One of the more frustrating things about doing careful work is discovering that the answer was supposed to be yes.
Usually you find this out when you bring back an answer somebody didn’t want. You’ve spent a couple of weeks on a deal, you walk them through why you’d pass, and they ask you to take another look. Fair enough. I’ve missed things, and sometimes a second look is exactly what the deal needs. It’s when I’m back for the third meeting having essentially the same conversation that I start to wonder what I was asked to do.
Say there’s an apartment deal somebody on the investment committee really likes. The first pass comes in below the return we’d need at the seller’s price. The team checks the rents, gets better renovation pricing, and goes back to the lender. The deal still comes up short.
At the next meeting somebody asks what happens if we assume a little more rent growth and sell at a lower cap rate. It takes about thirty seconds to find out. The deal works. I’d probably ask what we’d seen in the leasing that made us comfortable with the higher rents. It’s a reasonable thing to ask, especially if we’re about to offer more for the building on the strength of that number.
Maybe we want to buy it anyway. We own the property next door, and there’s something we can do with both sites that we can’t do with one. I’d be happy to have that conversation. How much is that worth to us, and how long are we willing to wait for it? If we’ve already put enough rent growth in the model to get the return we need, we can get through the whole committee meeting without ever discussing what we’re paying for the site next door.
The team pays attention to how these conversations go. If you bring in a rent comp that helps the deal, it goes in the memo. If you bring in one that hurts it, you get asked whether the building is really comparable. Maybe it isn’t. After a few rounds, though, you get a pretty good sense of which comps are going to take up the rest of your afternoon.
That’s where diligence starts to become validation. I think of it as a Near Enemies pattern because some of the extra work really does improve the analysis. The team may have a much better handle on the property by the end. It can still be surprisingly hard for anyone in the room to say they think we should pass.
Before I send the team back out for bids, I’d like to know what we’ll do if they come in higher than we’ve budgeted. We might offer less or scale back the renovations. We might be willing to absorb the cost because we want the site next door. I’d rather have that conversation while we’re waiting for the bids. It’s amazing how much easier it is to be flexible about the renovation budget once you’ve told the seller you’re going to buy the building.
Sometimes we’ve already decided to buy it and need the team to figure out what we’re taking on. I’d tell them that. If we’re asking them whether we should buy it, I’d want to be able to answer one question before they go off and do another week of work. What could they come back with that would make us change our minds?