Top Ten Mistakes Investors Need to Avoid When Purchasing Investment Properties

There’s a huge problem in the real estate industry that nobody is talking about: DUE DILIGENCE.

The vast majority of investors and real estate professionals barely scratch the surface when conducting due diligence. 

·      Investors are leaving large amounts of money on the table by not learning how to properly conduct due diligence

·      Real estate professionals are putting themselves at risk for potential litigation

·      Most of this is because “they don’t know what they don’t know” which is what can hurt them

·      By learning these important skills it reduces stress; makes you feel more confident; makes the sellers of the properties less likely to play games while negotiating with you

·      Becoming adept at conducting due diligence ultimately makes you a better investor because you’re more prepared to make an informed and intelligent decision

Having and adhering to a proven system allows you to conduct due diligence faster, easier, more efficiently and you’re less likely to miss something.

Here are the 10 most common mistakes to avoid when purchasing an investment property opportunity:

Mistake # 1: Not Valuing the Property Correctly

It’s always surprising how many investors are willing to buy off on price after negotiating with a seller, just because they arrived at an acceptable purchase price. Do your homework!  That means checking for sales comps and other available properties on the market. Empower yourself by contacting the more active commercial brokers in the vicinity and inquire about local property values and sale comparables. You’re constantly adjusting your valuation during your due diligence based on your findings.

Mistake # 2: Not Understanding your Lender’s Underwriting Requirements

Before you spend a lot of time, money and energy conducting your due diligence, make sure you’ve had a preliminary discussion with some lenders about the amount of the loan they would consider putting on the property.  Today’s Lenders are very conservative and look at many aspects of the property such as: physical condition; sale and lease comparables; leases in place; intended use; environmental issues; credit worthiness of purchaser; etc.  Check with them before you get too far down the road with your due diligence to avoid surprises later.

Mistake # 3: Not Checking If The Property Complies With All Current Municipal Building Codes

It’s a fairly common occurrence that a buyer finds out after purchasing a property that it doesn’t meet the compliance of building or Americans with Disabilities Act (ADA) codes.  This comes up when the contractor goes to pull a permit from the city for intended improvements or when the city inspector comes out to inspect the contractors work, discovering the infractions.  Be sure to keep an eye out for tenants whose space has been built-out without a permit. It’s a good idea to have a contractor, architect or space planner inspect the property to discuss any improvements and compliance issues during your due diligence period.  You don’t want any costly surprises after the closing.

Mistake # 4: Assuming There Are No issues Within Existing Tenant Leases

The leases can have many “trip wires” such as cancellation provisions, contraction provisions, caps on pass-through expenses, fixed option rent, to name a few.  You want to be aware of these provisions because if the tenant exercises them, it could put you in a bind and devalue the property.  It’s important to have a competent real estate attorney read the leases if you are not familiar with commercial real estate leasing.

Mistake # 5: Assuming Lenders Will Accept All Third Party Reports

Before hiring any third-party vendors to conduct an inspection and prepare a report, make sure that your lender approves them.  This goes for the Property Condition Assessment, Environmental Reports, or any specialized reports such as seismic or geological studies. Mistakenly having to pay two different vendors for the same report costs much more than time, it is very expensive.

Mistake # 6: Trusting that the Seller and Their Representative Have Disclosed All Issues

You have to be a detective when performing your investigation and due diligence on a property you’re looking to purchase.  Not all sellers are going to be forthcoming when it comes to disclosing the problems of their property.  Remember the Latin saying, “caveat emptor”: let the buyer beware.  Ask the hard questions and make sure you do that in writing, i.e. emailing them, so you can keep track and record all correspondence in case you need to bring it to court one day.  Always ask for back up receipts, lien releases, copies of paid invoices, etc.  Remember, ASSUME NOTHING.

Mistake # 7: Expecting the Closing Statement To Be Without Issues

Before you sign the final approval of the closing statement sent by the escrow officer, be sure you have scrutinized all the items listed… as well as those omitted.  Many times a seller will load up items to be credited to themselves and “forget” items that should be credited to the buyer.  Some commonly overlooked items are:  letters of credit or Certificates of Deposits used as security from tenants that the Landlord needs to assign to the new buyer; leasing commissions owed to brokers on leases that have recently been signed; tenant improvement allowances owed to tenants or contractors; vendor billings that need to be prorated or paid in full prior to new ownership taking over, etc.

Mistake # 8: Not Checking Out the Competition

Especially if you’re not familiar with the area, you want to be aware of the subject property’s competitive set.  Those are the properties it directly competes with. If you see rent specials or other concessions, you need to know why this is happening in the marketplace. It could mean there is a lot of vacancies in the area, meaning you’ll have to factor that into your financial analysis.

Mistake # 9: Not Spending Time at the Property

Go there at different times of the day. The reason I say that is that you’re going to get a much better idea of what goes on there. That parking lot of the subject property might be a hang-out for kids to party on the weekends. You get a chance to speak with the tenants and see how the property operates at various times. It might even change your mind about the property.

Mistake # 10: Not Walking Each and Every Unit

Even if the seller doesn’t want to disrupt the tenants, which is a ‘red flag’ for me. I want to see every one of them. You don’t know what they’re going to be hiding or what you’ll end up seeing. Maybe one of the units has mold or fire damage issues. Insist on it.  Even consider passing on the opportunity if the seller won’t allow it.  It’s that important.

What is ‘re-trading’ a deal?

Re-trading means asking the seller for a LEGITIMATE discount. Make sure you document the reasons you’re asking for a discount properly. Write a letter and itemize each and every issue that you uncovered and that needs to be addressed. It’s all in the manner you present it. And if they don’t address it, make sure you have an out. Too many buyers today ‘make up’ reasons for the seller to discount the purchase price, as if it’s just part of doing business today.  Don’t get a reputation for that.  It’s too costly.

If I were to try to boil it down for you, the key ‘take-away’ from learning how to conduct due diligence properly?

ASSUME NOTHING.  If you’re going to assume anything at all, assume that there are multiple problems to discover. Learning how to properly conduct due diligence will help you uncover those problems, as well as discover hidden value enhancers to increase property value.

Brian Hennessey is the author of the #1 best seller on Amazon, “The Due Diligence Handbook For Commercial Real Estate” as well as “The How To Add Value Handbook For Commercial Real Estate”.  Both are available as audiobooks on Audible.com and ITunes.

You can learn more about his books as well as other valuable resources for real estate investing at www.impactcoachingsystems.com.

Posted on October 18, 2017 and filed under Commercial Real Estate.

You Make Your Money on the Buy

You may have heard this old adage, which is very true when investing in real
estate, as well as other investments. Many investors have a tendency to attribute
it solely to pricing. It’s true that pricing is a major component and is important;
however, it’s not the only important component. There are many other elements
that can play a crucial role in evaluating investment real estate that will have an
effect on its current and future value.

Specifically, what I’m referring to is the investigation or due diligence performed
when looking to put your hard-earned money into real estate. This is a subject
that the vast majority of investors will skim over, relatively speaking, instead of
doing a “deep dive” and giving it the worthy consideration it deserves. Too many
investors are under the influence of “hopeium” when purchasing investment real
estate. They believe and hope that it will all work out in the long term, which may
or may not be the case.

Warren Buffet said, “Risk comes from not knowing what you’re doing.” The
typical investor is usually doing their real estate investing on a part time basis and
is under time constraints to get their due diligence completed. There is plenty to
do during that process. Depending upon the investment genre, you may have to
gather market info, if it’s not in your familiar marketplace. You have physical
inspections, lease reviews, loan application, appraisal, etc. Most buyers are
stressed and just trying to survive to make it through to the close of escrow with a
minimal number of headaches, distractions and hurdles to overcome. The
problem with this scenario is you are counting on no hidden issues popping up
during due diligence, or especially after the closing, that will cause you heartache,
or worse, financial disaster.

There are an untold number of items and issues that can derail an investment
that you will not know about unless and until you uncover them before you close
escrow. The idea of conducting proper due diligence is to minimize the risk and
optimize the value through thorough investigation of the investment. We know
that the seller of the property will not hand you a list of issues and potential
problems when opening escrow. In fact, they are hoping you don’t discover any
issues or reasons not to complete the transaction.

Once you become aware and acquire the skillset of properly conducting due
diligence when purchasing investment real estate, you will feel more confident
making an informed and intelligent decision. You will know, once you have
completed the due diligence process thoroughly, to move forward with the
purchase, or not.

Here are some of the items and issues that many investors may leave to chance
and often overlook:

  • Thorough review of the leases and all the provisions that can affect value
  • Thorough review of the service agreements
  • Not insisting on interviewing the tenants
  • Investigating the submarket they are investing in more thoroughly
  • Not visiting the property at different times of the day and week
  • Not utilizing a skilled real estate attorney to help them through the transaction, including negotiating loan documents
  • Not hiring professionals to assist in various aspects of their investigation whether it be legal, financial review, lending, etc.
  • Letting the appraisal process go on “auto-pilot” hoping they get to the value they need for the loan they applied for
  •  Knowing how and what you should negotiate on with the seller to legitimately ask for a credit

There’s a list of other items, tips and strategies that can help to save you money,
headaches and stress, as well as optimize value once you know where to look.

I heard a story from a friend of mine who is in the property management
business. He said he received a call from an investor one day who said they were
referred to him. He was in the process of buying his first office building and
needed a property management company to manage it. He asked if he could help
him with the transfer of management when it closed escrow, which was in the
next two weeks. My friend asked when his due diligence period ended. The
investor asked, “What’s due diligence?”. My friend was taken aback, especially
when he was told his earnest money was already non-refundable.

Yes, that is an example of an investor who was more than “clueless” investing in a
real estate investment he knew nothing about. Believe or not, there are similar
examples of this type of investing process that goes on every day. I see it regularly with people who are in 1031 exchanges, who are hell-bent not to pay
the taxes and “throw the dice” on an investment they know nothing about
because their back is up against the wall and they’ve run out of time.

There is no reason to put yourself in a bad position when investing in real estate.
You need to increase your knowledge in order to reduce your risk. This doesn’t
mean that every time you invest it will work out fine with no problems. There are
always unforeseen issues that can come up or extraneous factors that will affect
the markets. The idea is to minimize your risk as much as possible, while
optimizing your chances of it working out in your favor.

If you’re interested in learning more about properly conducting due diligence visit
my website at www.impactcoachingsystems.com. I have some terrific resources
and tools available, complimentary, to help you with your real estate investing.

Yes, it takes more time, energy and sometimes expense, but learning these
skillsets will pay you exponentially. It works like any other skill you’re looking to
acquire: the more you do it, the better you get at it.

Brian Hennessey is the author of one of the #1 best sellers of commercial real
estate books on Amazon, “The Due Diligence Handbook For Commercial Real
Estate” as well as “The How To Add Value Handbook For Commercial Real
Estate”. Both are available as audiobooks on Audible.com and ITunes.


You can learn more about his books and other valuable resources for real estate
investing at www.impactcoachingsystems.com.

What can I do to get my property leased?

My property has been sitting vacant for too long.  There has to be something I can do to get it leased.

Some potential problems may be:

• The asking rent is too high

• There's too much competition in the area

• The property needs improvement

• You need help getting it rented

Many investors aren't proactive enough when it comes to getting their property leased.  They'll put up a "For Lease" sign or place it on a website or listing service like LoopNet and hope that the phone will ring.  They'll let it sit vacant for a while, sometimes months, and then decide I better do something.

Here are some questions you need to ask yourself if you have a property that's been sitting vacant an inordinate amount of time:

1. Is my asking rent too high?

 You need to do your homework and find out how your property compares to its competition in your submarket. 

If it's an apartment, what are other similar apartments renting for, what's the vacancy rate in the area, what's the competition offering. 

If it's retail, office or industrial, it's basically the same process.  You want to make sure you're competitively priced and letting the world know you are ready, willing and able to make a deal.

2.  What's the competition out there and how can I position my property differently to attract tenants?

Knowing your competition is a critical component of being able to compete in the marketplace.  How can you be competitive if you don't know your competition and what they're doing to attract tenants?  You can find this out by talking with brokers or calling on the competition and asking what they're offering.

Then you can decide, once you have gathered the facts, what you can do to position yourself in the market to be more competitive.  That may be in the form of lower asking rental rates, concessions such as free rent, moving allowance, or whatever else you may come up with to differentiate yourself.

3.  Does my property need to be improved to enhance its lease ability?

Sometimes investors "can't see the forest from the trees" and don't notice that their property could use some TLC, like paint, landscaping help, etc.  It helps sometimes to have an objective third party opinion as to what they think it could use.  Also, drive your competitive set that you’re competing directly with and see how your property stacks up against them.  Sometimes it is just a matter of taking care of the deferred maintenance.  Don't let that get too far out of hand or the dollars can add up quick.

4.  Could I use help in getting it rented?

Many times investors will try to save paying a commission by trying to lease it themselves.  While this could possibly work out at times, most times I've seen it work against landlords.  I call it "stepping over the dollar to pick up the nickel".  Depending upon your property type, where it's located, what your competition is and other various factors that may affect, you may be better off letting a real estate broker help you in getting your property leased.  Run the numbers on how much a broker's fee would cost versus how much rent you will need to pay the commission, and you'll see how long it has to sit vacant to pay for it. If it sits vacant too long it becomes stigmatized and prospective tenants will start to see it as a problem property and avoid it.  They'll assume there must be something wrong with it for it to sit vacant so long.

In order to find out who could possibly be the best candidate to get your property leased, interview at least three top real estate brokers in your market that specialize in your property type.  Ask them what they would do to get your property leased.  They'll need an exclusive listing to put the time, effort and energy to market it, if you want them to make a serious effort in getting it leased.

It's important to be proactive when it comes to getting your property rented.  After all, it is a business that makes you money, so it makes sense to take it seriously.  Do that and you will increase the chances of getting your property leased in a timely manner.

Brian Hennessey is the author of “The Due Diligence Handbook For Commercial Real Estate” a #1 Best Seller on Amazon.  Coming Soon - His new book is “The How to Add Value Handbook for Commercial Real Estate” also available on Amazon soon.

Posted on July 2, 2017 .

Should Real Estate Brokers Get Involved With Due Diligence When Helping Their Clients Buy Property?

 

The old school approach that most brokers follow is that: "Don't get involved with due diligence when selling property. It will just expose you to possible litigation." That may have been the case many years ago, but it certainly is not the case now. In fact, just the opposite is true. Brokers are exposing themselves to potential litigation by not getting involved with helping their clients with due diligence.

Here are the facts:

• There is case precedence for brokers who were taken to court and lost because didn't get involved with helping their clients perform due diligence. Basically, the courts have ruled that if the broker is going to be compensated in the transaction they should be looking out for their client's best interest and and, at the very least, pointing them to experts or resources that can help uncover certain issues or problems.

• "Ignorance is not a defense." As a broker, you're better off being actively involved with the due diligence process to help your client investigate the investment opportunity.

• You can help to avoid potential litigation by offering your services to assist your client perform due diligence tasks. You will also be seen as a true ally and valuable team member.

Comments from opposing view points:

• Some investors insist that they don't want the broker involved with the due diligence when purchasing investment properties because it is not truly an unbiased opinion.

• Some brokers think that the amount of work involved is not necessary.

• Some brokers believe their clients don't really welcome their involvement with performing most due diligence.

There are some investors that don't want their broker involved with performing due diligence. That could be because their broker has not demonstrated to them that they are quite capable of helping them with it and do in fact have their best interests in mind.

This are many mutually beneficial points for allowing the broker to get involved with helping to perform due diligence. Also, the more brokers are involved and learn how to properly conduct due diligence the more value they add to the equation.

The world is changing rapidly to a more "valueadded" service orientation that clients continue to gravitate to. As brokers add this to their service arsenal, more clients will want to do business with them because they're realizing the benefits of having someone who knows what they're doing when conducting an investigation and due diligence on an investment opportunity. This offers the broker a unique selling proposition that the vast majority of other brokers are not offering clients.

As a broker, you want to find out sooner rather than later if there are issues that can't be resolved so you can move on to do other ones that are doable. As an investor, you want a broker on your side that can help you get through the due diligence process in an efficient manner, reducing the stress and additional workload.

Posted on January 21, 2017 .

Is this A Good Time to Invest in Commercial Real Estate?

In today’s tumultuous investment world it’s very confusing, with all the conflicting information available, to decide where it’s safe to invest money and what to avoid.

Commercial real estate offers investors a diversified investment in a tangible asset which has been steadily climbing in price since the 2009 economic crisis we experienced here in the U.S. Prices should continue to appreciate as the economy improves and demand increases, as long as interest rates continue to stay low.

Depending upon the type of commercial real estate you’re interested in, i.e. retail, industrial, office or multi-family, there are various factors that need to be decided before you invest. For example, are you willing to take a more “hands on” approach, and if so, how much “hands on” work are you willing to do? Obviously, this will depend upon your experience with: tenants; leases; accounting; property maintenance, etc. Also, it is imperative you have a due diligence process plan that will help you determine if the investment is, in fact, what you’re looking for and what the problems or potential pitfalls it may have. Sometimes the best deals are the ones you don’t do.

If you’re going to be an owner/user of the property, either for all of it or a portion, then you may be able to qualify for a Small Business Administration (SBA) Loan which will allow you to get in for as little as 10% down at, incredibly low interest rates. These loans are at some of the lowest rates seen in decades and are actually some of the easiest loans to qualify for in today’s difficult lending market. Lenders are eager to make these types of loans since they are government guaranteed. The one caveat is that you must occupy at 51% of the property to qualify for this type of loan. You may take up to one year to take the required amount of space needed to qualify.

It can make a tremendous amount of sense if you’re willing to be a property owner and tired of paying rent to help your landlord pay for their property. In the 30+ years I’ve been involved in the commercial real estate business, one of the most common remarks I’ve heard from owner/users is: “One of the best things I ever did was buy this property to run my business from. It ended being worth more than the business I’ve had all these years.”

Many business owners have benefited from owning their own building and realized the plusses of it; tax benefits such as depreciation, interest write off; controlling one’s own destiny when it comes to knowing what your rent is going to be in the years to come, and appreciation. Many owners will decide to hang onto the property after they left or sold their business and lease it out as rental property to supplement their retirement. For many owner/users it becomes their main source of retirement income.

If you believe that you may be able to benefit from owning your own commercial property for your business, the best thing to do is have an experienced commercial real estate broker do a financial analysis, i.e. lease vs. buy comparison, to see if the numbers make sense for you. You’ll also need to decide if it fits into your overall business plan and if you have the capital to invest. A few of the questions you should consider are:

  1. How much will my business be growing in the next few years?
  2. Do I plan on staying in the general area or moving out in the near future?
  3. What is the general forecast for the industry I’m in?
  4. Can I qualify for an SBA loan?
  5. What is the optimal size property for me at this time?
  6. How much space will I need to grow into for the foreseeable future?

There are plenty of other issues and questions that need to be addressed and answered before making the decision to move forward in buying a building for your business. This is where a well structured due diligence plan will help you determine if it’s right to move forward with a purchase or not. You want to know what the issues are before you buy, not after.

Whether you are an owner/user or investor, commercial real estate can be a great way to diversify your investments. The commercial real estate market has been hit hard and has been bouncing along the bottom for some time during the economic downturn, but the recent improvement in values over the last 6-10 months has shown that the market is starting to get better. Now would be a good time to invest as values are on an upward trend and interest rates are at all time lows.

To learn more about how to purchase commercial real estate please purchase my book at amazon.com: “The Due Diligence Handbook for Commercial Real Estate”. It has many more tips on how to evaluate, create value, cut expenses and investigate properties so that you can make an intelligent and informed decision while looking to invest in income properties.

Posted on January 20, 2017 .