What is a Deal Breaker?
Deal Breakers Explained
The term “deal-breaker” has different connotations depending on the context in which it is used.
For example, a relationship deal-breaker could happen if one person would like to have children and the other would not, resulting in the end of the relationship (being unwilling to have children would be the deal-breaker in this case). A political deal-breaker can arise if the two sides cannot agree on an item, such as a budget. If one item in the budget is the underlying cause of the disagreement, that item is the deal-breaker).
The term deal breaker is a common one in the real estate arena, both with investors and primary home buyers. The following are some common real estate deal breakers.
A Bad Location
Location is arguably the most important attribute of most properties. A property in a good location is more likely to make money for an investor, and a property in a bad location might not pay off. If the investor believes it will be more difficult to find buyers and renters for a property in a bad location, the bad location would be a deal-breaker.
A bad location can also be a deal-breaker for primary homebuyers. If the house is too far from the buyer’s job, or if it’s in a high-crime area, a bad school district, or a flood zone, any of these negative attributes could be deal-breakers for the homebuyer.
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Real estate investors use metrics to determine whether a property will likely make a good investment. They generally look for properties that can produce positive cash flow. To determine whether a particular property might be a good deal, an investor determine what the net operating income (NOI) and the capitalization rate (cap rate) will likely be. The numbers might not prove favorable for an investor if the price to obtain the property is too high, making a high-priced property a possible deal-breaker.
If the seller of a property is unwilling to lower their asking price, the buyer might deem this a deal-breaker, because the higher price simply doesn’t allow the numbers to work and/or if similar comparable homes in the market have recently sold at a significantly lower price. A home that doesn’t appraise for the asking price could also be a deal-breaker if the buyer then cannot get a mortgage loan to cover the cost of the home.
Too Many Problems
Some buyers will only buy a move-in ready property that is well-staged, anything less being be unacceptable, or a deal-breaker.
Other buyers look for properties that might need some repairs and renovations so they can save money on the cost to obtain the property. Therefore, a property that needs repairs and renovations is not necessarily a deal-breaker for investors or primary homebuyers. It would depend on what the repairs and renovations involve and what the buyer’s appetite is for dealing with the deferred maintenance.
Even for buyers who are willing to make repairs, many of them still consider the following issues to be deal-breakers:
- Foundation issues
- Unpermitted additions
- High levels of radon
- Termite infestation
- Any other costly repair
These issues tend to be extremely expensive, hence the reason for them being common deal-breakers.
Buyers and Sellers Refusing to Compromise
Buying real estate generally involves negotiations between the buyer and the seller. When either party ceases to compromise, the deal might not happen.
Deal-breakers arise from a failure of both parties to continue the dialogue and seek a remedy that both sides can accept. If one party won’t budge on an issue, whether it be big or small, it can become a deal-breaker for the other party.
Any issue deemed by a potential buyer to be large enough to cause him or her to change their mind about purchasing the property is said to be a deal-breaker.
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