Why We Walked Away From a Deal That Penciled
The Harrisburg 8-unit, the $450,000 paper margin, and the lesson that’s worth more than any property we’ll ever own.
Well, here’s something worth thinking about.
You spend years telling people that you protect their capital. You build a brand on it. You put it on your website. And then a deal lands on your desk that, on paper, looks like the kind of thing you wait your entire career for. And you have to actually mean what you said.
That happened to us recently in Harrisburg, Pennsylvania.
The setup
The property was an 8-unit multifamily building. A renovation project. The previous investor had run out of funding partway through, which is more common than people think. Construction was almost complete. The asking price was $750,000. The stabilized value, once tenanted at market rents, was projected at $1.2 million.
I want you to sit with those numbers for a moment.
That’s roughly $450,000 of paper equity sitting there, waiting for someone to pick it up. Cash flow looked excellent at our underwriting. The location was solid. The unit mix was right. The renovation work, from what we could see at the surface, looked clean. It was the kind of deal that, if you were building a syndication portfolio, would make you look brilliant.
And we walked away.
The kind of walk-away that costs you sleep
I’ll be honest. Walking away from a deal that pencils that well is not a small thing. It’s not a clean decision. You go to bed thinking about it. You wake up thinking about it. You ask yourself, more than once, whether you’re being too conservative. Whether the next operator who picks it up is going to make a generational return while you sit on your hands and tell yourself you did the right thing.
That’s the thing about discipline. It’s only meaningful when it costs you something. If saying no were easy, it wouldn’t be discipline. It would just be habit.
So why did we walk?
What due diligence actually means
Here’s where the story gets interesting. The numbers told one story. The walls told another.
During our underwriting and due diligence process, we asked the seller for permits. Standard request. You always ask, because permitted work means inspections, and inspections mean the work was checked at every critical stage. Framing inspection. Rough electrical. Rough plumbing. Insulation. Final.
The seller couldn’t produce them.
Not “I’ll get back to you on that.” Not “they’re around here somewhere.” We’re talking about a project where substantial renovation work had been performed across eight units, and there was no record with the City of Harrisburg that any of it had ever been inspected.
And the walls were already closed.
Why that matters more than people realize
I want to slow down here, because this is the part of the story most people don’t fully appreciate. When you renovate a building and you don’t pull permits, you’re not just skipping paperwork. You’re deciding, on behalf of the next owner and every tenant who will ever live there, that nobody needs to know what’s behind those walls.
You see the problem.
When the walls are closed and the work was never inspected, you have no way of knowing whether the electrical was done to code. You don’t know if the wiring is properly grounded. You don’t know if the breakers are sized correctly for the loads. You don’t know if the plumbing rough-in was pressure-tested before drywall went up. You don’t know if there’s fire blocking between floors. You don’t know if the insulation was installed properly or if there are voids where condensation will rot the framing for the next twenty years.
And here’s the thing. The previous contractor had every incentive to do the work as cheaply as possible because no inspector was ever going to look at it. That’s not a cynical assumption. That’s just how human nature works when you remove accountability from a process.
So the question we had to ask ourselves was this. What does it cost to find out?
The math behind the math
To properly verify the work, we’d have to open the walls back up. Not all of them, but enough to spot-check the rough work in every critical area across all eight units. That’s drywall removal, repair, and repaint. Add in the electrical inspector, the plumbing inspector, the building inspector, and probably a structural engineer if we found anything serious. Then add in the cost of redoing whatever was wrong, plus the carrying costs of having the property sit while we did all of this.
Conservatively, that work alone was going to cost us $150,000 to $250,000 on top of the purchase price. And that’s the optimistic scenario, where what we found was correctable. If we found something structural, or if the city decided to require a full tear-out of unpermitted work (which they’re entitled to do), that number could double.
There was also a financing problem. Most institutional lenders, when they see unpermitted renovation work in the diligence file, will not write the loan. So even if we accepted the rehab cost, we were now in a position where our refinance exit was uncertain. We’d be locked into the deal with private capital and limited options.
But the financial cost wasn’t even the most important factor.
The real risk
The real risk was this. Even if we did all of that work, even if we made everything right, we would still own a building with a renovation history that no future buyer’s lender would feel comfortable with, and no future buyer’s inspector would sign off on without raising concerns. We would be carrying that scar on the property for as long as we owned it.
And if we eventually wrapped this into a syndication, we’d be asking our investors to carry that scar with us.
That’s where the conversation ended for us. Because the fundamental question we have to ask, every single time, is not “can we make this work?” The question is, “can we make this work in a way we’d be proud to put our investors’ names on?”
The answer was no.
What this is really about
I want to make a broader point here, because I think it matters.
There’s a particular trap that exists in real estate investing, and it gets a lot of new operators in trouble. The trap is this. When the math looks good, you start looking for reasons to make the deal work. Instead of underwriting the deal, you start defending it. You start steel-manning the optimistic case and waving away the pessimistic one. You convince yourself that the risks are manageable, when in fact you don’t really know what the risks are.
It’s the same psychology that runs through a lot of bad decisions in life. You see what you want to see. You weigh the upside more than the downside because the upside is what you’ve been thinking about. You tell yourself a story where things work out, and you mistake the story for an analysis.
The discipline isn’t in the spreadsheet. The discipline is in the willingness to walk away from a spreadsheet when the underlying reality doesn’t support it. And in a very real sense, that’s the whole job. Anyone can run numbers. Anyone can make a deal look good if the inputs are favorable. The question is whether you have the judgment, and the temperament, to say no when no is the right answer.
What we tell our investors
This is what we tell our investors, and what we tell ourselves.
We’re going to walk away from deals that pencil. We’re going to leave money on the table. We’re going to watch other operators take down the deals we passed on, and sometimes those operators are going to do well, and we’re going to feel, for a few weeks, like we got it wrong.
We’re going to do that anyway.
Because the alternative is to be the operator who took the Harrisburg deal, and a year later is having a difficult conversation with his investors about why the property they thought they owned isn’t worth what they paid for it. That’s a conversation we will not have. Not because we’re afraid of it, but because we don’t have to have it. We can just not buy the property in the first place.
That’s how we rise up together. Slowly, sometimes. Conservatively, often. But honestly, every single time.
Rise Up Capital partners with private lenders and accredited investors to build wealth through carefully underwritten real estate. To learn how we evaluate deals and protect investor capital, schedule a free 30-minute call.
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