How Our Deal Broke Down at the Last Minute—And Why I’m Happy About It

Key Takeaways:

– The author is frustrated because their team spent five weeks working on a preferred equity investment deal that fell through
– The investment was for a mobile home park with a significant waiting list and below-market lot rents
– The operator changed the terms of the deal on the day of closing, leading the author to cancel the deal
– The author emphasizes the importance of conducting thorough due diligence before investing capital
– They advise against moving forward with questionable investments based on sunk time or money costs
– The author is happy with their decision to cancel the deal because they believe there would have been more trouble with the operator in the future
– They encourage passive investors to not skimp on due diligence and not get emotionally attached to operators or deals
– Real estate is seen as a better investment option compared to speculative investments with higher potential upsides but also higher risks
– Syndicators have been known to turn potential investments into risky speculations through poor deal structures
– The author stresses the importance of protecting hard-earned capital and avoiding unnecessary losses
– They mention the potential impact of losses or gains on future financial stability and inheritance
– The author wants readers to avoid frustration and disappointment in the long term.

BiggerPockets:

I’m really a pretty nice guy. I’ve met hundreds of you in person and spoken to a few thousand more prospects/investors by phone or on Zoom. So, hopefully, most of you agree. 

But as I write this, I’m a bit miffed. You see, our Wellings Capital team is like family. We love and care for each other. So, I hate to see anyone on our team taken advantage of. But it feels like that’s what happened here. 

Our team recently spent over five weeks heads-down on what should have been a straightforward preferred equity investment. I did the due diligence trip in the fall. It was a beautiful mobile home park, and we were eager to add it to our investment portfolio.  

We were supposed to close the deal two weeks after my trip. Ben, Troy, and I had visited the team’s headquarters and felt we understood them quite well. We liked their team, their asset types, and their track record. 

Here are some details on the asset and the proposed investment: 

  • The park had a significant waiting list (about 30 families), and homes typically sell within a day or two of placement by the operator.
  • Lot rents were about $175 below market rate in an above-average location.
  • 9% current pay cash flow to our fund, reserved for the first year.
  • 6% compounded annual upside takes the total coupon to 15%.
  • 2.5% origination fee, plus 1.5% exit fee.

As a preferred equity investment, this opportunity provided investors with a meaningful equity shield in the first loss position. And the operator, a 26-year CRE veteran, would sign a personal guarantee. 

We finally got to the closing table. The operator had spent weeks complying with our stringent but reasonable requests. We wired the money to the closing attorney, anticipating signatures the next day. We even emailed our investors with the closing announcement. 

Amazingly, on the morning of closing, the operator changed the terms of our deal. It wasn’t a complete overhaul of terms, but this was unacceptable—game over for us. We pulled the plug on the deal and got our funds back from the title company.

Do You See Why I Am a Little Ticked Off? 

This was a massive time drain for our team members and a significant disappointment since we had been conversing with this firm for over a year since our first visit to their headquarters. And it kept us from working on other opportunities. 

But it makes two simple points: 

1. It’s critical that you go to great lengths to perform appropriate due diligence before investing your hard-earned capital. 

2. Don’t move forward with a questionable investment based on sunk time or money costs.   

Passive investments can be a wonderful thing, but they can be a great source of frustration and loss if you link up with the wrong syndicator. It’s worth it to do the heavy lifting on the front end.

I don’t mean to sound arrogant. But we have reviewed and rejected hundreds of popular deals over the years. Many did quite well—while the tide was rising. Some have failed or are struggling in this receding tide

So Why Am I Still Happy? 

I have a lot of reasons to be happy, even amidst my irritation. Most notably, I’m happy because I’m satisfied that we did the right thing for investors and for ourselves (as fund managers). Because this deal could have gone okay, but it’s more likely there would be more trouble with this operator ahead. 

Are you a passive investor? I’m encouraging you not to skimp on due diligence. Invest the time, and don’t get emotionally married to any operator or deal. 

And there are much better ways to speculate. I wouldn’t do that in a real estate deal with projected returns in the teens or 20%-plus range. Why? Two reasons: 

1. Tech, pharma, and angel investments can have upsides of 1,000% or more. The risk-adjusted returns in most deals may stink, but there are those rare opportunities that create massive wealth for the lucky speculator. 

2. Real estate is a hard asset with (hopefully) real projected cash flows. It is perfectly designed for investment (rather than speculation). 

Sadly, many syndicators have dragged unwitting investors into speculative deals. The assets aren’t the problem. They were often solid properties with excellent cash flow potential. But the deal structure (overleveraging with risky debt, assuming rents would grow to the sky, etc.) is what got them into trouble. 

These syndicators turned potential investments into risky speculations. And many of you could figure this out through appropriate due diligence—either your own or through a trusted consultant. 

This is our hard-earned capital at stake. Don’t flush it down the drain. Remember: $50,000 lost or gained today could make a big impact on your future and the inheritance you leave behind for those who follow you. 

Plus, I don’t want to see you ticked off for the next decade.

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Mr. Moore is a partner of Wellings Capital Management, LLC, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (“PPM”) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188 or email [email protected]. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

In this article, I want to share a recent experience that left me feeling a bit frustrated. As a member of the Wellings Capital team, I consider my colleagues to be like family, and I hate to see anyone on our team taken advantage of. Unfortunately, it seems like that’s exactly what happened in a recent investment deal.

Our team had been working diligently for over five weeks on what should have been a straightforward preferred equity investment. We had done our due diligence, visited the property, and felt confident in moving forward. Everything seemed to be in order, and we were excited to add this mobile home park to our investment portfolio.

The investment opportunity seemed promising. The park had a significant waiting list, homes were selling quickly, and lot rents were below market rate. The deal offered a 9% current pay cash flow, with a 6% compounded annual upside and an equity shield in the first loss position. The operator, a 26-year commercial real estate veteran, even offered a personal guarantee.

After weeks of negotiations and compliance with our requests, we finally reached the closing table. We wired the money and expected to sign the next day. However, to our surprise, the operator changed the terms of the deal on the morning of closing. This was unacceptable to us, and we decided to pull the plug on the deal and retrieve our funds.

This whole process was a massive time drain for our team, and it prevented us from pursuing other opportunities. It served as a reminder of two important lessons. First, performing thorough due diligence before investing your capital is crucial. Second, don’t let sunk time or money costs sway you into moving forward with a questionable investment.

Passive investments can be a great way to generate income and build wealth, but it’s essential to choose the right syndicator. We have reviewed and rejected numerous deals over the years, and while some have performed well, others have struggled. It’s worth putting in the effort upfront to ensure you’re making a sound investment.

Real estate deals with projected returns in the teens or 20%-plus range may seem appealing, but there are other investment opportunities with even higher upside potential. Tech, pharma, and angel investments can yield returns of 1,000% or more, albeit with higher risks. Real estate, on the other hand, offers stable cash flows and is designed for investment rather than speculation.

Unfortunately, some syndicators have led investors into speculative deals by overleveraging or making unrealistic assumptions. It’s crucial to conduct proper due diligence or seek guidance from a trusted consultant to avoid falling into these traps. Our hard-earned capital is at stake, and it’s important not to waste it on risky investments.

Ultimately, I’m still happy despite the frustration of this recent deal. We made the right decision for ourselves and our investors, even though the deal could have turned out okay. I encourage all passive investors to prioritize due diligence, invest the time, and remain objective throughout the process. Take control of your financial future and don’t let poor investment choices haunt you for years to come.

Remember, the money you invest today can have a significant impact on your future and the legacy you leave behind. So, choose your investments wisely and don’t be afraid to walk away from a deal that doesn’t meet your criteria. Your financial well-being depends on it.

Disclaimer: The opinions expressed in this article are solely those of the author and do not necessarily reflect the views of BiggerPockets. Investors should conduct their own research and seek professional advice before making any investment decisions.

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