The following is a scenario that is cropping up more and more with my clients and with those who have recently reached out to me asking for input on a potential real estate or business deal. I thought it might be helpful to others to put into writing my thoughts on the subject…

As a value investor when it comes to buying real estate, I find it imperative to constantly remind my clients and myself, for that matter, to stay disciplined and keep emotions in check. Easier said than done; and that includes yours truly. As a value investor for nearly 16yrs, it is extremely difficult to “run the numbers,” remove emotion from the equation and come up with what you feel is a fair and genuine offer only to see a frustrated seller huff and puff and say…”well I need to sell it for X because I need the money to pay off [fill in the blank] or for another investment.”

A property is worth what it’s worth based on what it is and the market conditions. It is not based on what one needs to pay off a bill or fund another project or what one hopes to get for that matter. Equally frustrating are situations where the asset was doing well before the current owner purchased it and whether through misfortune or incompetence, the current owner has driven the property/business into the ground and yet, fails to see this except at the margins. And of course, he still insists on making a profit from his sale even though there is no logical argument to say that he should.

How do you combine professionalism, persuasion and frankness in order to make the seller see that you’re not trying to put the shaft to him? In reality, it is the owner himself through mismanagement that that is clearly the holder of said shaft.

I must admit I’ve struggled with some recent “value” purchases in bridging that gap between what I feel is fair market value and the owner’s desire to sell high. It’s understandable why an owner will hold out for as long and as strongly as possible; I think it only human nature for one facing a substantial loss not wanting to see it crystalized . In each of the last three deals, my clients and I were looking at properties that carried a lot of excellent potential for some pretty cool projects; projects that would likely get noticed by more than a few inside and outside the industry and more importantly, all three had great profit potential. That being said, the risks and efforts to make these properties work was/is substantial. In all three cases, we’re talking about mulit-year projects with substantial soft and hard costs. And in all three examples, the current owner had contributed in various ways to the decline of the property.

It can be very disheartening for an eager investor with a cool and profitable project staring him in the face, being told by his advisor to hold firm and be prepared for a failed deal. Surely it’s far better to deal with that disappointment than to overpay for an investment that might add a decade to the return on investment due to a rash offer.

I must say I continue to work on my negotiation and communication skills with the hope of being able to bridge those gaps in the future. I continue to hold out hope that each of these three deals might be resurrected. I also continue to find new and creative ways to bridge these gaps by creating different structures and agreements that allow for the current owner a second chance at turning around their investment all the while giving up a portion of his business/property in return for this new lease on life. Unfortunately, we haven’t bridged that gap—yet!

In the end, I will continue to instruct my clients and anyone else who seeks my advice to be disciplined; there’s always another property or business to buy and a disciplined purchase based on cold hard numbers rather than emotions and a competitive drive not to lose (auction fever syndrome) out on a price that plays more to your ego than your brain. And of course, I will try my utmost to follow my own advice for my own purchases

Brian Dagenais