Proper due diligence is amongst the most critical phases in real estate investment, and one that trips up many novices.  It can have huge downside if you blow it off, but it is also the phase in which the bulk of profits can be generated.

Many novice investors, knowing how important due diligence is, decide that they will sit down and struggle through documents “for as long as it takes,” and only when they are comfortable with the deal will they make an offer. 

 

This is a recipe for doing a lot of work, without any payoff.  We recommend a different approach.

 

When a property meets your investment criteria, make an offer based on the numbers provided.  Then go through the documents in detail.  Most investors feel that they must do all due diligence up front.  There are two key problems with this approach.  First, as you´re only a potential buyer, you don´t have access to all information, and you will spend additional time fighting with the seller over access, which could sour the relationship before you´re out of the gate.  Secondly, because you haven´t entered into the contract and have no lock on the property, and could be doing a lot of work for nothing. 

 

We generally feel that the ideal amount of due diligence should be between 50 and 100 hours, depending on deal size and complexity, but given that it can save (or make) hundreds of thousands of dollars, the hourly payoff is enormous.

 

As you´re doing your due diligence, note any and all divergences from the original numbers provided, and be prepared to renegotiate offering price based off of these differences.  For example, if the current owner´s income is $2000 less monthly that they originally informed you because of expenses not originally accounted for, and you were buying at a 7.5 Cap, your offer should be reduced by $320,000.

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About 75% of the time, the information received in the due diligence phase is not what was originally provided.  Most people think this is bad news, but they´re wrong.  This is actually your chance to renegotiate the price.  The vast majority of sellers will do this.  For those who don´t, walk away from the deal.

 

There are a number of due diligence materials that must be reviewed, depending on the asset type.  A good starter list includes:

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• Operating Statements

• Lease contacts

• Security deposits

• Rent roll

• Tenant Financials

• Maintenance logs

 

AW Hopewell specializes in performing due diligence on all properties we invest in.  It is one of the most important value added services we offer to our investors in order to assure they are making the best investments possible. 

 

To learn more about how AW Hopewell can help improve your commercial real estate portfolio, or if you have specific questions about how we perform our due diligence, please contact us.  We´d love to hear from you.