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Investors should invest in due diligence as in satisfying lender requirements. | International Residential Real Estate Investors Association
Thursday August 17th 2017

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Investors should invest in due diligence as in satisfying lender requirements.

The commercial lending crisis underscores how important due diligence is.  Nevertheless, many investors spend little more than the costs of meeting lender due diligence requirements as part of due diligence.  Consider that to satisfy the lender we pay $10,000 to $15,000 for property condition, phase I and appraisal.  We spend another $3,000 to $10,000 for surveys.  Title work runs from $3,500 to $10s of thousands.  Legal, background, lien searches, etc. adds 10s of thousands.

Considering these, we should plan to spend $25,000 to $50,000 additional to complete the necessary due diligence to draw out our requirements as investors to minimize risks, maximize value opportunity, and to assure adequate funding.  For larger more complex deals this figure could even be greater.

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6 Responses to “Investors should invest in due diligence as in satisfying lender requirements.”

  1. 062291va says:

    your underlying principle is great except for the varying scale of investment property values…..not all investors can afford to budget $25K or more for due diligence, nor do all deals have an aggregate value of such size that $25K would be conducive to the proposed transaction, but the line item should be there….I usually prep owners and buyers by talking about nuisance fees, the very least amount that a Phase 1 or 2 inspection can cost, as well as other desirable investigations, and temper that number based on the particular property or collection of properties being considered for conveyance. In a spreadsheet or written budget used as a template, a separate line item can be inserted for this value and easily modified or eliminated based upon the specific situation.

    The basic premise is good, but the larger numbers preclude opportunities to serve a wider group of customers and a broad scope of properties.

    Good points for discussion! Thanks for bringing this issue to the table!

    From an interested LinkedIn Reader

  2. 062291va says:

    The posted responses are all good answers…..the only thing I might add is that known or discovered issues may present opportunities to add value…..if the seller refused or neglected to adjust the sales price for such negative items as the dd exposes, then a good negotiation plan would include working the price down to accommodate mitigation of the negative condition. The goal is to reduce the price enough that the buyer’s efforts are rewarded with additional added value, over and above what the simple fix would have cost..of course the buyer must have the resources to execute the fix as well as the purchase, and ….any interested lender must agree….

    J. Knight

  3. 062291va says:

    your underlying principle is great except for the varying scale of investment property values…..not all investors can afford to budget $25K or more for due diligence, nor do all deals have an aggregate value of such size that $25K would be conducive to the proposed transaction, but the line item should be there….I usually prep owners and buyers by talking about nuisance fees, the very least amount that a Phase 1 or 2 inspection can cost, as well as other desirable investigations, and temper that number based on the particular property or collection of properties being considered for conveyance. In a spreadsheet or written budget used as a template, a separate line item can be inserted for this value and easily modified or eliminated based upon the specific situation.

    The basic premise is good, but the larger numbers preclude opportunities to serve a wider group of customers and a broad scope of properties.

    Good points for discussion! Thanks for bringing this issue to the table!

    J. Knight

  4. 062291va says:

    I don’t think you can set an exact amount on the spend – a better rule of thumb would be a % of the investment as clearly larger more complex transactions will require greater diligence.

    But I agree – from a fund perspective where you are acting as a fiduciary for someone else’s interests, great care should be taken in all diligence matters, research, risk assessment, environmental etc to ensure that you understand all the downside implications of a particular investment. Whether the lender requires this as well or not should be irrelevant as you are a guardian of someone elses’s capital. This is also good practice for private investors of course.

    Dominic Wilson (from LinkedIn)

  5. 062291va says:

    Doing proper due deligence is extremely important for my clients and for myself as a real estate broker. It keeps my clients from buying problems (such as contaminated sites), and can generate key negotiating points that can put my clients at an advantage. As real estate broker for almost 30 years, doing proper due deligence has kept me out of court and a position of ever being liable for damages.

    Whenever possible we will try to get as much data as possible and even complete the process before making an offer. This in turn has allowed numerous clients to complete purchases in an extremely short period of time. For some sellers the quick sale of an asset can be more important than getting top dollar.

    A strategy which we have used with commercial REO properties is to complete all due deligence prior to the offer being made. Then if the timing is right, make the offer just before the end of a period such as the end of a quarter. The offer will be for all cash, no contingecies and with a 7 day or sooner closing, but with a hugely discounted price. We have closed multiple properties with this strategy.

    On transactions where we have a longer time frame to do due deligence during escrow, my clients will usually do a variety of inspections including: physical inspections of the property, environmental studies, termite and pest control inspections, running a scope on the sewer system, etc. In most cases when things are discovered which were not originally known by the buyer at the time of the offer we have negotiated corrective work, credits back to the buyer or price reductions.

    George Kivett – LinkedIn

  6. 062291va says:

    As others have said the value of due diligence beyond satisfying the lender is often neglected. I also agree costs are hard to predict as much relies upon the complexities of the site, not just the size.

    Something else to remember is vendor due diligence (with appropriate warranties) can often reduce buyers’ costs by obviating some of the due diligence surveys (environmental, asbestos etc.) and has helped unlock a number of deals in my experience.

    Neil Foster from LinkedIn

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