The Zoom call with the sellers' lawyers ended and we all remained seated in silence until one of the partners to the deal got up and left the room, slamming the door. The call was not easy. After 2 extensions the sellers announced through their lawyers that they did not intend to wait any longer and that they were cancelling the preliminary agreement and forfeiting the deposit. All attempts at persuasion, including an offer to transfer them a further sum on account of the price, did not help.
For more than a year before the Zoom call, the client had been trying to raise money to complete the purchase of a building under construction in a European capital, which it was decided to sell because of an inheritance dispute between the local developer's sons. A deposit of 10,000 euros was paid, and it was agreed that my client would raise the balance for the purchase of the building within 6 months.
Immediately after signing the preliminary agreement he began his marketing efforts and sold 2 of the 30+ apartments in the future building in presale. He was optimistic, but then the discussions about the judicial overhaul began and the well ran dry. For several months he was unable to sell. As the date for completing the purchase approached the pressure grew, and he began negotiating with banks in the country where the building is located and with other financing bodies.
As the completion date approached, we understood that he would not be able to raise the required balance. We held quite a few conversations and discussions on the subject. I tried to persuade him to cut the damage, lose the 10,000 euros and exit the deal, since the uncertainty about his ability to raise the balance was too high at this stage. In the end I was sent to negotiate an extension, under which the client was required to pay a further 10,000 euros on account of the price and receive two more months to raise the balance. The money was raised from an investor.
Since intensive negotiations were under way with 2 financing bodies, the investor agreed to add a further sum as we neared the end of the extension period, in order to obtain another period of time to complete raising the balance.
October 7 caught us all by surprise, and caused the 2 financing bodies with which the client was negotiating to suspend/stop the discussions. One of them also announced that it had no intention of financing the purchase. The other began raising difficulties. We tried to persuade the investor to finance the entire purchase, but he said, perhaps rightly, that since additional funds were needed to complete construction and he could not finance that, he feared that the client would not be able to complete the project.
1. Do not sign an agreement before you have secured at least 50% of the first-stage financing for the project.
2. Always combine several financing sources at the investment stage (and do not rely on one investor, one lending bank or one financial capability).
3. Afraid of missing a real estate opportunity? Learn to work with an option agreement on the deal and test the risk and your capacity.
The issue often arises with developers who do not have the capital required to carry out a purchase and try to do so using buyers' money or other outside financing. Quite a few of the developers I work with enter a deal when not all the financing sources are known to them and they do not have the required capital.
How do you, as developers, handle this?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית