Investments in real estate can often appear promising on paper, but it's not until after thorough due diligence that you can truly determine whether a deal is worthwhile. At Valore, we have encountered numerous investment opportunities that initially seemed lucrative but were ultimately declined due to various issues discovered during the acquisition process.
One example is Pucket Point Apartments, a 110-unit value-add opportunity with an asking price of $10.5 million. Although our quick analysis indicated the investment was a good fit, further underwriting revealed two major issues: a significant increase in property taxes following the sale and unachievable post-renovation rents. These issues necessitated a $3 million reduction in the sale price, which the seller refused, leading us to decline the investment.
Another example involved a three-property portfolio called the Raytown Three Portfolio. After negotiating a purchase price of $25.2 million and executing the purchase and sale agreement, we had a 30-day due diligence period to inspect the properties thoroughly. During this time, we conducted an extensive physical inspection involving multiple professionals, including electricians and plumbers.
Although everything seemed to be proceeding smoothly, our inspection team discovered significant undisclosed life/safety issues, including widespread mold and structural damage. The cost of remediation for these problems far exceeded our initial estimates, making the deal financially unviable. Despite attempting to negotiate with the seller, we ultimately decided to terminate the contract and decline the investment, incurring a loss of $150,000 in inspection, legal, and lender fees.
While losing $150,000 may seem substantial, it pales in comparison to the potential risks and financial strain associated with moving forward with an unsound investment. Thorough due diligence is crucial in ensuring that a real estate deal is truly worth pursuing. It is only after this comprehensive process that you can accurately determine whether an investment opportunity is as promising as it initially appears or whether it's better to walk away.
