Taking a Peak at the Dark Side
I’m probably taking this a bit too far, but I feel like I’ve just had a peak at the dark side. I should give you a little more background before I get ahead of myself.
I have a client who inherited some land out in the middle of the country. He decided to sell the land piece by piece and put something on facebook: Not the greatest marketing strategy I’ve ever seen. Amazingly enough, he received an offer, and it was not one of those bottom feeder, low-ball offers that you would expect. It was a good price.
Here is where it begins to get interesting. The buyer wanted my client to seller finance the sale. He would pay us a down payment and pay the rest over some term This in of itself is not unusual and my client was happy to take the down payment and stage out the remainder of the purchase price, plus interest, over time. The buyer offered to pay 20% of the purchase price up front, as a down payment, and the rest he would pay to my client under a promissory note. So far, so good.
This is where it begins to get hinky. The buyer was a company and did not offer to guarantee the loan. He also wanted our client to release tracts as the buyer sold them. When we asked for a preliminary development plan, his replies were vague. We explained to him that he was asking us to be the lender and we wanted the basic protections that a bank would require. He flatly refused, claiming that our position was not like a bank who loaned money. If he defaulted, we would take back the land and we would be in the same position we were in now. Not really true, but we continued to talk.
He also asked to apply the down payment toward the releases. I’ve seen that before, but without a development plan or any controls over how the property was divided and sold, or even the amount of the release price, we were beginning to feel uncomfortable.
When a property is divided and sold like this, the release price needs to be more than enough to pay off the loan. Usually, the price is 110% or more of the loan balance and is allocated among the lots according to their value. Corner lots are more valuable than others. Lots that front the highway are worth more than interior lots and are cheaper to develop. The developer does not need to build roads. In most cases, the developer can build a driveway to the highway.
During this entire time, the buyer continued to insist that he was reasonable and open to negotiate these points, but his actions proved otherwise. Everything we asked for, he flatly refused. We asked for personal liability by the person who controlled the buyer. He refused. We asked to base the release price on the value of the lots. He changed the subject. We asked for examples of other development projects that he’d done. He began to become defensive and angry. He acted like I was a deal-breaker and looked to my client for help.
After a few minutes of this, it became very clear that this buyer had an agenda. I will never fully know what his private intentions were, but the way the offer was drafted, he could buy the land and sell off all of the most valuable pieces and then walk away, without any liability or risk. The property would be ruined and he would have some money in his pocket. My client would have no recourse other than to take back the property and try to sell the interior lots. To do this, he would be required to build the roads and spend more money.
Was this the buyer’s intention? We will never know, but the old adage kept echoing over in my mind: “If it sounds too good to be true, it probably is. He was offering a good price and good interest. This made my client want to try to stretch to make a deal.
In my 34 years of practice, I have only “killed” three deals and this was one of them. I am a deal maker, not a deal killer. It pains me to be in this position. But there is a time, when you catch a glimpse into the dark side and know, that there are no happy endings here, and it is time to cut your losses.
What did I take away from all this? These guys are predators and con artists. They lure you with the hope of big returns. They also try to manipulate you with pressure and emotional coercion. When you are doing business, don’t get caught up in all the emotion. Remain dispassionate. It is just business. When the deal no longer makes sense, calmly walk away and never look back.
William M. Bell, Jr.