Commentary
As of April 2022, experienced syndicators (those who raise money from investors to invest in real estate) stopped using hard money to secure deals. At the time, many investors were questioning this practice as not going hard on the money made those of us more experienced lose out on some potential cash-flowing properties. However, this decision came from years of experience. I have been through turbulent markets before and knew going hard on the money in an environment where interest rates were changing could have some negative consequences for investors.
What is Hard Money?
Before I explain why I stopped going hard (nonrefundable earnest money) with money to secure deals, let me first explain what that means. When you put an offer on a multi-family property and are accepted you have to put down earnest (money put down to secure real estate during the due diligence process) money. This earnest money is refundable if you decide to back out of a deal for any reason in the allotted time frame. In multi-family deals, the total of earnest money is normally about one million dollars. In a competitive market, some buyers will go hard on the money. This makes the earnest money non-refundable, so the seller gets to keep it even if the buyer decides not to close on the deal. This is really enticing to the seller for obvious reasons and as a buyer going hard on the money really gives you a competitive edge over other offers. If you do your due diligence, going hard on the money is a great strategy in a stable market.Why We Stopped Using Hard Money
So fast forward to early 2022 everyone was going hard on their earnest money including my company MC Companies. The market was stable and we were able to acquire a lot of great deals this way. However, when the FED increased rates a quarter of a percent in March my company took a pause. We spoke with our lender and many others in the industry and knew the FED meant business in calming inflation. That is when my partner and I made an executive decision that our comapny was going to stop going hard on our earnest money for the time being. This was a move based solely on our experience and the connections we have in the industry.The issue with a multifamily deal is that they take months to close. While a slight change in interest rates can happen, a large change can turn a good deal into a bad deal for investors. With rates going up half a percent in May, and three-quarters of a percent in both June and July a lot of cash-flowing deals have turned sour. These interest rate hikes confirmed we had made a good decision.
My comnpany was also affected by these rate hikes. With the three-quarter percentage hike in June, the numbers on a deal we were in escrow for no longer made sense. Because our earnest money was refundable, we had no issues backing out of the deal and our investors were not affected. In fact, they were pleased with us for keeping their best interests in mind and choosing to not move forward with the deal.
