What I’m thinking about: How sitting on liquidity and moving fast on distress just landed us potentially the best anticipated acquisition we’ve ever seen…a commercial property in NC’s Research Triangle that went from a $450K purchase to $250K in one negotiation.
(Delaying a return to the newsletter series about the life-changing 11 hours I spent with Alex Hormozi, to report on how we structured this deal, and how it relates to this unprecedented macro environment.)
Quick context: Commercial properties have an exceptionally high bar for us to consider funding. To start, you’re generally dealing with a smaller buyer pool, longer average DOM, and higher capital requirements.
99% of commercial deals that hit our inbox get rejected quickly because there’s a near-zero precedent for sales, or comps are ancient, or the parcel is reliant on speculative growth, or sellers are delusional on pricing. (I could write several thousand words on the risks of commercial land, so the above is a brief summary).
This parcel was different.
The property had solid commercial sale precedent in the area…multiple transactions between ~$700K-$1M over the past few years, including a number of them within the past few months, with remarkably similar characteristics.
The local market and population is still experiencing solid growth (or worst case maintaining status quo), in the face of general macro headwinds around much of the US.
(We’ll continue to dive into macro data and how it relates to real estate in many future newsletters…it’s one of my keenest areas of focus, hard to get a grip on the full picture, and many professionals are woefully under-informed, or misinformed, about economic drivers underpinning the market.)
The tradeoff for this deal is that the municipality governing the planning and permitting of this commercial land is exceptionally slow. Even if we found a buyer within 2-3 months (likely), it would likely take at least a year to close, conservatively closer to two.
Many funders balk at that timeline, preferring exits to stay firmly under 12 months max. While we share that enthusiasm for capital velocity, longer time horizons just need to be priced into the risk.
Investing decisions all exist on a spectrum, right?
In this case, I figured a $700K exit would be conservatively reliable, with $600K being a worst case scenario.
In a risk-off environment where liquidity is king, tying up $450K in this situation would be foolhardy.
So I threw out a number that would work: $250K.
(Virtually always, unless the deal in question is in the bottom 25% of characteristics, or falls below or $50K min purchase threshold, I’ll suggest a number that would make a deal more interesting to us. It rarely pans out, but if you don’t make offers, you can never win.)
The land investor who brought us this deal is sophisticated, had clearly done his homework, and lined up a responsive commercial land broker with an excellent track record.
A requirement for us to fund any deal is to understand the seller’s motivation…we have to ensure that we aren’t being hoodwinked.
In this case, the distress was real. Medical expenses piling up (healthcare premiums are continuing to spike nationwide…another reminder that patient capital wins the day, and we can solve a lot of folks problems quickly, in the face of increased economic burdens).
The seller had bought the property for $400K over a decade ago, so at the original $450K price point, he was essentially breaking even after opportunity cost and inflation.
The land investor countered with our $250K offer, without pressure, offering to connect the seller with the agent we had engaged, with the understanding it could take upwards of 2 years to get a higher price on his property, but if we were to take on that risk, and close quickly, $250K was the best we could do, otherwise we would walk.
All of that is true. As Hormozi remarks, the person that is more willing to walk from the closing table wins almost all negotiations. (Yes, we all tout the virtue of pursuing ‘win-win’ scenarios, but almost always…someone wins a bit more, even if just psychologically.)
I often imagine nirvana is to be in a state of being impossible to be negotiated with…for anything.
The seller also put extreme time pressure on us and insisted on closing within a week of signing an agreement.
There aren’t a lot of companies who can cough up a quarter million dollars in cash within a few days, and that amount of money goes a long way toward medical bills, regardless of how sick you are.
Stunningly, over the weekend, I wake up to see that our land investor partner successfully got the seller to sign an amendment for $250K…I had to do a triple take!
(I’ll never get tired of the thrill of this business when you KNOW there’s a killer deal to be had.)
This is why slack in the system (and your underlying finances) is so critical in today’s market. We can sit quietly, for potentially weeks on end, passing on ‘okay’ deals…in order to leap onto screamers on a Sunday morning so we can close on opp’s that can make our entire quarter.
Knowing when (and how) to pursue biz opportunities with 10/10 intensity is a skill few companies excel in. It’s becoming our bread and butter, particularly in a risk-off, distressed environment.
After thoroughly grilling our realtor on pricing and exit strategy, we confirmed there’s as close to zero chance of losing money as is possible in land.
Even more encouraging, we discovered that we’re buying at a level where we could flip to another opportunistic buyer at ~$500-600K within six months (through normal marketing methods, or a local auction…with reserve pricing fortunately), or hold for the full ~2 year entitlement and potentially exit closer to $1M.
As we’ve learned the hard way multiple times, optionality is power in an unpredictable macro, and illiquid industry like land.
Make sure you have at least one guaranteed out…as you never know exactly how the market will respond and which types of buyers will come forward.
Almost always, when possible, we will pursue velocity over maximum profit in uncertain markets. We prefer a ~2X in six months over a ~4X in two years when liquidity is valuable (and the macro remains shaky).
Due diligence was tight. Ideally we’d have engineering studies to assess rock content and development ease, but at this price even worst-case scenarios don’t touch our downside protection.
Again, price for risk within the circumstances presented to you…and be ready to walk if your price isn’t accepted.
We expect this property to close imminently (and yes, expect distressed sellers to be loose cannons until title fully transfers…but our underwriting holds regardless of whether this deal finalizes or not).
Some will work, some won’t…but the process remains the same.
Use our lessons to your advantage, volume negates luck.
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Looking for funding from operators positioned to move fast on distressed deals? Serious Land Capital leads the industry in rapid capital deployment on properly-priced opportunities, with significant liquidity reserves. $50K minimum purchase price. We don’t sit on the sidelines when distress creates openings. Eyes wide open 7 days a week…
