Money is Made on the Buy, but Execution is Everything

Real estate is a field full of time-honored wisdom, and one of the most enduring phrases is: "Money is made on the buy." This simple saying underscores a fundamental truth: the profit potential of any investment starts with securing the asset at the right price. It means that thorough due diligence and a deep understanding of your target market are crucial to finding those advantageous buying opportunities.

Think of it this way: when an owner prepares a property for sale, their broker will assess its potential value and create marketing materials, including financial projections. These projections can range from wildly optimistic to cautiously conservative, depending on the broker's assumptions and market insights. Sometimes, though, important details simply get missed.

The Overlooked Opportunity: A Case Study

We saw a compelling example of this with a 96-unit apartment complex in South Carolina. The listing broker had put together a comprehensive marketing package for prospective buyers, complete with forward financial projections. A critical part of these projections is accounting for property taxes, which in most states are reassessed based on the new purchase price. Experienced brokers factor in this increase, often estimating it based on the anticipated sale price. Less experienced — or perhaps less diligent — brokers might just carry forward the old tax figures, failing to account for the impending reassessment.

In this specific case, the broker did factor in the tax reassessment at 100% of the anticipated sale price, which was a good start. What they missed, however, was a significant detail: a specific South Carolina exemption that allowed for a 25% discount on the assessed value for this particular property. This wasn't a minor oversight; it translated to a whopping $103,500 annual reduction in expenses. When you apply the market cap rate at the time (6.50%) to that expense reduction, it means the property's value was understated by nearly $1.6 million! We quickly validated this additional value when we had the property appraised during the closing process, and the appraiser incorporated the correct tax accounting into their report.

This anecdote perfectly illustrates how money can truly be made on the buy – by uncovering hidden value through meticulous due diligence. These kinds of clear discrepancies and overlooked opportunities do still exist. However, they're becoming increasingly rare.

The New Real Estate Reality: Execution is Everything

Today's real estate investment landscape is far more sophisticated. There's been an influx of savvy buyers, and with heightened competition, if an attractive opportunity is identified, it's highly probable that many other potential buyers have also spotted it and factored it into their pricing. The gap in valuations has narrowed considerably, and in recent active periods, deals have even traded above their perceived fair market value.

This is precisely why, in today's market, execution is everything. While a smart buy lays the groundwork, it's your ability to execute your business plan that ultimately determines your success. There's significantly less margin for error now. This underscores the critical importance of having the right teams in place, as achieving your projected returns hinges directly on their capabilities and the Sponsor's leadership.

In real estate, your pro forma financial projections are a best-case scenario. Achieving them, or even exceeding them, relies entirely on the successful implementation of your strategy. Consider these significant changes that have disrupted the industry, shattering business plans:

Market Volatility and Unforeseen Costs

Even with the most meticulous due diligence, market conditions can shift rapidly post-acquisition. For example, the average 30-year fixed mortgage rate skyrocketed from an average of 2.96% in 2021 to 6.81% in 2023, fundamentally altering financing costs and buyer demand. Simultaneously, construction costs, particularly for residential buildings, saw historic jumps, with 15.8% inflation in 2022 after a 14% increase in 2021. This means renovation budgets can quickly become obsolete. Furthermore, property insurance premiums have surged, with average annual increases of 14% from 2021 to 2022, 22% from 2022 to 2023, and a staggering 45% from 2023 to 2024, often doubling overall costs in just three years and forcing owners to take on more risk through higher deductibles. An execution plan must be agile enough to adapt to these escalating expenses.

Tenant Relations and Retention Amidst Rising Rents

Rent prices have pushed higher, putting immense pressure on tenants. While this can increase gross income, it also increases the risk of delinquencies. Data shows a significant increase in the fraction of renters incurring a late fee, from 15.4% at the end of 2021 to 23% at the beginning of 2023. With a larger portion of a tenant's income going towards rent, it is now more critical than ever to effectively manage your tenants, prioritize their satisfaction, and ensure they are making rent a top financial priority. Poor property management leads to high tenant turnover, which means costly vacancies, marketing expenses, and wear and tear from constant move-ins and move-outs.

Value-Add Implementation

Many modern real estate strategies involve "value-add" components – renovations, amenity upgrades, or operational efficiencies. These are not passive undertakings. Successfully implementing a renovation plan on time and within budget requires expert project management and a skilled construction team. Delays or cost overruns here can mean months of lost rental income and significant budget overruns, effectively negating the perceived "value" from the buy.

Operational Efficiencies and Cost Control

The initial pro forma often assumes certain cost savings or operational efficiencies. It takes a dedicated and capable asset management team to identify and implement these. This could involve negotiating better vendor contracts, optimizing utility usage, or streamlining maintenance processes. Without this rigorous oversight, expenses can quietly creep up, chipping away at profitability.

Your Blueprint for Success: The Power of Your Team

Achieving your pro forma assumptions hinges directly on the capabilities of your teams and the Sponsor's leadership. A skilled property management team is essential to ensure high tenant occupancy, maintain tenant satisfaction, and achieve your projected rental income. A reliable construction team is necessary to complete any planned renovations on schedule and within budget. Finally, a strong asset management team is vital for continuously monitoring key performance indicators, identifying deviations from the plan, and implementing swift, decisive adjustments to get back on course.

The Bottom Line

While the age-old wisdom that money is made on the buy still holds true as the bedrock of a successful real estate investment, the market has evolved. In today's competitive and fast-paced environment, the ability to deliver on that business plan – through the expertise, adaptability, and dedication of your teams – is what ultimately determines the degree of your success and the security of your investment.