How To Conduct Real Estate Due Diligence

Underwriting and due diligence is the most important part of the real estate investment process. Putting capital into the wrong investment can result not only in money lost but serious liability issues as well.

Underwriters put a tremendous amount of time, effort and knowledge into conducting property due diligence . . . before presenting an opportunity to  investors.

Here’s a quick overview of how to conduct real estate due diligence and underwriting.

Understanding Real Estate Underwriting

Underwriting is the process used to evaluate and determine the potential of various investment real estate opportunities. Underwriting that isn’t conducted properly creates below-market performance, expensive liability issues, and loss of capital for investors.

Good underwriters combine a boots-on-the-ground, big-picture approach for underwriting with sophisticated software modeling. They analyze a countless number of various data points, and both qualitative and quantitative factors to evaluate the risk-return potential of each prospective investment.

Detailed Due Diligence Steps

Once a potential investment has been identified, a lead underwriter is assigned to the property. The underwriter ensures that the property meets a stringent risk-return profile by performing an extensive and detailed analysis.

There are literally hundreds of data points used in a detailed due diligence process including:

Financials

  • Review last 3 years of tax bills
  • Capital expenditure (CapEx) review for last 3 years and current budget
  • Current month’s tenant improvements (TIs)
  • Schedule of tenant security deposits
  • Outstanding TIs and leasing commissions due
  • Utility records
  • Current invoices from service contract providers and utilities
  • Insurance quote review
  • Loss report from current insurance company for last 3 years

Building

  • Building and site plans including subcontractor warranties
  • Existing Phase I report
  • Insurance quote from 3 vendors
  • Property owner association (POA) document review, where applicable
  • Easement agreement review
  • Building service contracts, including leasing broker and property management companies
  • Maintenance and CapEx log review
  • Warranties
  • Property management agreement
  • Tenant contact list
  • Certificate of insurance
  • Copies of zoning and government permits, and written confirmation of code adherence
  • ALTA survey on file
  • Certificate of occupancy, improvements, and renovations for last 3 years
  • Current property condition reports
  • Copies of zoning reports
  • Warranties for all mechanical and structural systems such as HVACs, roof, and riser system
  • Notice of past, current, and pending litigation, citations or violations

Reports

  • Property condition assessment ordered
  • Phase I update ordered, if needed
  • UCC and judgment lien searches
  • Research any restrictive covenants, easements, and agreements

Comparables

  • Contact area brokers experienced in asset type being acquired
  • Obtain lease comparables – with both historical and current asking rents – for surrounding properties
  • Generate demographic information

Loan

  • Loan commitment letter from lender
  • Estoppels signed by tenants
  • Subordination and non-disturbance agreement (SNDA)
  • Property appraisal
  • Deed of trust/mortgage
  • Security agreement
  • Assignment of rents
  • Fixture filing
  • UCC-1
  • Contract assignments
  • Escrow closing instructions
  • Broker opinion of value
  • Partnership/LLC borrowing authorization
  • Corporate manager borrowing resolution
  • Signature authorization form
  • Primary and secondary lender commitments, if applicable
  • Lender loan documents
  • Budget and proforma review and approval

Title

  • Order title search from escrow
  • Order updated survey, if needed

Miscellaneous

  • Schedule site tour
  • Deposit earnest money
  • Register legal entity to hold property
  • Create operating agreement
  • Set up bank account for holding entity

Post Closing

  • Schedule and confirm property visit by asset management company and management committee member
  • Confirm all client-specific asset acquisition requirements are met
  • Notify in writing asset manager, property manager, and accounting firm of new ownership, when applicable

If at any point during this rigorous due diligence and underwriting process the underwriter decides that the property does not meet its requirements, they should not hesitate to walk away from the prospective deal.

Top 5 Benefits of Investing in Real Estate as Part of a Portfolio

Investing in real estate is an excellent way to diversify your portfolio with a physical asset that generates income while simultaneously acting as a hedge against inflation. Due to consistent demand, real estate values also increase over time, increasing the potential for profit even more.

Industry experts list these top 5 benefits of having investment real estate in a portfolio:

#1 Passive Income and Increasing Values

The value of real estate keeps increasing for two reasons:

  • Rental rates, particularly in the multifamily housing sector, are continuing to rise due to demand.
  • As more investors look for quality real estate opportunities, increased bidding activity results in cap rate compression and increased values.

Income-producing real estate also generates passive cash flow month after month. Passive income can be used to pay off mortgage debt sooner, build equity faster, and leverage that equity to purchase more property.

#2 Tax Laws Are Real Estate Friendly

Current tax law is extremely friendly to real estate investors. Non-cash expenses such as depreciation allow investors to reduce the amount of taxable net income. When the time is right to sell, Section 1031 exchanges can be used to defer the payment of capital gains tax by relinquishing one investment property and acquiring another like-kind property.

#3 Hedge Against Inflation

Real estate investors are protected against the short-term and long-term effects of inflation. As prices increase, rents rise, and asset values grow.

According to the Census Bureau the average rate of inflation in the U.S. is about 3.2%, and at the average rate of inflation prices double every 20 years. But commercial real estate has more than outpaced the rate of inflation. In fact, over the past 10 years, average prices for office property, shopping centers, and large apartment buildings have more than doubled, according to the Federal Reserve Bank.

#4 Using Leverage Magnifies Returns

Positive leverage can be used to magnify the returns from investment real estate. Depending on the type of project, you can borrow between 50% and 90% of the property purchase price at interest rates that are lower than the anticipated annual return on the investment. Traditional portfolio components like stocks and bonds aren’t nearly as easy to use as collateral for financing.

#5 Variety of Investment Opportunities

Real estate provides a wide variety of opportunities to investors. Popular income-producing options include single-family rental housing, multifamily property, commercial buildings like offices and shopping centers, and vacant land.

It’s also possible to realize the benefits of investing in real estate without actually buying a property:

  • REITs: real estate investment trusts, real estate mutual funds, and real estate ETFs – or exchange traded funds – allow investors to buy shares of publicly-traded real estate funds.
  • Crowdfunding: online real estate investment platforms let investors buy fractional shares of institutional-quality office buildings, retail property, and multifamily projects.
  • Real estate partnerships: joint ventures with an experienced managing partner responsible for the hands-on, day-to-day operations of the investment works with passive investment partners who contribute money instead of their time while sharing in the profits and appreciation in value that the property generates.

Real estate burnout and how to avoid it

real estate burnout

Because real estate can be a 24/7 business it can easily lead to real estate burnout if you allow it to. Here are some of the best ways to avoid burning out in real estate while still being a six-figure earner.

Finding the work-life balance that works for you avoids real estate burnout

When you’re first starting out in real estate it might seem like you’re living to work. It’s true, in a highly competitive business like real estate there are dues to pay and hours to put in. But balancing work and play will make you more productive.

Three ways to balance your work life and avoid burning out are:

  • Take the same day off each week
  • Set the right expectations with clients upfront
  • Focus on a single real estate niche

Avoid real estate burnout by closing your office

Just because the real estate business can be 24/7 it doesn’t mean that you have to work around the clock, week in and week out. Closing your office one or two days a week means no phone calls, emails, or text messages.

These tips work even if you don’t have a physical office to close. Closing your office is as much mental as it is physical.

Avoid burning out by setting the right client expectations

Setting the right expectations with clients also helps agents void real estate burnout. If your office – or yourself, if you don’t have a physical office – is closed on Sundays or the weekends, let clients know right up front.

Many real estate agents are afraid do to this because they’re afraid of being seen as non-responsive. But in fact, the opposite is true. By letting customers and clients know that you have set business hours they’re much more likely to view you as the real estate professional that you really are.

Focusing on a single niche helps avoid real estate burnout

A lot of real estate agents, even those that have been in the real estate business for a while, believe that they have to be all things to all people. They figure the more they do, the more money they’ll make. Unfortunately this is one of the major factors in real estate burnout.

Focusing on a single real estate niche helps avoid burnout by concentrating your skills, knowledge, time and effort on what you’re best at. If you do that, the money – and the clients – will follow.

Five examples of real estate niches are:

  • Buyer representation
  • Commercial property management
  • Office leasing agent
  • Coworking office specialist
  • Multifamily sales specialist

 

Five Real Estate Rental Property Expenses Not To Forget

real estate rental property expenses

Here’s a list of five real estate rental property expenses not to forget about when calculating your ROI. They apply to whatever real estate niche you’re working in.

As a good real estate accountant or bookkeeper will say, ‘Report all of your income and expense as much as you can’.

Tenant Credit Reports

Checking the credit and background of prospective tenants is a must-do and one of the most important tips for a real estate landlord or property manager.

While the cost of running an individual report is small, the annual real estate expense for credit reports can really add up.  Especially if you have a large multi family property or several single family rental homes.

Leasing Fees

Surprisingly, many beginning real estate investors overlook expensing out the finder’s fee paid for leasing the rental property.

One reason this happens is that the leasing agent will collect the upfront monies from the tenant – such as the first month’s rent and security deposit – then remit to the owner this money less the leasing fee paid out of those upfront monies.

The landlord mistakenly only accounts for the money he or she actually receives instead of the gross income from the tenant.

Back Office Property Management Time

The time spent on little tasks like answering incoming phone calls, balancing the bank statement, and endorsing rental checks can really add up over the course of a year.

One way to account for this time spent managing your real estate investment is to use a stop watch or timer on your computer.  Then, log the minutes on a spreadsheet along with the date and a brief description of the task.

Onsite Property Management

Just as with the back office time, onsite property management time can add up as well.  It’s also one of the most overlooked real estate rental property expenses.

This category includes tasks such as driving by or walking the property, meeting a vendor onsite, and checking out the competition.

Market Research

Speaking of the competition, don’t forget to expense the time spent researching your market.

This can include things such as dues and subscriptions, property drive-bys, shopping the competition, and online research.

Common Real Estate Rental Property Expenses

Some of the most common expenses with a real estate investment property include:

Top FSBO Commercial Real Estate Tips

fsbo commercial real estate

FSBO commercial real estate is commercial real estate being sold by the owner.  It’s not that uncommon in the commercial real estate business.

That’s because – unlike residential real estate – most FSBO commercial real estate is owned by professional business people.  As a result, the investment group holding the real estate includes an attorney, high-net worth individual, or even real estate professionals.

Here are a few tips for buyers thinking about investing in for sale by owner commercial real estate.

Buyer Representation For FSBO Commercial Real Estate

More often that not, with FSBO commercial real estate, or any commercial real estate for that matter, a buyer is buying problems that the seller can’t handle.

That’s not necessarily a bad thing.  Sometimes commercial real estate owners don’t have enough capital to make repairs or upgrades.  Other times they lack the property management resources to find and keep great tenants.

Situations like these can be a good deal for the buyer, if the buyer has what the seller lacks.

But whatever the reason, buying FSBO commercial real estate means that you’re buying someone else’s problems.

That’s why it’s important to hire a buyer broker to represent you in a for sale by owner commercial real estate transaction.

Commercial Real Estate Due Diligence

Commercial real estate investors should always be sure to do their due diligence.  It doesn’t matter if the property is a FSBO or listed on the open market.

There’s a lot more due diligence when buying commercial real estate than when buying a residential property.  Some of the things commercial real estate buyers should always verify include:

  • Tenant leases, tenant quality, and historical rent payments
  • Current zoning and potential business restrictions
  • New competition coming to the market
  • Discover why the owner is really selling

 

Real Estate Loan Scams

real estate loan scams

Whenever a real estate market heats up, real estate loan scams also rise.

Here are three common real estate loan scams to watch out for if you’re buying – or selling – real estate.

Seller Financing

Now, seller financing in and of itself isn’t a real estate loan scam.  But, this method of buying and selling real estate can be, if you’re not careful.

For buyers, seller financing can turn into a real estate loan scam if you pay the seller directly.  To protect yourself, always go through a independent third party such as an escrow company or attorney.  They will track payments received, the loan balance, and money disbursed to the seller.

For sellers, always remember that you are the bank, since you are carrying the note.  Sneaky buyers can turn seller financing into a real estate loan scam by providing you with bad credit information or selling the property to someone else without your knowledge.

Lease Purchase

Lease purchasing – real estate can also turn into a type of loan scam if you’re not careful to have everything in writing.  Also be sure to have written in your lease purchase contract what dollar amount or percentage of payment is applied toward the purchase price of the property.

Remember, a lease purchase agreement is different from a lease purchase option.  With an option, the tenant/buyer has the option to purchase at a predetermined price, but doesn’t have to.

Interest Only Mortgage As Real Estate Loan Scams

Using an interest only mortgage to buy real estate can also end up being a real estate loan scam if you’re not careful.

With an interest only mortgage, payments by the buyer only go toward interest and not principle.

In a real estate market where prices keep rising that’s OK.  But if the market suddenly drops, buyers can quickly find themselves upside down with negative equity on the property.

How To Market A Pocket Listing

pocket listing

A pocket listing is a listing that isn’t on the multiple listing service. Pocket listings are found in both residential and FSBO commercial real estate.

Sellers and real estate agents have pocket listings for a number of reasons.  But regardless of why, pocket real estate listings can be difficult to sell.

Here are three great ways to market a pocket listing.

Get Neighbors To Market Your Pocket Listing

Everybody loves a secret, especially neighbors who know that a place is for sale.

By letting the neighbors know you have a pocket listing, you’re putting word-of-mouth advertising to work for you.  It’s also the ultimate way of putting six degrees of separation to the best possible use.

Internet Real Estate Sites

The internet is the perfect place to market pocket listings that aren’t on the MLS.

Websites like Zillow, Trulia, and even Craigslist are great places to advertise a pocket real estate listing without having to go through the trouble of putting the property on the MLS.

This is also a good technique to use when you really want to zero in on qualified, serious buyers.

Most of the real estate agents on the multiple listing service are weekend warriors.  At most they’ll do one or two transactions a year, which means you’ll quite likely end up dealing with an amateur and their buyer client.

Social Media Real Estate Marketing

Marketing your pocket listing on social media is another great way to let people in your sphere of influence know you’ve got a great off market property for sale.

Part of your circle of friends probably includes real estate agents making six figures a year.  These are the types of agents that you want to share your pocket listing with.

They’ve got the experience and the contacts to help get your pocket listing sold to the most qualified buyer.

How To Get Buyers To Pay More

get buyers to pay more

Here are three easy ways to get buyers to pay more for your property.

These tips work in both a hot real estate market and cold real estate market, and for both commercial real estate and residential properties.

First Impressions Count

Experienced negotiators understand that first impressions are lasting impressions.  Once people have made a subliminal decision, it’s very difficult to get them to change their minds.

That’s why making a positive first impression is key to get buyers to pay more for what you’re selling.

In real estate that’s also known as curb appeal.  Well kept landscaping, no litter, and if you’re selling commercial real estate no vagrants hanging around the property.

You’re going for what’s known as the ‘Wow Factor’ when prospective buyers pull up the curb.

No Deferred Maintenance

Deferred maintenance items are things that need to be fixed or repaired but haven’t been.

Items like peeling paint, a loose shingle, or a small graffiti mark on the fence can be innocent enough.

But they can also make a buyer wonder why they haven’t been taken care of – especially if you’re selling your property.  Even worse, deferred maintenance that a buyer can see will also make the buyer think about things that can’t be seen.

Take a loose roof shingle for example.

A loose shingle means that water can get into the inside of the roof, which means dampness and potential mold issues.  Which in turn means potential health issues for the occupant and unknown legal issues for the new property owner.

Get Buyers To Pay More With A Good Story

Another key to getting buyers to pay more is by having a good story to tell.

As a seller you’ll need to be honest with yourself about the problems with your property.  Look at your real estate from a potential buyer’s point of view.

This doesn’t mean you need to apologize.  But it does mean you should foresee as many potential objections or questions as possible, and know ahead of time what your answers are going to be.

A smooth, practiced response goes a long way to convincing a potential buyer that they’re making the right decision to purchase the real estate that you’re selling.

Three Easy Ways To Increase Your Home Value

increase your home value

Here are three very easy ways to increase your home value and get buyers to pay more for it.   After all, like the saying goes, why spend (a lot) of money when you don’t have to?

Best Way To Increase Your Home Value

Real estate is all about location, location, location.  But real estate is also about appearance, appearance, appearance.

Improving the curb appeal of your home and its appearance is easy and relatively inexpensive.  Things you can do to improve the appearance of your home and increase its value include routine landscaping, decluttering, and fresh paint in today’s designer colors both inside and out.

Updated Fixtures

New faucets, electrical outlets and switches, and door handles are pleasing to the eye of the new home buyer.  Replacing these items is also pretty inexpensive and can usually be done without using a high-priced handyman or contractor.

You can increase your home value by thinking of updating fixtures as improving the curb appeal of the inside of your house.

Energy Efficient Appliances

For home owners who have a little extra money in their budget,  upgrading to LEED certified, energy efficient appliances can pay off in both the short- and long-run.

Are you thinking about selling your home in the not too distance future?  First-time home buyers will appreciate – and pay extra for – the work you’ve put into updating the appliances in your home to today’s Energy Star standards.

If you’re more of a buy-and-hold home owner, then the money you save by having energy efficient appliances will quickly add up over a few years.

Highly-rated air conditioning units, heating furnaces, water heaters, and kitchen appliances can help save a surprising amount of money with today’s energy efficient standards.

 

 

Real Estate Time Management Tips

real estate time management tips

Here are two real estate time management tips to help take running your real estate business to the next level.

Emails Take A Lot Of Time

There are certain tasks in any business that are affectionately called ‘time sucks‘.

Time sucks are things that, well, take up a lot of time without giving you anything in return.  Like more income, for example.

Email can be a huge time suck in any business, but especially in real estate.  That’s because real estate agents only get paid when a deal is done . . . and not by the hour or on a salary.

Even for correspondence that is time sensitive, checking, sending & receiving emails should be limited to two or three times each day.  Many people schedule their email times for first thing in the morning.  Then again around lunchtime, and toward the end of the day.

Have A Routine & Stick To It

Another good real estate time management tip is to have a routine and stick to it.

Devote a certain amount of time each day – at the same time each day – to tasks such as real estate marketing & prospecting, or client outreach, and administrative work.

Remember, having a successful real estate business isn’t about how many hours you work each day.

It’s about how smart you work!