Failing the Buyer Interview
The decision to sell a property is not one to be taken lightly. Unlike more liquid investments, property sales take months, involve multiple points of negotiation, and carry significant transaction costs. From the seller’s perspective, agreeing to work with the wrong buyer can be both frustrating and costly. The buyer interview is one tool that can be used to minimize that risk.
Outside of unique situations, for most sellers the goal of the process is to find the best combination of price and surety of close at acceptable terms. In Acing the Buyer Interview, we touched on some of the consequences of picking the wrong buyer:
Every acquisition requires the buyer to prove to the seller (and seller’s broker) that they can and will deliver on their promise to close the transaction at the terms they are offering. To the seller, the downside of picking the wrong buyer is at best time wasted (weeks if not months) and at worst a broken deal. For the broker, recommending the wrong buyer to their client means a potential lost commission and a certain loss of credibility. With so much on the line, neither sellers nor brokers want to make a mistake.
That post highlights strategies buyers can use to improve their chances of making it through the interview process. On the other hand, what are some red flags that sellers might want to watch out for?
The buyer is unprepared. They have not shown that they have done the work to secure financing (or strong quotes) or lined up due diligence providers. Their underwriting is full of placeholders or assumptions that have not been confirmed. They haven’t spoken with property managers or other service providers. While many of these items will typically be taken care of in due diligence, you want to know that the buyer is proactively thinking about them.
It’s unclear where the equity is coming from. This might be a syndicator who hasn’t finalized investor commitments or an advisor who indicates that the deal might be a fit for any number of their clients (without having one fully committed). This might be understandable at the initial offer stage, but by the buyer selection stage you want to know they have raised the funding they will need.
They are buying as part of a 1031 exchange and are making offers on multiple properties. The 1031 exchange process involves strict rules on timing and identification of replacement properties. Early in the process, an exchange buyer may make offers on multiple assets in order to guarantee they will be able to close on at least one. This could translate to a lukewarm commitment to your property over other options or a questionable closing timeline if the initial sale hasn’t closed yet. Alternatively, they could be nearing the end of their identification period and desperate to get something under contract, which would be a positive sign.
They rely on style over substance. The buyer is overly cocky, dropping names and relying on salesmanship over clear, honest answers to your questions. There are many exceptions, but this can sometimes come from larger firms who expect to be exempt from the process based on reputation alone.
They try to railroad the process. No one likes a bully. The interview is a chance to pick a partner who you will be negotiating with/against for months. All else equal, if it feels like you are going to make everything difficult, you aren’t winning a tiebreaker. Also known as the no a**hole rule.
They have a bad reputation in the market. This group may have a history of tying deals up and dropping them later, re-trading on price at the last minute without legitimate reason, or other shenanigans.
Their team is inexperienced. They may be represented by a broker or attorney who is new to the game or out of their element (a residential broker working on a commercial transaction, for example). This has the potential to drag out the process or bring unnecessary complications.
None of these red flags should be automatic disqualifiers for any buyer, but they do warrant additional consideration. Once you select a counterparty, you are committing to work with them through what can be a months-long process. There may be cases where there is only one bidder, in which case the interview will at least allow you to go into the process with eyes wide open. In those cases where you have the luxury of choosing between multiple qualified bidders, using the buyer interview to find the best fit is key.