As of April 2022, MC Companies stopped using hard money to secure deals. At the time, many investors were questioning this practice as not going hard on the money made us lose out on some potential cash-flowing properties. However, this decision came from years of experience. Ross and 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 our investors.
What is Hard Money?
Before I explain why MC Companies stopped going hard 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. 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, like MC Companies does, going hard on the money is a great strategy.
Why We Stopped Using Hard Money
So fast forward to early 2022 everyone was going hard on their earnest money including 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 Ross and I 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 Ross and I made an executive decision that MC Companies 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 Ross and I had made a good decision.
MC Companies 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.
Why Other Syndicators are in Trouble Less experienced syndicators were not in the same situation as MC Companies when these rate hikes occurred. They did have hard money down on deals they were in escrow on. When in this situation the syndicator is put in a position where they are less focused on if the deal is good for their investors and more focused on not losing their million dollars in earnest money. Because of this, they are forced to raise money for and close on a deal that no longer offers the returns that were laid out in the pro forma. Depending on how the returns are affected by the interest rate increase this could result in the investor not making any money on their money or even worse losing their initial investment.
Ross and I have that experience and are continuing to watch the market. As I stated before, hard money is a great strategy in the right market conditions but is risky in markets like we have today where the interest rates are changing. If you have any questions on our investment strategy please reach out to Caroline in Investor Relations (email here) and she will be happy to assist you.