Reflection: There's No Trophy For Complicated Deals
I've been lucky enough in my career to meet with some very successful, smart investors who I admire, and over time there have been some quotes or phrases that really stick out to me.
One of them was from the CIO of an under-the-radar family office. This guy had the clearest mind for real estate risk that I've ever encountered.
I remember him saying once: "There's no trophy for complicated deals"
Meaning to me is: Sometimes a deal is just a good deal. Every once in a while you have an opportunity to take core-plus risk for 20%+ returns without doing a whole lot.
Sometimes you just get lucky. In fact, you're allowed to get lucky and should almost feel entitled to get lucky every once in a while and just own it (in the same way that you should expect to be unlucky most of the time).
Because if you're always playing defense and you try to overcomplicate it, you risk fucking it up. If you constantly feel the need to "earn" a good deal and need to always play chicken with the seller, badger your brokers, and sweat over the docs, you're going to be your own worst enemy. Not every deal needs to be a war story. Don't let ego get in the way.
Anyone have any stories that support this sentiment? Would be interested to hear other thoughts.
Oh god yes, "not every deal needs to be a war story" rings so true. So many shops out there grossly overcomplicate deals and get too stuck in the weeds.
Preach. On the lending side and I would say at least half of sponsors overanalyze deals. They literally make it more complicated than it has to be. Then at my firm, our internal credit team asks for all kinds of analyses and stress tests that just makes shit insufferable. IMO, less is more.
'Complexity is the enemy of execution' - and in real estate, it's all about execution. We don't have the luxury of waiting for the market to 'come around' on our brilliant equity trade / option arbitrage. Time kills deals, and complexity drives delays.
Amen
It's the same concept as "if it doesn't work on the back of a napkin, it doesn't work at all."
This one always cracks me up. Trophies obviously aren't why we're in this business, but complicated deals are LITERALLY the deals you win trophies for. They're the kind of deals that get industry awards. I understand the sentiment, but it's just such an inaccurate saying.
I literally have a trophy for a complicated deal
Is the trophy worth anything....no, and this stupid plaque honestly just reminds me of how big of a headache it was for not that much money
Yeah, I took the sentiment as "you don't necessarily get paid for a complicated deal" but the saying on its face is not literally accurate.
Haha I get it, but it is funny
I used to work for a group that the principals all came from very prestigious backgrounds, but LOVED to do the most complicated deals ever.
The result:
50% of the portfolio is a 0
25% of the portfolio will be a single digit IRR (underwritten high teens)
15% of the portfolio are decent deals, but can go veryyyy wrong quick
10% of the portfolio are good deals with better risk adjusted return (these actually were the easiest deals in the portfolio, 'business plan wise')
When you add more complicating factors, you're adding more real estate (hah) to get shot up. These layers of addt'l risk include CapEx, planning/entitlements, leasing, location, etc etc.
It teaches you, sometimes when you have a 15 tab model, maybe that's a sign there might be too many things out of control to be comfortable with your 20% return being realistic
Can you explain why 50% will be a 0 and 25% are single digits IRRs? Also ways the 15% of decent deals can go wrong very quick in general terms?
Not OP, but because they're pursuing overly complex deals that require perfect execution. The overall point here is that the more complex a business plan and the hairier a deal is, the more things there are that can go wrong and screw up your returns. If I have to perfectly execute a major renovation or redevelopment, get entitlements in place, lease up substantial vacancy, refresh the tenant mix, and more all on a single project then there's way more risk involved to hit my target returns than if I just need to execute on one or two of those things.
My suspicion with the firm being discussed above is that they basically only went for overly complex deals rather than mixing in one or two into their overall acquisition strategy, so the higher portfolio risk leads to way fewer successful deals (the negative impact of complex deals would be compounded further if 80% of your portfolio consists of them and your execution team is stretched too thin and can't focus on the business plan for all of them).
This is so true. Yes, you may squeeze out a marginally higher IRR by condo platting this speculative charter school/museum/office tower on a ground-leased parcel which is itself a sandwich leasehold. Is it worth it? How many years off your life is that deal worth to you, because the stress and brain damage will impact your health.
I’ll throw out a saying too.
“Better lucky than smart”
lol
The same is true for brokerage. The successful broker who slings $5m-$10m investment sales deals usually make more than the debt and equity brokers who deals with significantly more complexity on a day to day basis.
I can agree with this to a degree. I work on the debt broker side of the biz and it's astounding hearing how much some of these IS brokers collect on fees. I will say though that if a broker knows how to arrange equity and does it on a consistent basis, it's not surprising for them to make over 7-figures. Ripping a fee on both the equity and debt often times puts the fee in the mid 6-figures in the middle market segment.
Up until a point, even if you're doing well in brokerage there really are only a handful maybe 1 or 2 in a given market that make seven to eight figures year in year out. I am in a Tier 1 market and a very successful broker who has done billions in deals bragged about how he just invested $50k with someone on the principal side.. Like that's nothing no offense, a lot of these successful brokers are still feast or famine. They could make $1mm one year, $300k the year after, $500k after that and these are brokers who are known in the industry you see closing deals.
"There's no trophy for complicated deals" - there very well might not be...but it entitles you to wear a cape around the office and wield convolution as your super power.
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