Are You a Dealmaker or a Tire Kicker? - by Ray Alcorn

In an average year, our family business will buy, sell, and finance $10 million to $15 million in deals. That volume gives us a pretty good read on market conditions, and we stay in close contact with dozens of buyers, sellers, and brokers. Over the years, we've learned that there are generally two types of players in this game:

1) dealmakers, and 2) to borrow a term from the car business-tire kickers.

Dealmakers vs. tire kickers

Tire kickers look at dozens of properties and talk a great game, but don't really know enough to take decisive action. Dealmakers know how to close the gap between the offered and asking price and successfully close deals.

A tire kicker has little knowledge of the market or what he is looking for; a dealmaker knows where to invest because he has researched the market, knows what to look for, and doesn't waste time looking at properties that do not fit his criteria.

A tire kicker has not established lender relationships or business plan and asks every seller for 100% financing; a dealmaker has existing lender relationships, can bid an all-cash price, or can assume existing loans.

A tire kicker figures he can manage the property cheaper--not by improving the operation, but by cutting corners; the dealmaker knows exactly how he will manage and improve the property and anticipates the costs.

A tire kicker analyzes a property based solely on the most recent annual operating statement; a dealmaker will examine the trend of operations over several years, eliminate anomalies, and integrate the information with overall market trends.

A tire kicker will capitalize the net operating income at a 'market' rate for valuation; a dealmaker will be more aggressive and use a rate that reflects their own return and loan requirements

A tire kicker will base the valuation on the operations as stated; the dealmaker will use a normalized, forward-looking projection that reflects his operation of the property and the effects of an improvement plan.

A tire kicker attempts to make one deal structure fit every situation (e.g., seller financing); a dealmaker finds the seller's most pressing need and structures the offer accordingly.

My old deal folders are full of unconsummated offers from tire kickers. When we're selling property, we try to flush out tire kickers quickly to avoid wasting time on a deal that has little hope of closing. It is often an intuitive judgment, but in most cases, I can size up buyers by how they approach the deal.

They make low-ball offers before they even look at the property. Or they fill the offer with weasel clauses and a laundry list of contingencies. They have no bank references or track record that indicates they can perform. Tire kickers are often unsure of themselves, and it shows.

How to spot true dealmakers

True dealmakers are easy to spot. A true dealmaker knows his financial capacity in cash and credit; he has criteria for property type, market, and minimum return requirements. He uses the tools of financial measurement to quickly evaluate the property, then formulates a game plan and deal structure that allow him to achieve his goals.

He doesn't grind the seller for the last dime of price concessions because he knows that the real proof of the deal is in the ability to make the plan a reality.

Interestingly, years of experience does not automatically mean a buyer is a dealmaker, nor is a new investor a guaranteed tire kicker. The determining factor is the extent of the investors preparation. In a nutshell, the dealmaker has taken the time to think things through.

He has a firm grasp of his financial capacity and knows what, where, and when he wants to invest. He has a business plan that addresses those criteria, and taken the time to form lender relationships. In short, he is ready to act when the opportunity appears.

We recently sold an apartment project. It was a 'B' property in a very good market. Within the first couple of weeks it was on the market, we received five written offers. Two of them were low-ball, contingency-laden offers from pure tire kickers. The remaining three offers were very close in price, but widely divergent in terms.

One of them had not seen the property, wanted us to finance 90% of the price, and asked us for the names of available fee managers in the market.

The second buyer did a property inspection and seemed financially qualified, but wanted us to wait until they could put their current property on the market, secure a buyer, and complete a 1031 exchange.

The third buyer performed a personal site inspection, then made an all cash offer. His terms included a thirty-day inspection period and closing within thirty days after acceptance of the property condition, with no contingencies other than clear title and survey. The property fit his investment criteria for location, size and management requirements.

He was prepared to accommodate our needs for a 1031 exchange if needed. He based the valuation on the current rent roll and normalized operations under his ownership, and used the pre-closing period to form an improvement plan to increase income.

As you may have guessed, this is the buyer we chose to work with, and the deal closed as agreed. This is a shining example of a dealmaker at work.

Four basic steps to structuring great deals

If you want to build significant wealth in commercial real estate, you have to take the time to think things through. Great commercial real estate deals don't just happen; they are created by dealmakers, those who have taken the time to develop a strategy to accomplish their investment goals. What does such a strategy look like? It's simpler than you might think.

Get your personal financial house in order. Orient your financial affairs to serve your purpose. Only then, can you be ready to act when opportunity appears.

Form your criteria for property type, size, and location. As the saying goes, if you don't know what you're looking for, you might not find it. Observe the local market and identify opportunities within your capacity.

Once you've identified a potential deal, learn how to accurately value a property based on its condition, your return requirements, and your borrowing power. Decide whether a deal is good based on fact, not emotions or the opinion of the moment.

And finally, learn how to structure deals and make offers too good to refuse. Act decisively, and then reap the profits.

Those four steps are the four modules in my new book, DealMaker's Guide to Commercial Real Estate. The book is written for those who have some working knowledge of real estate, a desire to expand their comfort zone and portfolio, and to give the investor the working knowledge to become a true dealmaker.