Which Comes First in Real Estate: The Deal or the Money?

Commercial real estate investing has always been fraught with complexities, but one of the most persistent challenges investors face is the "chicken or egg" problem.

In essence, it’s the struggle of timing...

Do you secure the deal first or the money?

This question is at the heart of many investment strategies, and the answer is far from straightforward.

The Timing Challenge

When you find a deal that meets your investment criteria, the clock starts ticking. The process typically involves conducting due diligence, which might need to be completed within 15- to 30-days, and then securing financing, which often comes with a 45- to 60-day contingency.

The pressure can be intense, as any delay can jeopardize the entire transaction.

In today’s market, the situation has been further complicated by longer wait times for critical reports along with the difficulty in securing financing, both which add more pressure to an already tight timeline.

Since February 2022, with the rapid increase in interest rates, securing money—whether through lenders, gap financing, or equity partners—has become a more drawn-out process.

Investors often find themselves in a situation where they don’t know if the funds will be available until very close to the closing date.

This uncertainty can lead to tough decisions: do you walk away from a potentially lucrative deal, or do you proceed despite the risk of financing falling through?

The Deal - Time-Sensitive and High Stakes

The nature of commercial real estate deals means that when a good opportunity arises, there’s little time to act. Delays in due diligence can be costly, and when combined with slow report generation, investors may find themselves in a bind. If due diligence reveals a potential problem late in the process, the investor might not have the time to thoroughly investigate the issue, forcing a difficult choice between abandoning the deal or proceeding with significant risk.

Even if you navigate these hurdles and secure the deal, the challenge isn’t over. The next step is arranging the necessary funds. If you have your own equity, the process is smoother. However, raising capital from friends, family, or institutional investors can be particularly challenging in today’s uncertain market. With fears of a recession combined with already elevated interest rates, potential investors are more likely to hold onto their cash, making it harder to secure the necessary equity.

The Money - Who Holds the Cards?

In the current market environment, financial institutions and equity partners have the upper hand. They have the capital but are increasingly selective about the deals they fund, often dictating strict terms. The shift in power dynamics is evident as some joint venture equity partners have changed their strategies entirely.

For example, some have moved away from joint venture equity or quasi-equity solutions and now focus exclusively on senior debt or bridge debt. This shift reflects a more conservative approach.

This cautious stance means that securing financing has become more difficult. The conversation around whether to raise money through a fund or on a deal-by-deal basis is more relevant than ever.

Holding a fund with no deals can be costly due to the preferred returns owed to investors, but raising money on a one-off basis requires willing investors in an uncertain time.

If you can’t raise enough equity in time, you might have to put in more of your own money at closing—assuming you have it available.

Market Uncertainty and Investor Hesitancy

The current economic climate adds another layer of complexity. Many investors are hesitant to commit to deals, preferring to wait and see how the economy unfolds. This caution is understandable, given the potential for a recession and ongoing concerns about interest rates. Institutions, too, are more particular, with many now sitting in the driver’s seat, able to dictate the terms of any deal.

Final Thoughts

The biggest issue in commercial real estate investing today is undoubtedly the chicken-or-egg syndrome related to deals and money. The timing of securing both due diligence and financing has become increasingly challenging in the current market environment. Investors need to be nimble, well-prepared, and, perhaps most importantly, patient.

The truth is, both the deal and the money are critical.

* Sign up for my weekly newsletter, Cash Flow Net Worth, where we discusss actionable real estate investment ideas and insights to help you increase both your passive cash flow and net worth over time.