together. So it's not like, you know, you're ready to, you know, get a deal signed up and your team isn't ready and you're not ready to move on something. So it's, you know, even the smaller deals, you know, those first things when you're breaking into a market, that's how you cultivate relationships. And you know, just like, you know, the flip side of that is, you know, over delivering, right? So if you say you're going to do something, you know, you're on top of things every step of the way, you're over communicating and look, you know, problems, challenges come up. I mean, that's the business. But I think being upfront on that, when there are issues, when things come up and not just using them to kind of negotiate a retrade or something like that, but you know, if there's an issue where it's going to require a creative solution, you know, if you can show that you're someone who is flexible, is willing to be solution oriented, I think you can also really differentiate yourselves from others. So just really important, no matter the size of the deal, especially for those of you starting out, you really want to build the right reputation and show that you're someone who delivers.

Great, perfect overview. And I definitely want to dive into some of these terms and some do's and don'ts during the process. But just out of my own natural curiosity, and also because I love your stories, I was wondering if you could start us off with a deal that, you know, remains planted in your mind. Maybe it's something from the pandemic. I know all sorts of different deals were going on during that time. I know you've also won all sorts of awards for the deal, so maybe it's one that really stood out above the rest. But any, anyone that you want to share to kind of give us an overview of how this process is carried out.

Yeah. So I think just what would exemplify what I just said was a closing that we did, you know, right during the, you know, the really, the early, the dark days of COVID And I think we might have even spoken a little bit about this in one of our prior episodes. But 103105 McDougall street, it was an estate sale. The building in before COVID hit was half vacant. Conant had turned the gas off at the building. It had a lot of issues. There was a lot of challenges. We were ready to go. We had a contract ready. And then Covid hit, and the buyer who had the contract said, look, we don't know. Is this the end of the world? We don't know what's going to happen here. We're out. And then it took a couple months to regroup, and buyers were coming in, and they were bidding 50 cents on the dollar from where we were before. But again, in fairness, no one knew. And the estate had their own challenges. They had to pay estate taxes. I mean, there wasn't, you know, at that point, I guess, some type of extension being contemplated. And they also, you know, to run the property was. Was a nightmare for them. So, you know, I give a lot of credit to Davion holdings, and I haven't had Sean on my. My show yet, but I've got to do it because I'd love to hear what it was like for him to kind of jump through hoops and get things done at a very challenging time in the market. And, you know, a lot of these deals, you know, we negotiate a contract for a couple of weeks, we get it signed, and then it's 60 to 90 days to close. And I don't want to say that's a relaxed time frame, but it gives you kind of time to go out and do your diligence beforehand, get the property inspected, get the lender on board, and then obviously, during closing, allow for that. But in this case, the pricing had come down. The estate was really kind of at odds. Just really wanted to pull the rip cord and get out. And to Sean's credit, he said, you know, we're going to just show up and we're going to sign a contract and we're going to close on this all equity, and that's what happens. So, I mean, it's amazing to. For many. And we talked about some of these prior shows about, hey, if you're not ready kind of for the big time, so to speak, which is New York is a put 10% down hard deposit market. I mean, there's other secondary tertiary markets where you might be able to tie up a deal for 25 grand. But the fact that John showed up with over $22 million, you know, on the spot, I'm sure there's a story there behind the scenes about how he got the capital lined up and got it done. But you know, like after a deal like that, it's every buyer's dream to be the broker's first call. You know, especially when there's deals that are quiet off market and you do something like that. You know, brokers are going to remember, I'm sure there's brokers listening to this show right now and they're going to say, oh wow, you know, I, you know, I forgot about Sean, or maybe I don't know him yet. Let me go look him up and put a deal in front of them. I mean, that's, that's really how it works. So I would say that. And then one of the earlier episodes that we did, we actually talked about a transaction was a multi step transaction where Avison Young won Rebny's coveted deal of the year award. And the reason why, I just want to share this with the audience. It was an interesting transaction because we actually represented two churches simultaneously. Church of the Epiphany was a church on the Upper east side. You know, they had a church there, but there was over 150,000ft of development rights. So, you know, they were looking to monetize that. So we sold that to a developer. But you know, that developer was willing to give them time to actually relocate to a new. The other church that we sold. And we had to find that church a place to relocate to. And we did it all at the same time. And so I think the key to that, and you'll have to listen to the episode to hear all the details. It was a lot of fun. But we were really in the solution business. The church was not going to sell unless they knew they had a place to go. And not only a place to go, but giving them the time to relocate. So I think as a buyer out there, being creative is super important. You know, go back and listen to that episode also with Francis Greenberger who, you know, was, you know, back in the day, he did these deals called stretch deals where he would tell a seller, okay, I'll give you your price, but you got to give me two years to close. And you know, he'd go out and he'd condo the building and sell off a couple you know, line off a couple units to sell so he could kind of almost close with no money down and he'd have the rest of the units available. So, you know, that's also what I really love about this business is because creativity can really pay off.

Yeah, those are great examples and it speaks to all the different pieces that are involved and how it can become complicated, so to speak. But also that's really where the opportunities lie. So the preparation, all those other steps we've talked about are key. And then I think they can help make this step actually go very smoothly. So you touched on some terms I'd like to dive into, especially the offer, the contract. I think those are some things that tend to come to mind when we talk about closing the deal. I'm curious if you can speak to those steps. Maybe we want to start with an overview of them if they're different, for instance, in real estate investing as opposed to residential purchases.

So Rachel, just, just so, so I'm clear, want to talk about kind of the differences of a residential transaction versus commercial. Okay. So, you know, and it's a great place to start because most of our listeners, or a lot of them have probably bought a home before or an apartment. Right. And you know, that, that whole process, you know, if you haven't done it before, you know, the broker is very helpful and, you know, helping make the introductions. But it's really, you know, your attorney who is going to help with the closing documents and then dealing with the mortgage broker or the bank to make sure it lines up and it's commercial, is not too dissimilar. Right. I mean, it's the same kind of idea. You know, you're going to have a closing attorney, you're going to, you know, typically you're going to have a bank and a lot of that work and a lot of those, you know, third party reports, whether it's a property condition report, whether it's, you know, certainly an appraisal, those are the kind of things that, you know, a lender is going to require, whether it's commercial or residential. So there's a lot of similarities. I mean, I think where commercial starts to get a whole lot more complicated is the tenancy. Right. So when you're buying a home, typically you're buying it vacant, right? You're buying it from another end user who they live there, they're moving, they're going somewhere else. But when you're buying a commercial property, you're inheriting those tenants. And so it becomes that more important to understand okay, to get copies of the leases, any of the amendments, and understand the history with the tenant. Because, you know, in many cases, especially post Covid, if we're talking retail, for example, I mean, I would say it's the exception, not the rule. If the retail tenant was paying rent throughout. So there might have been concessions, there might have been deals where, you know, they were forgiven rent or maybe that rent was put on the back end. So, you know, really diligencing the leases and understanding, you know, what's the current status? Are there arrears right now to the tenants owe money understanding, especially for residential, what's the status of the units? Are these units, you know, in states like New York, where we have regulation, you know, are they rent stabilized? Are they rent controlled? Are they fair market? Are there, you know, that's a whole nother episode to understand, you know, all the ins and outs there. And we have a national, if not a global audience. And so, you know, you need to take a look in your jurisdiction and find out, you know, are there restrictions in rent? Rent regulation is definitely something that's happening in a lot of states across the country. So there's a lot more that goes into the diligence to understand the tenancy and what's there, certainly in, you know, residential. Oftentimes the seller will be required to make certain repairs to a house to get it ready for clothes, or they'll make representations where they say, okay, well, you need to, you know, certify that the roof is in good working order, the heating system, you know, all these mechanicals. Whereas with commercial, it's, hey, it's as is, where is. You know, you go and do your inspections, but if the boiler needs to be replaced, that's on you. Right? And so, yes, you're taking on a lot more liability on a commercial purchase. So that's why it's that much more important to understand, you know, have that inspector come in and understand what kind of work that needs to be done. There's also, you know, I don't think you're running into environmental questions on residential. Hopefully not, but for commercial, yes. I mean, especially if you're developing, you need to be concerned with that. And then also, you know, the use. And, you know, if you're buying a home and you're planning to expand it, you know, sure, you're going to need to understand, can you add square footage to the lot? You know, are there restrictions on how many bedrooms you can have based on, you know, in some towns, it might be based on a septic system and what. What it can handle. You know, commercial. There's a lot more to what you can and can't do. You know, what can you build? How high can you build it? So when you look at the team, it's just that that's why it's important to, you know, have that much larger team around you on commercial to make sure that you're thinking about all the various aspects of the property. Because again, when you're buying it, you're buying it with, you know, with those issues as well, which. Which could also be opportunities. I mean, sometimes these owners are selling because they're sick and tired of dealing with the problems and the repairs. And, you know, you might have that expertise and ability to turn that property around and improve it.

Exactly. And we've had some great conversations on other episodes about how different investors might look at different properties differently. So that can definitely be a key advantage that you can have in those situations. So I'm curious if someone looks at a property and wants to make an offer, if you can talk us through what a good offer would include, what would we put in it to it? Maybe we want to speak a little bit on the timing, when we would make it to.

Great. So I'm a big fan of starting out with giving verbal indication. I think it's kind of a good way to kind of test the waters because there is a lot of effort to really underwriting a deal, putting in a formal offer, which, yes, I do believe, if you're serious, putting in a written offer is the way to go. And we'll talk about that in a bit. But I think to start the dialogue. And that's really if it's a brokered property or even for sale by owner and they have an asking price, kind of looking at, you know, where they want to be, where your numbers are, and giving some quick feedback to the broker or the owner. And, you know, look, they might be asking for $10 million, and your back of the envelope is $8 million. You're probably too far apart from doing something. So, you know, I think explaining and saying, look, I've, you know, done a quick back of the envelope. I'm seeing the value at 8. This is why I don't know how much flexibility there is with the seller. But if you think it's worth my time, I'll dig in and I'll really underwrite it. And I'm willing to put in a formal offer. But again, I don't, you know, I don't want to spin my wheels. I'm sure you don't want to spin my wheels. So let's make sure we're in the right ballpark. But I think that verbal guidance is also helpful because as brokers, we're still taking note of that. And if we do get a price reduction, you know, hopefully we will remember to come back to you. I say hopefully because when it's verbal, you know, sometimes, you know, hopefully that broker's taking notes. But I think putting something in writing, yes, there is a benefit to that, that there's a shelf life. So I think if you are in range, I think putting an offer in, again, if the broker, you know, is doing their job properly, they need to forward that bid to the seller to give serious consideration. And I think when a seller does see an offer in writing, they understand that you're serious and that you've taken the time. So the types of things that you want to put in an offer, obviously the price, the deposit, the closing period, and if there's any contingencies. So again, in most markets outside New York, you're going to be able to ask for a due diligence period. So you know, you'll close the deal in 90 days, but you need 30 days within there, which is a due diligence period. That's time where your deposit is not at risk. Right. And so you could put up a 5 or 10% good faith deposit. But until that due diligence period expires, that's when your offer goes hard. If there's any conditions of the property, right. For the closing, it might be okay. You've told me you've got this tenant that's holding over, hasn't paid you rent in three years. Maybe you're willing to take on that risk in exchange for a better price. Or if you don't want to deal with it, a condition of the sale might be okay, you need to deliver that space vacant and that should be stipulated in the offer. So those are the kind of things for a standard offer. Now, if you want to take this up a notch, you could submit an loi. A letter of intent. A letter of intent is a binding document. And as the broker, when I'm representing my seller, I tell my sellers, do not sign Lois. Right. Unless if there's, you know, if it's a very complicated transaction where you know, the both buyer and seller need to spend some time together to try to figure out the framework of a deal that might be a reason to do a letter of intent. But a letter of intent is basically saying it's A. It's okay. We are agreed. These are the basic deal terms. But we're going to, you know, seller's going to give buyer a 30 day window to actually negotiate a PSA, a purchase and sale agreement that happens during that process. Okay? Now if you're a buyer, look, you know, I get, I would say three quarters of the written offers we get are in LOI format, right? Because the LOI at the bottom it says, you know, hereby agreed to and accepted. They're asking the seller to actually countersign that offer. And it'll say, you know, look, this is subject to a mutually agreeable contract signed by both parties. But if a seller is to sell that, what they're basically doing is taking the property off the market. Okay? So not a great thing for a seller if you're giving a buyer basically exclusivity on the deal for 30 days, 45 days. Right. As a buyer, it's a great thing because then you've got it locked up where you can be making sure that you have all your information together. You're making sure your equity is lined up. And that way also you have exclusivity while you're negotiating a contract. Right. Because in New York, again, if we're in a market where we don't do, Lois, we don't do due diligence in a contract. If we agree to send you a contract, I'm going to send you that contract. And there's got to be some good faith where, hey, you know, it's not like it's very rare that the buyer is just going to turn around and sign whatever contract you send them the next day. No, their attorney is going to weigh in. A lot of buyers are not going to do that due diligence. You know, they're not going to bring in an engineer, they're not going to bring in environmental until they have a purchase and sale agreement where, okay, the seller is serious, they're willing to trade. You know, I'm ready to go. Unless if something, you know, there's major structural issues, there's environmental issues. So I'm now starting to spend legal. My attorney's going to mark up the contract. We're negotiating back and forth, but guess what? I'm not protected as a buyer. Now, if the seller receives a higher offer, you know, there are a few. Go back and listen to the episode I did with Jeff Corral on the value of a handshake. You know, he has said, hey, if I get a higher offer, even if I am not legally bound, I'M going to give that buyer that fair shot because they stuck out their neck. But, you know, look, there's a lot of sellers who say, hey, it's not over till it's over. And unless if I've got a signed contract by both parties and a deposit, I'm still free to entertain other offers. So what happens if I'm a week or two into my contract negotiations, my due diligence, I've racked up 20, $25,000 in expenses. And then, you know, seller's broker says, I'm really sorry to tell you, but we got a higher bid that we're pursuing. Right? So that is the risk of going out and having to buy on those terms. And so, Rachel, it's really market driven, right? Because in secondary tertiary markets where you might not have 10 bidders for every property, it might take that letter of intent for a buyer to say, okay, I'm going to actually give this serious consideration and spend time on legal. I need to know that I've got a window here to perform. So, but remember, this type of landscape, it works both ways. So challenging when you're a buyer to go in unprotected and to, you know, have to negotiate at your own risk. But when you're turning around and selling, it's a lot better when you don't have to give anyone exclusivity and you can, you know, you can entertain those options. So, Rachel, I know that's a super long response, but I think it's important for our listeners to understand kind of the different levels of offering and kind of the rules of engagement with negotiations, which are really market driven. So they really vary in different markets.

This is so helpful. Thanks for that thorough answer, James. And yes, it definitely speaks to the value of knowing your market, knowing where you're playing. A couple follow up questions on, on your points. I know we've talked a lot about team players. I'm curious who's involved in making the offer? For example, if I'm an investor, I want to purchase a property, am I writing up the offer? Am I creating a letter of intent or am I having others do it? Who am I showing it to?

You are the one who, yes, has to come up with the business terms. Right? There's business terms and there's legal terms. So you need to decide how much you're willing to pay for the property, how much of a deposit you're willing to stake. But you really do need to defer to your attorney as well as your mortgage broker on how much time you're going to need. Because you don't want to sit there and say, all right, here's my offer. It's $10 million, 10% deposit and I'll close in 30 days. Well, those are great terms, like, sellers love to hear that. But hey, unless you got $10 million sitting in the bank, that's probably not so smart an idea to submit that. So I think you need to speak to your attorney and your mortgage broker to understand how much time you're going to need to close the loan. And it could be 60 days at the shortest. It could be 90 to 120 days. Right. And so I think having that guidance on the timeframe is going to be really important. But the other thing is you don't want to do anything in writing that's binding until your attorney has had a chance to review. Right. So even that loi. And you know, sometimes I step into a situation as the seller's broker and the seller says, well, you know, I was in negotiations with this group and you know, I signed some paperwork with them, but they've been dragging me along forever and I'd like you to go sell the property. Well, hey, timeout. Let's look at what you signed and how long are you stuck? Like, did you. Are you bound by this document? And so, you know, if you are going to do an loi, super important that there is, you know, timelines here that, you know, it's a tight window and if, you know, either side doesn't perform that, you're not, you know, stuck with that in perpetuity, or there's nothing, you know, binding. And so, you know, at the very least, you need to make sure that, hey, this offer is, you know, really non binding on, you know, just on this paper and is subject to a fully negotiated contract. Right. Because you, you actually don't need an attorney, right, to sign something binding. I mean, again, this really depends on which state you are and what's binding, what's not. I mean, in New York, you know, there is some case law out there that even verbal agreements are binding. So you gotta be really careful what you say. You gotta be really careful what you email. I'm constantly telling our sales team, you know, you never want to email back, you know, congratulations, we have a deal, it's accepted, you know. No, no, no. I mean, I cringe when I hear that because it's like, no, no, no, we are agreeing to send you a contract. We will send you a contract. Okay? But no deal is a deal until there's a Fully negotiated, signed contract that's been returned to you and there's a deposit received. Right. So really important before you start, you know, sending stuff out there, you know, having your attorney, you know, make sure that the language looks good. Now, once you have the template, o and by the way, if you're a buyer and you're making a serious offer, why wouldn't you submit an LOI in hopes that the seller counter signs and gives you the time? I mean, probably nine times out of 10, it's not going to work. But if you do have that opportunity to tie up a deal, why not? So, but yes, make sure your attorney has given you guidance on the language and that you're talking to your professionals to make sure that you have enough time to do what you need to close.

Perfect. That's so insightful. And I really appreciate your perspective on both sides, the buyer and the seller. Like you said, certainly being the seller can come at a later step. So it's actually very helpful to be thinking about that right from the start, too. So I'm curious if we're, you know, we talked about the offer, putting it together, sending it out, what should the buyer be looking for from the seller? You know, what. What do you want to see, maybe, is what I want to be asking, what should be looking for from the seller?

The. I mean, typically, once a seller has agreed to transact with you, if there's a broker involved, they're going to circulate a deal memo, a transaction memo that's basically introducing all the parties involved. You know, dear Rachel, we've agreed to send you a contract based on these terms. You've told us. This is your attorney. This is our attorney. We're going to send you a purchase and sale agreement. So you get this deal memo, the attorneys are introduced, we're going to send you a contract. Now, at this point, this is when you really need to start digging in on your diligence. First and foremost, like I said, you're going to need to go in and review leases. Are the leases intact? Is this what was represented? I mean, the broker setup is just going to have, you know, a rent roll. Are the rents accurate? You know, are the lease expirations right? Are there, you know, pass throughs? You know, is the tenant supposed to be paying a portion of the real estate taxes? Are they actually doing it? So, you know, asking for, you know, a T12, a trailing 12 statement from the seller, you know, let me see your income, let me see your expenses. Could I see your tax returns? You can Ask for all this. Whether or not a seller is going to share it is another story. A lot of sellers don't want to share their tax returns because it's usually a bleaker picture than, you know, maybe what was represented on a broker setup, which is, on a broker setup, very important. When you look at those line items on expenses, are those actual or are those projected? You know, and you're also verifying things like the real estate taxes. Okay, well, you know, they said the taxes were $100,000, but guess what, that was last year and now there's been an increase and now they're 120,000. So I mean, these are all the things that you're checking to make sure are accurate. So certainly the leases, this is also, you know, if there's violations on the properties, you want to go through and make sure if there's any issues, are there open fines, you know, any disputes with the tenants, getting that arrears report who owes money. You just, you want to go into these situations, you know, you know, eyes and wide, you know, eyes wide open. And you can, you know, if you've done this enough, you can take a look for yourself. But really, for that lease review, you're going to need a landlord, tenant attorney to do a quick review because they know what to look for. They know what's, you know, if there's anything that's missing. Amendments to the leases, what do they say? Do the tenants have any rights to renew? I mean, these are all things that you're going to want to produce. So at the very least, the seller should produce all these documents. They should have the lease files you're going to go through. If they have prior reports, whether it's a property condition report, environmental, you can ask for it. But again, the sellers are not going to represent that. So they'll say, well, look, here's the property condition report, here's the environmental from five years ago when I bought the property. But I'm not representing this, so you're going to have to go in and get your own updates. Now you might go and call the same inspector that did the property inspection five years ago, might call the same environmental company, although they might not be accepted by your lender. I mean, you need to speak to your mortgage broker who will typically arrange these inspections with the lender based on who's on their approved list. If they are on the approved list, that's great because you can then, you know, update those reports. So again, you can always ask the seller for these files and to, you Know, get the information, you know, they should at the very least, you know, share those leases and understand the seller will or should represent in the contract. And here I go giving legal advice. So please consult your attorney. I'm obviously not an attorney, but the seller should be representing that the leases are true and accurate and there's no side deals. Right. So you're not going to buy it and then the next day the tenant's going to show up with, oh, here I had a five year extension for a dollar a year for the next five years. You know, those situations should not be coming out of the woodwork after a closing. But really, you know, at its you know, most basic, you know, element of for to transact, the seller needs to deliver free and clear title. Okay, I own this property, I have the ability to, to transfer it to you. There are no liens on the property. So there's no lenders coming out of the woodwork saying, hey, this seller owed me, you know, this amount of money. And that's what title insurance is. Right. So that's another person in your team, is that title agent who's going to go in, look at the history of the property, make sure there's no issues, there's no easements. Did they sell off the air rights to a neighbor? We didn't even know about that. Those are, you know, again, there's a lot of stuff there, but having the right team to make sure that everything is done properly. So when you close, no one's going to come back after the fact and say, hey, you know, I've got claim to this property. And if they do, you've got the proper insurance lined up to make sure that they'll defend you.

Perfect. You covered so many great factors here. And I really like the discussion on due diligence and due diligence and how that's carried out too. I'm curious if you can speak from your experience, you know, we've talked about what goes into the process. Are there changes that often come about during the due diligence process? Perhaps surprises? Not necessarily. I'm just curious what sort of fluctuations might happen between the buyer and seller with the due diligence.

Yeah, great, great question. And I think, you know, the surprises are usually if there are things in the leases that were not disclosed earlier. You know, certainly if there are significant repairs that need to be done. And again, this goes back to the first thing I said about the credibility as a buyer. If you're walking through a building and you realize the building needs a gut rehab and your business plan is to renovate these units, then don't try to go in and nickel and dime the seller to say, hey, I got this property condition report and I need to update the common areas and the kitchens and baths. You knew that getting into it, if there are major structural issues, where, hey, I just did the report and they said that the back wall is about to implode. That's obviously something serious. Where. If it's a major, major issue. So I'm doing a deal now where, you know, they went and they did the environmental report and they said, hey, we're looking at the history of the property. There used to be a dry cleaner on premises. Okay, well, did they actually do on site dry cleaning or not? If it was on site, there might be environmental issues. And these are things that until someone actually realized they had the deal and had the contract that they were not going to pay money, you know, for an environmental inspection to go in and research the history of the property. So, you know, then again, is it, you know, does the seller then represent that there haven't been issues? I mean, a lot of these things are about getting the lender comfortable because the lender might say, hey, we're not going to lend on this if we don't know what the history is here and that the property has a clean bill of health. So that might elevate the phase one, which a phase one environmental report is just a, a visual inspection and looking at the history of the property. A phase two is actually invasive where you might actually be going in boring, taking soil samples and finding out if the soil is clean, if there are major environmental issues. So again, I mean, those are the kind of things that would actually, I think, kill a deal if there are major environmental issues, structural problems. But the other stuff that comes up, you know, with the violations, for example, look, there might be open permits that, you know, you swapped out the boiler, but you didn't, you know, your plumber didn't sign off on the work and didn't file it. And so that work needs to be done. And as the buyer, you might say, hey, I'm not closing this deal with an open permit here because that plumber, they don't care about me. You're the one who paid them to do the work. So either get them to close it out or I want money in escrow. I want $5,000, which is, you know, otherwise I'm going to have to call an expediter. I'm going to have to get a new plumber, come in certify that the work was done properly and file it. I'm not going to, you know, I'm going to need money in escrow to make sure that, that, that was done properly. Right. But there might be older stuff where again, maybe, or maybe it's a repair that's yet to be done. And again, you're buying it with the knowledge knowing that you're going to have to do repairs. But still, usually the custom is that the seller is going to pay the fines. So hey, you got a fine on, you know, whatever it is, there's an issue with, with the roof, I'll pay the fine. The issue here, maybe the local law, some of the facade work, I'm going to pay, the seller has to pay the fine on it, but I'm going to take the responsibility and do the work. So a lot of that negotiation is okay, who's going to pay the fine? So again, it's a lot to think about, but having the right counsel, the right team to go and inspect, make sure there's no issues with the property or if they are, that you're aware of them going in is really important.

Perfect, thanks for walking us through that. So as we look at the contract process, I'm curious if you can talk us through what we should know about when it comes to getting the contract signed. I know you mentioned some research that lenders might be involved in. I'm curious if you can talk about that and what to expect with the contract signing.

Yeah, so the purchase and sale agreement is, you know, in its simplest form, you know, it's, it should be pretty straightforward. Right. Again, if the seller can deliver free and clear title, buyers willing to buy as is, whereas we're just agreeing on how long it's going to take the deposit and obviously the proceeds. But in many cases the negotiation, the mortgage docs can be a lot more involved in satisfying the lender and making sure that everything is provided for to close that loan in a timely fashion. Also, we talked about if you have a partner, right, that you're buying this with, you're going to need to negotiate a joint venture agreement. Those joint venture agreements can take way longer than a purchase and sale agreement because we're going to agree. How are we working together? How are we dealing with day to day decisions? How about major decisions? How do we decide if one of us wants to sell and the other does not? You know, there's a lot of things that we need to think about to work together as a group. And that's why typically the first deal that you're doing together is going to be the toughest because we need to figure out, you know, what. What are the agreements? We're putting together a new, you know, LLC together. But how is this going to work? Same thing with the lender. The first time you're working with a lender, they're going to be asking you for, you know, your financials. They're going to be doing kind of a deep dive on your track record. But once you have successfully closed a loan or seeing the property through, paying off the lender, going through a full cycle, that should give them the confidence and make that process a lot easier in the future. But you have all these things that are kind of coming together at the same time. I mean, the purchase and sale agreement, again, that is not typically what takes the longest. It's usually that joint venture agreement that's going on, you know, simultaneously. Right. Because if we're going to buy this property together, we need to understand how we're working together if our joint entity is actually, you know, signing this. Right. And that also is, you know, who's putting up the deposit? Right. So who's putting up the money? What's our financial agreement? You know, if I found the deal and we talked about that's a great way to start off is getting into the business as you find the opportunity. You've got this sweat equity going into the deal, but the general partner is, you know, executing on the plan. If they're putting down the deposit, they are probably going to look for the lion's share of the returns. They're going to say, look, we're putting the money down. We're guaranteeing that we're going to come through with the closing. You know, we want an outsized share of the returns. So again, that's all a negotiation. But it's something to start thinking about, you know, in advance. Because again, if you're, if you're out there fighting for a deal and, you know, you're in competition, it's not like the seller is going to sit there and wait a month for you to figure things out with your partner on how you're going to, you know, work as a group, they're not going to wait for you. They're going to go with someone else. So I think it's really important when you start cultivating a relationship with a partner to talk about the approach. How are we going to do this? What do the economics look like? And sure, they can vary from deal to deal depending on the risk profile and what it is, but understanding things like what's the timeline? Okay, we're buying this together. Are we doing this as a two or three year hold? Is this a ten year hold? Again? What happens if one of us wants to sell it or not? I mean, those things need to be ironed. You want an investor who's aligned with your business plan. So you know, when you're doing this, it all can happen seamlessly.

I'm so glad you brought up this joint venture agreement because we've spoken before about partners and how they're often involved in deals. A quick follow up on that before I get to some of my last thoughts. I'm curious if you can speak to if there's sometimes multiple joint venture agreements, maybe any other do's and don'ts to keep in mind as you're forming one?

Yeah, I don't, I mean, I think the idea of kind of running around with multiple partners is not, I mean, what typically happens is the sponsors, you find a great opportunity you're looking for could be a general partner or it could be a limited partner, a group. And so you're going to put together your deck. This is your offering, this is the property, this is your underwriting. We talked about that on one of our previous shows about how to kind of present the deal and the economics. But once you find a partner, it's, you're definitely, you're going into that deal. I would not change gears on it unless if they get cold feet and they pull out. So I think it's, I would not have multiple partners that you're negotiating with down at the last minute. I mean, once you know who your partner is, you're in and you are, you know, that negotiation is really happening with the seller and you need them to be, you know, on board with you, especially if things change and the seller might come back and say, hey, I got a higher offer. So if you all are interested, you got to up the bid and you know, you need to be willing to, you know, think about it as a group. Are you willing to do that?

Perfect. Thanks for clarifying that.

Yeah, Rachel. I will say though that we should talk about the multiple contract potential for the seller. So again, there is no law as far as I know, that a seller cannot have multiple contracts out. And I believe the right thing to do, certainly as a broker and oftentimes we have a high bidder, whether it's a bid deadline, someone wins the bid, we send out one contract, there's a negotiation. But you know, in very competitive markets, you can be in situations where there are multiple contracts out. And in fact, if a process is super competitive, the broker might say, okay, you know, we have our initial bid deadline, we have a half a dozen finalists to, you know, have a final round and to do further legal due diligence. I'm going to send you, Rachel, a draft contract, and I want you to put in your best price, your highest deposit, your shortest close, and then I want to see how your attorney marks up the contract. And by the way, we're going to send it to three or four other groups as well, and then we're going to get everybody's contract back. And then we're going to weigh, you know, obviously, first and foremost, who paid the most, the highest price, who had the best terms. But then also, you're now going to be judged on the quality of your markup. So going into a situation like that, again, all this is at risk. So you're, you're racking up legal fees and you don't even know if you have the deal yet. So that is for a super competitive process. But it does happen. That's why, again, if you're a buyer trying to lock something up with an loi so you have time, you know, it's your deal as long as you perform in a certain timeline, you know, is preferential. But if it's a really hot property and you know, it's a great deal, you might be willing to jump in and compete like that. And some might say, hey, this is a way for me to differentiate myself. I have no problem buying this property at this price. I can move quickly and I'm willing to compete and get the deal perfect.

I'm glad you brought that up, too. So one of my last questions I wanted to ask was actually about the closing. I'm wondering if you can talk us through how the closing typically occurs, if that's usually a smooth, quick part of this process or not necessarily.

You know, when I started in the business 20 plus years ago, I mean, these closings would take, you know, hours, right. Because there were all the adjustments that were happening at the table. And you know, how let's pro rata the real estate tax payments, the water and sewer, bring the bill, this and that, and all these adjustments. And then you're waiting for the wire to come in, you know, from the bank and making sure the, you know, the mortgage is in place. Now, a lot of this stuff is done in advance. So you go, and most of these closings aren't even done in person anymore. Right. Because everything Is, you know, is virtual. So, yes, I mean, you are at that closing. You are making those adjustments to get. And that's very similar when you're buying a home, right. There's going to be adjustments, too. And if the seller, if you're buying a house that has oil heat and there's oil left in the tank, you're probably paying for whatever oil that the seller didn't use. And not too dissimilar on the commercial side. So it's. It's mostly those adjustments that are taking place and then making sure that, you know, all the wires and everything's distributed, everybody's paid at the closing, you know, legal fees, you know, title insurance, the brokers. And so just making all those. Those adjustments to the table. And again, a lot of that used to kind of be done, you know, all those adjustments on the spot, but. But now things have become a lot more efficient where a lot of this is done in advance. So it's hopefully a very smooth process. I find that the, the, as a broker, we tend to celebrate more when we get a contract signed than when it actually closes because, you know, there's so much work to get, you know, buyer and seller to the table, to agree on everything to actually transact and put that hard deposit down. You know, typically once that is done, especially if you have a hard deposit and there's no contingencies, then we're just sitting waiting for the, you know, the buyer to finalize, you know, get the lender in place to close. You're waiting that 60, 90 days. That's really the time again for that to happen. But we're not. I mean, look, we might help out a little bit here and there. The buyer might say, you know, hey, James, my lender needs, you know, some comps for the property. Can you help justify. We're just making sure this appraises right, and we're helping, but we're not, you know, our hard work is done. I mean, certainly the job of the broker is really getting that deal signed and then kind of being helpful, you know, for the close. But usually, you know, after the signing, it's. It's. Everything is more or less agreed to and how this is playing out. It's just giving the time for that to happen.

Perfect. This has been such an insightful discussion on all things closing the deal. I really appreciate it. So I'm wondering if we can leave listeners with maybe a resource, maybe a podcast you did that really highlights this step or books, anything that they can go to to learn a little Bit more about closing the deal.

Yeah, I'm thinking of one of the early shows I did with Marianne Gilmartin, you know, running around. And there was one other thing to the closing is getting estoppels. I forgot to talk about this. But this is where the tenant actually has to verify. Yes, my lease is true and accurate, and it's ready to go. So part of this closing process and what the seller is delivering is this tenant acknowledgment. And so she talked about having to try to pull these all together at the 11th hour. She gave a great story of while she was on vacation. And some of the paperwork needed to close was actually at the post office. They had to find the Postmaster General at three in the morning to go open it up and have the deal close in time for this complicated bond offering. So. So, you know, again, there is a lot of fun, you know, in some of these stories. Probably wasn't fun for her at the time, but afterwards, you know, coordinating and doing whatever it takes to get the deal done. Because in a lot of times, yes, there is a significant timing pressure that happens here. These dates are real. Getting to the table, signing before other people do, like, speed is sometimes very important to getting a deal done. And again, that's why having the right team, knowing what you're doing so you can move faster than others, you definitely get that inside edge that we talked about. But it can also leave for a lot of situations where it's down to the wire and, you know, that's where that creativity and, you know, doing whatever it takes to get something done is, you know, really exciting and a key attribute to being successful.

Awesome. Yes. Definitely. Go and listen to that podcast. Great stories there. And this has been, like I said, a great discussion on closing the deal. In the next step, we'll be talking about repositioning the property, so we'll actually be moving past those signings and on to what you want to do with your investment.

That's awesome. And it's also, you know, something that. And we can talk about this certainly in the next show, but, you know, during this closing process, you know, hopefully by now you've already figured out what your business plan is and you're using that time to your advantage. So that's actually a great way to close because, you know, if you have two to three months to close, you know, you should be lining up your architect, your contractor, even filing permits. Now, sometimes you typically cannot do that as the buyer, but sometimes if you get a friendly seller, you might say, hey, you know, can you file this paperwork on my behalf to get the ball rolling? Because the dream is if you're going and doing renovations, you want to start swinging hammers the day after you close. You don't want to wait to close and then start from scratch, all the filing and then you got to wait six months. And meanwhile, especially if you're sitting with a vacant building, you know, you're paying expenses and it's taken away from that opportunity. So we're going to talk about ways to improve reposition properties. But it's important to note that that should really that legwork should start before the closing. So I think that's a great way to end. So thank you again, Rachel. This has been a lot of fun. We are making incredible progress here. I know that the book, we are working really hard here because we've got to get this book out at the beginning of next year, 2023. I already have some college professors asking me, james, I want to use this for my, you know, January spring term. So, you know, let's get make sure that we get this, this book to the publisher in time. So thank you as always, for all the great work here and the incredible questions and to our listeners, we so appreciate your tuning in and your feedback. It means so much to us. So until next week, this is your host, James Nelson of the Insider's Edge to Real Estate Investing. Thank you so much for joining.

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