The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Expensive mistakes can sometimes come along when you believe you’re doing the right thing for a particular deal. Sinking money into LOI underwriting and term sheets might seem like an important step, but they can sometimes over promise and under deliver what is ultimately a costly mistake. Relying upon interest rates outlined in a LOI or term sheet might yield an unwelcome surprise as a project gets underway.
Richard Wilson: What is the most expensive mistake that you have had to make the hard way that you can help other avoid by sharing it here in the interview?
John Manes: Well, I’ll give you one of the first mistakes that we’ve made. I don’t know if it’s the hardest one, but one of the first ones is we got an LOI from a company out of New York that they looked at the katy project that we had three and a half or four years ago, they gave us an LOI, we liked what we saw on the paper, we paid them $8,000 in underwriting fee to underwrite the project, then we paid them another $38,000 for a application fee to get it rolling and so on. So a total of $46,500 bucks I think was the total tab. And the most expensive lesson I learned there is that the LOI piece of paper is not worth the piece of paper that it’s written on. Because in the end they told us it was 6-7% interest rate on a construction loan, we liked that, and in the end they came back and told us 9%. And we said “Well, that’s not what you said in the LOI.” “ Well, yeah, but my investors told me that they wouldn’t do it for less than 9.” And we literally lost $46,000 like that, and we lost it when we had no money.
John: So, it hurt twice as hard. By knowing what I’ve learned is LOIs and term sheets mean nothing. Their execution is what means something. It’s like you giving your girlfriend a promise ring, right? While you’re dating some other chick. That’s what the LOI and the term sheet is.
Richard: Right, right.
John: It’s an expensive – it was a $46,000 mistake for us.
Richard: Yeah, yeah.