Anatomy of a Pass Why We Say No to Most Deals

Process · Green Peaks Capital · Dallas–Fort Worth

The most important number in a sponsor's track record isn't the deals they closed. It's the ratio, how many they looked at to get there.

A sponsor who underwrites forty deals and buys one is running a filter. A sponsor who underwrites three and buys one is running a search for justification. Both can show you the same closed transaction.

This article is the filter. Not a summary of it — the actual sequence, with the actual numbers, in the order they get applied.

The sequence

Step one: the hard stops

Before anyone opens a model, a deal has to survive a list that requires no judgment at all. These are instant kills — no discussion, no exceptions, no “but look at the return.”

These rules exist because they were written when we were calm. A criterion set in advance is worth ten judgment calls made at 11pm on a deal you have already spent forty hours on.

Step two: rebuilding the numbers

Deals that survive the screen get fully underwritten. The core discipline is a single sentence:

Value what the property does, not what the broker says it could do.

Income comes from the current unit-by-unit rent roll and actual collections in the trailing twelve months, never the proforma. We quantify loss-to-lease, delinquency, concessions, and vacancy against the submarket.

Expenses are where most optimistic underwriting hides, so we normalize the seller's operating statement and add back what gets stripped out:

There is also a counterintuitive flag we watch for: an operating expense ratio below roughly 40% of effective gross income on a Class B or C asset is a warning, not a selling point. Real buildings cost real money to run. A ratio that low almost always means deferred maintenance, uncompensated owner labor, or expenses that simply were not recorded. When a deal looks too clean, it usually means the problems haven't been written down yet.

Our working assumption is that operating expenses land at or below 52% of effective gross income after we take over. If we cannot plausibly get there, the deal dies.

Step three: four thresholds, all required

A deal has to clear every one of these. Not three of four, not “close enough on coverage because the IRR is strong.”

We test four measures independently: an internal rate of return floor, a cash-on-cash return floor, an equity multiple floor, and a debt service coverage floor. All four have to clear — a deal that's strong on three and short on the fourth is a pass, not a deliberation.

The coverage floor is tested against actual, day-one income, not stabilized, not post-renovation, not proforma. The property has to cover its debt on the rent it collects the month we buy it. That is the difference between a plan that has room to be wrong and one that requires everything to go right.

We also target loan-to-value around 65% rather than the 75–80% the market will often lend. That is a deliberately more expensive choice: it means raising more equity for the same asset, which dilutes returns. What it buys is survivability. Leverage is what turns a difficult year into a lost investment, and the equity that gets wiped out in a downturn is almost never the equity in a conservatively levered deal.

Step four: breaking our own model

Before any deal goes to the partners, we try to break it. Every underwrite is stressed on three axes simultaneously:

• Rents down 5% from underwritten levels
• Exit cap up 50 basis points from our already-conservative assumption
• Renovation costs up 20% over budget — on top of the 10% contingency already built in

If the deal only works in the base case, it doesn't work.

This is where most otherwise-attractive deals die, and it is the single highest-value thing we do for the capital we steward. The base case is the outcome that happens if nothing surprises you. Nothing has ever not surprised us.

One related rule governs the offer itself: maximum offer price is an output of the underwriting, not an input. We never start from the asking price and work backward to justify it. If our number lands below the ask, we submit our number anyway. Motivated sellers move. Unmotivated ones were never our deal.

What a pass actually looks like

Two recent examples from our pipeline, anonymized. Both looked reasonable at first glance. Both died, for different reasons, at different stages.

Neither of these was a bad property. Both will trade to someone. They were wrong for a strategy built to protect capital first.

Due diligence: three outcomes, all wins

Even after a signed contract, the filter keeps running. Due diligence is 30 to 45 days, and the standard we hold to hardest is this: we walk every unit. No exceptions. The units a seller steers you away from are the ones that change the price.

Alongside the physical work — condition assessment, roof, HVAC, plumbing scoped on anything built before 2000, electrical panel types, environmental — we audit the rent roll against actual signed leases unit by unit, and check twenty-four months of operating statements against bank deposits to confirm the collections are real.

Due diligence ends one of three ways, and we treat all three as successful outcomes:

• Pass — findings confirm the underwrite. Proceed to close.
• Re-price — material findings, documented with contractor bids attached, renegotiated as credits or price. We never re-trade without documented findings; that reputation is worth more than any single deal.
• Kill — terminate in writing before the inspection deadline. Walking away from a bad deal costs pride. Closing one costs years.

Why the fast no matters

Every deal a broker sends us gets an answer within 48 hours: yes, no with a specific reason, or the questions we need answered. Not “we'll circle back.” Not silence.

That is partly courtesy, and mostly self-interest. A broker who gets a real reason — “your OpEx assumption doesn't survive reassessment,” “the rent gap is 6%” — learns what we buy and sends better deals next time. The best properties are sold before they are listed, and they go to the buyer who responds fast, gives honest feedback, and closes what they tie up.

Discipline in the screening process is what earns the deal flow. And deal flow is what makes discipline affordable, because you can only say no to most things if you are seeing enough things.

For an investor, that loop is the thing worth diligencing. Not the pitch deck on the one deal that made it through. The forty that didn't, and the reasons why.