Due Diligence is a timed process for the buyer to inspect and confirm the information about the property and the deal before any money is lost. Most buyers focus on the physical characteristics and the financials of the property. They look at the condition and age of systems, roof, maintenance, etc. On the financials the focus on the Net Operating Income. If everything checks acceptable, they move forward.
These simple and obvious features are easy to identify and verify. However, they are only part of the story.
In order to know the “rest of the story”, you need to meet with the seller and determine why they are selling the property. The seller’s motivation can open the door to opportunities in creative financing.
One of Doc Haller’s students, presented an opportunity to purchase a $3M property operating in excess of 10% NOI. There was only one problem, the student lacked the $1.2 M required to close.
During the due diligence, several things were learned by reviewing the tax returns and the loan documents:
- Property was held by a corporation.
- The existing note from the bank, in the name of the corporation, had 9 years remaining on the term.
- The banknote did not have a due on sale clause for change of corporate ownership.
- The seller did not need the cash from the sale.
- The seller needed to remove the debt from his balance sheet in order to proceed with another project that he needed financing for.
