Underwrote a relocation firm's interest letter as if it were occupancy. It cost me $6,800.

This is a deal I didn't close, and the money went out anyway.

I've been working toward a first purchase for a while and got further than usual on a four-unit near a hospital and two office parks. The plan was three units plain and one furnished corporate, and the seller's broker introduced me to a relocation management company that places people in that submarket. I got a letter from them. It said they'd anticipate placing 6 to 9 assignments annually in a unit of that quality at rates in the $2,800 to $3,200 range, subject to vendor approval and availability.

I read that as a demand letter. My underwriting used $2,900 at 75% furnished occupancy on the one unit, which is what got the deal from a 6.1 to a 6.9 on my numbers and got me comfortable with the price.

What I spent before it died: $1,900 on inspection and a sewer scope, $650 on an appraisal deposit, $2,400 to a real estate attorney for review and an entity setup, and $1,850 non-refundable on a furniture order I placed early because there was an eight-week lead time on the sectional and I wanted the unit ready at closing.

It died because I finally asked the relocation firm's vendor manager two direct questions in writing. First, does the letter commit anything. No. Second, what does approval require. A minimum of two years operating furnished inventory, a 24-hour contact, and rates set from their rate card, which was $2,450 to $2,600 for that unit type, not $2,900. At $2,500 and a realistic first-year occupancy of maybe 40% while I sat in the approval queue, the deal was a 5.4 and I walked at day 21.

What I'd do differently: I'd send the two direct questions before spending a dollar. The letter cost them nothing to write and it was accurate on its own terms. I was the one who turned "anticipate" into an occupancy assumption. And I'd never order furniture before closing again, no matter what the lead time is.

Answer

1laurenkim53Passive

I'd put the cause somewhere else than either of you. The deal needed one furnished unit at $2,900 and 75% to work. That means the deal didn't work.

Run it plain. Four units, market unfurnished rent, and see what it is. You said it's a 6.1 on your numbers before the furnished unit, and you were willing to buy at 6.9. The furnished unit was doing 0.8 of cap rate on a strategy you had never operated, in a channel where you were not yet an approved vendor, at a rate that turned out to be 15% above the buyer's own card. Any one of those going wrong takes you back under your threshold, and all three were unproven at once.

The useful rule I've landed on for the cheap rural stuff I look at: the deal has to clear on the operation I already know how to run. Anything new is upside I don't pay for. If you'd underwritten all four units plain and treated the corporate unit as a maybe, the relocation firm's rate card would have been interesting news instead of deal-killing news, and you'd probably still be in it.

The $6,800 is mostly real diligence money on a deal you correctly walked from, minus the furniture, which was the only genuinely avoidable line.

3 replies

0ehernandez74PO2BPRO5

The furniture order is the part I'd flag hardest, and I say that as someone who takes six months to decide anything. $1,850 gone on a unit you didn't own yet. Lead time pressure is how sellers and vendors get you to act out of sequence.

But I think you're being slightly hard on yourself about the letter. Getting anything in writing from a placing firm during diligence is more than most people manage. The failure was narrower. You didn't get their rate card, and the rate card is the only number that matters if they're the buyer.

2kevin_lombardPG1BPRO5

I had to read @hollow's post twice and then I understood the whole thread differently. I've been writing down furnished numbers from posts here as if they were the going rate. It hadn't occurred to me that the company doing the placing publishes what it will pay and that number is the ceiling regardless of what the market comps say.

@quill, when you asked the vendor manager for the rate card, did they just send it? Or is that something they only share with approved vendors?