For a week he did not stop sending messages that he had a new offer to buy a plot for construction and wanted to schedule a meeting. Since we have known each other for several years, I asked again and again whether this was a serious offer or whether we were once again meeting for a friendly chat, because every few months he would come with various half-baked offers and/or ideas, and only rarely did we start processes that ended in a project or two during the years of our acquaintance and joint work.
After the obligatory small talk, a bit of business gossip and two cups of coffee, he opened the presentation he had received on the proposed project. It is a plot near the center of the capital city in a tourist country, on which stands a one-story residential house, which according to him can be demolished, and a building of 4-6 floors built on the plot. There was also a basic business plan that showed a handsome profit from selling the apartments. But, and this is a big but, based on my experience, many parameters were missing for it to be possible to proceed here to a deal.
“David, you understand that this is an offer that is not yet ripe for a deal,” I told him at the end of the presentation.
“Why?” he replied. “There's a plot here, there's a price here, the costs of demolishing the house, planning costs, construction costs, expected sale prices. I don't understand why you're putting me down like this.”
“Very simple. Do you see that there are 2 scenarios here, in each of which there is a different number of square meters to build? What exactly are you going to build? One-room apartments? 2 rooms? 3 rooms? Are the apartments intended for the local public for sale or for rent? Shall I go on?” I replied. “I expect you to come with something more developed, perhaps even with a preliminary architectural sketch, after a local architect has sat down and examined exactly what the building rights are, what it is worthwhile and possible to build on the site,” I continued.
“I understand,” he said, like a pupil scolded by the teacher, “but why not start negotiating, start moving forward and gather all the data along the way? I understood that the owner wants payment of a deposit and the signing of a preliminary agreement as a condition for taking the deal off the market. I have already negotiated with him and he is willing to give us 3 months to carry out our checks.”
“No problem,” I replied. “You need to understand that you are taking a risk here.”
The owner demanded a deposit of 10%, and after negotiation conducted by the local team with his lawyer we managed to reduce the deposit to 5% against signing a preliminary agreement. In parallel with the negotiation David began carrying out checks with the local architect and generating a concept of the maximum utilization options for the plot. As he progressed in the process his enthusiasm for the deal waned, and it became clear to him that there was a gap between what had been presented to him in the initial presentation and what could actually be built and/or the expected costs, as well as future sale prices. A month and a half after signing the preliminary agreement he understood that the deal was less “glittering” than he had thought at first, but we did not manage to find grounds that would allow him to withdraw from the preliminary agreement without losing the deposit he had paid.
There is nothing more annoying than losing in a deal. But what can you do, sometimes you lose, it happens to the best of us, and it is important to me to reflect to you that in investments, there is no chance without risk. But when you take a risk, it is important that it be as calculated as possible. In this case David decided to take the risk in any event and to continue with the deal and try to carry out the project, although the developer's profit will probably in the end be lower than he had expected at the start. He made some changes in order to lower construction costs and reduce the risk and the loss.
Would you have taken this risk?
How do you perform the chance-versus-risk balance for yourselves before the start of a real estate project?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית