Rick owned a used building with several unique pluses and some deferred maintenance. He wanted to sell it so he could move on to his next investing goal.
The marketing package we put together revealed the roof was in its second half of its life. The drone video showed roof patches which tells sophisticated buyers and brokers that roof is past its peak of freshness. No one made any representation that the roof was new. Rick had installed standard dual-pane replacement windows and made several other improvements. The garage door replacement was clearly substandard.
Scores of buyers considered the building. We finally agreed on price with a buyer.
Buying an apartment building differs from buying a home. When you buy a home, you get to see the inside of the house as many times as you like before you make an offer. When you buy apartments, you don’t get to see the inside of the building until buyer and seller agree on a price, subject to the buyer approving the property condition. This gives buyer full access to property and respects the tenants. They won’t be disturbed by potential investors who are not willing to pay market value.
The buyer’s broker said the buyer was sophisticated and reasonable. The broker claimed there wouldn’t be a problem unless we misrepresented the property, or it had severe undiscovered defects. We believed the broker, and the buyer began her due diligence.
The property was in average condition for its vintage according to the inspection report. The inspector thought the roof should be replaced immediately. But the property manager provided certification from a licensed contractor stating the roof had five years left. All the experts agreed that the roof was near the end of useful life. The drone video had shown that reality before the offer was written.
The buyer asked for concessions almost three times what I expected. We explored the concerns and claims of the buyer and her experts. Rick agreed to correct the substandard garage door installation. And he offered a sensible credit for deferred routine maintenance.
Ultimately the haggle came down to the buyer’s wish to get a new roof on Rick’s nickel plus more than half the cost of new windows because of the inspector’s report about the window installation. Without those concessions, the buyer would walk away from the deal.
A representative from the window manufacturer declared the installation to be appropriate and the window manufacturer’s installation video showed the work was done in the approved manner. In the end the property inspector agreed that the windows were appropriately installed.
The buyer’s broker was still adamant about alleged window defect even when his inspection expert recanted. The buyer’s broker talked lawsuit language and made astounding and insulting claims about several of the seller’s experts and agents. The buyer’s agent language and claims were extreme. Many seasoned people in the transaction perceived his behavior was unprofessional.
Rick was amazed that the buyer and the buyer’s agent were going to abandon the deal. There had been no bad faith and no surprises, and we were within one third of 1% of a successful closing. In effect he was keenly disappointed that the other side wasn’t fair and reasonable.
Such is life.
Some clients want to “teach them a lesson” in a situation like this. That almost always ends badly. Americans expect an appeal to fairness to generate a more responsible answer from the other side. That does not always work where one rich person buys an income property from another. Both expect that they will never deal with each other again.
So, what should Rick do?
He needs to move on. I suggested that another buyer and broker, would be more sensible. I expected we’d sell the used building to the next buyer.
I had never seen a broker fight so hard for concession on imperfections that were obvious before the offer was written. It seemed to me that the buyer’s broker’s ego had caused the transaction to go off track. I couldn’t understand why a broker from a reputable organization would stick to a claim when the facts and his own expert did not support his case.
As the broker, my job is to help Rick do what’s best for him. I’ll also remember the buyer and the broker.
Now, let me ask you. Is there anything else Rick should do? What about me, is there anything else I should do?
Postscript: a year later …
The buyer bought what she considered her second-best choice.
Her agent made a much bigger fee on the other imperfect asset.
Rick kept the building, which is generating a mediocre return and is a second-rate option for his family’s long-term goals.
I got a blog post from the adventure.
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”