DON'T TRUST THE SELLER

After over 30 million in real estate transactions, I have learned a couple things. We will talk about one right now, which must be a mindset, protocol, and over all rule that is critical when analyzing a property for acquisition. This important piece of knowledge has helped save me millions in potential losses and assisted in properly valuating properties. OK enough build up here it is…………..

DON’T TRUST THE SELLER

When you go into a real estate, transaction there is a paradox between the buyer and seller. The buyer wants to pay as little as possible for the property. The seller typically over values their property and expects you to pay the premium. So in this dichotomy of goals as a buyer in acquisition mode we must conduct due diligence with extreme prejudice and expect the seller to omit or manipulate facts and numbers to aide in accomplishing his/her plight. Now I understand this sounds like paranoia, but in real estate investing only the paranoid survive.

There are several angles that I typically see where this reality surfaces during my due diligence process but for the sake of time we will discuss two. The first is the misuse of terms actual and proforma. It never ceases to amaze me the back peddling that happens when you realize the financials you made the offer on have suddenly changed and your 10 cap, on the advertised “actuals”, is now a mere 8.2 cap. There are many reasons for this disconnection. First the property may have performed at a 10 cap last year as a fluke but this year back to normal it’s at a 8.2 cap. Alternatively, the owner may have been managing the property so management expenses and vacancies were low. Lastly and most often, it is a manipulation of numbers like excluding expenses, or including non-relevant income.

The second is the lack of disclosure. Typically, if you are searching for an undervalued property the majority will have issues hidden deep below the surface to avoid scaring you off. These problems are the reason for the sales price and can be fixable or potential nightmares. Your mission is to find these problems then assess the solution, feasibility and cost. They can include deferred maintenance, inflated rents with concessions, mis-management, transient tenants, environmental, obsolescence and declining neighborhoods.

So word to the wise when you are knee deep in financial analysis and the numbers click start digging deeper, and do not settle until you expose the dirt. Another suggestion is to join a real estate club specialized in real estate acquisition. One company Stone Equity Group offers members a deal review to help analyze potential properties along with access to due diligence on exclusive properties including condos, duplexes, fourplexes and multifamily in the hottest markets nationwide.

Happy Investing ~ Joshua Host