Navigating your fears
Many of the podcasts I listen to (see above!) are about being bold, taking proactive steps, and moving beyond your fears. That’s easy to say but I’m sure that accounts for a high number of the people we see at seminars and other events who are excited and ambitious but who will never do a deal. Fear.
On my wall it says “Everything you want is on the other side of fear”. It’s a hurdle because I fear losing money. Most people do, but those with a lot of it, maybe not so much. They have compartmentalized it in their minds as a risk, that they might lose it and if they do they will climb right back and go to it again. Losing that money didn’t change their lifestyle, and their plans were bigger than the next deal.
How do we deal with our fears? First, recognize and isolate the fears you can control, then take steps to either prevent whatever it is that’s causing fear or to reduce the impact of it.
For example, when taking a syndication to close, maybe you fear that no one will invest in your deal. Think about when you will know if investors like your deal. For your first deals, they will take their time, assessing you, the returns, the location, your partners, your business plan, really everything. In the mean time, you have to get it under contract, then you have a number of other tasks that all have to be done right away. Inspection, loan term sheets, legal docs, investor presentation materials. All of it, pretty much all at once.
Then think about what you’re spending, what you’re not going to get back, and when you answer some of those fears. You should expect responses from your investors fairly quickly, say two weeks, but they won’t be firm commitments. Make sure you have more – much more –in soft commits than you need.
You have an inspection period. Will your earnest money go hard (become non-refundable) before you know if you have enough investors? Negotiate plenty of time up front for due diligence. 21 days, 30 days? How about 45 days? Of all the things you can negotiate with the seller, this may be your least flexible part of the offer.
Get your legal docs started. None of your investors can submit funds until the docs are complete and available to them. Legal docs are expensive but necessary. Possibly arrange partial payments for the legal docs, so if the inspection looks bad or your investors are all saying no, your loss can be limited.
Your earnest money is probably your biggest commitment to the deal. When part of it goes hard and you’re not sure if you have the investors, that’s a decision point. Think about, if I have to terminate the deal because I couldn’t find investors, will I try again. If you won’t, then you should terminate the deal before you lose that earnest money. Then go back and find more investors, nurture them, understand them, and make the necessary improvements to your business to increase the likelihood they’ll join the next deal. There will be another deal.
The same principals apply to other fears. Say one of your markets has mainly just one big employer. What happens if they shut down or reduce their workforce. Look at that employer very closely to determine the likelihood of that, although that will be difficult. As healthy as that employer might be, you never know what the company is thinking and you have no control over it. But are these tenants employed there? Are other employers moving into town? How much of the local employment does this company actually provide? It might be a big name employer who’s been there forever, but their total employment is only a small fraction of the region’s employment. Understand the cause of your fears and reckon with it.
Starting out in multifamily requires a level of confidence in your ability to succeed that means you will conquer your fears. It doesn’t mean blindly ignoring real risks but it does mean knowing you will have issues that you didn’t anticipate and you and your team have the skills and resources to solve them.