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MIT 3.0
3.1 Due Diligence
Cheat Sheet
Do not rush to complete the due diligence process, but be detailed oriented and discover any hidden agendas
1. Financial
- Your role is to be a real estate investigator during the due diligence process
- You will be the one to collect information as well as delegate information
- You will also be the one to ensure everyone (deal finder, loan officer, settlement company, partners, etc) is doing their respective jobs
2. Timing
- Record in your calendar the day you got the property under contract and the end date of the due diligence period (you should negotiate a 45 day due diligence period but don’t settle less than 30 days).
- Frontend = 1 day (driveby inspection if possible – if you cannot drive by, then have your deal finder do this and send you a video of the front, back and street view of the property)
- Financial = 10 days
- Physical = 10 days
- Buffer for negotiations = 9 days
- Record in your calendar the mortgage commitment date
- Record in your calendar the closing deadline date
- If you cannot meet any of the deadlines, then request an extension before the deadline date or back out of the deal before the seller does
3. Gather
- Due Diligence doesn’t technically start until after all documents have been received from the seller.
- This is to be articulated to the seller and the deal finder during the 3-way call.
- Begin the due diligence process (without advising the seller or the deal finder of such) by verifying the information you did receive from the seller.
- On units that you did not receive documentation regarding taxes or utilities, do additional research by contacting third parties. Don’t let a lack of documentation from the seller stop you from performing the due diligence. You can be resourceful in verifying the financials.
- Verify what’s reporting on the listing against the seller’s documentation and what information you find from third parties (Utility companies, Tax assessor)
- If you’re not provided with any utility bills, call the utility companies to verify the average bill for the property
- Verify the property taxes (county, school district, and local/ municipality tax) against what’s reported on the listing, tax bills received from the seller, and the property assessor’s website for the area the property is located. If you’re not provided with any tax receipts, then you can calculate the tax amount yourself:
- To calculate the taxes (unless otherwise listed online), take the millage rates for county, school district, and local/municipality and add them up. Next, take the total number you got from adding the three numbers up and divide it by 1000. You’ll then take that number and multiply it by the fair market value to get the tax amount for the year
- Verify the gross rental income by comparing what’s reported on the listing and what’s reported on the leases (leases must be up to date)
- Count income from washing machines, parking, vending machines, etc as bonus income (icing on the cake to sort of speak)
- Verify the property insurance by what’s reporting on the listing or the bills the seller provides you, or by contacting your insurance broker for a quote. That way, you’ll know how much the insurance will be
- Verify the property management listing vs the property management contract, and with what other property management companies will quote you at
- Regarding property management, you have to decide whether or not you’ll keep it inhouse or outsource it
- Verify any other fees such as trash service, occupancy permits, rental licensing fees, inspections needing done, etc by calling the respective companies and asking if there are any fees associated with having rental properties in the area
- Verify what’s reporting on the listing against the seller’s documentation and what information you find from third parties (Utility companies, Tax assessor)
- Continue to follow up with the seller for documentation that’s missing
- Send the financial documents below to the mortgage broker/ lender who does the underwriting so that you can receive a commitment letter (pre-approval letter) from the mortgage company once the property is under contract
- Seller Documents
- Leases(must be up to date)
- Rent roll
- Tax returns
- P&Ls (3 years of profit and loss statements)
- Utility bills (trailing 12)
- Lender Requirements
- Purchase and sell agreement
- Copy of the EMD check
- Entity documents
- Operating agreement
- Seller Documents
- You will also need to send the AOS to the title company
- The title company will verify if there are any liens on the property
- Send the seller’s Articles of Organization and the operating agreement to the title company and the mortgage broker/lender
- Share you personal financial statement with the mortgage company as well
4. Forward
- Once all documents are received, send the Earnest Money Deposit to the closing attorney/settlement company
- Make a copy of the EMD check and send it to the settlement company and the mortgage company as proof that you have the actual check
5. Validate
- Verify all of the revenue and expenses of the property
- Look for Value Add opportunities by decreasing expenses and increasing incomes through forced appreciation
6. Physical
- Verify all of the physical aspects of the property to include inspecting the roof to the crawl space and everything in between
- Complete the Pre-inspection Questionnaire by first doing a driveby of the property before ordering a property inspection
- If you’re unable to complete the driveby yourself then pay someone a small fee to drive by and complete the questionnaire
- Ask the seller to answer the questions on the questionnaire
- Once the questionnaire has been completed, the insurance company can begin writing up an insurance quote
- Order a property inspection using a professional property inspection company and coordinate the property inspection date
- If possible, attend the property inspection and ask questions to the property inspector while on site
- Have your team of contractors to complete the work once you receive credits at closing
7. Document findings
- If you find problems with the financials or physical attributes, document your findings into a report, ask the seller for any explanations and then use the report to negotiate credits at closing or to back out of the deal if the explanations aren’t given or if they are inadequate or if the repairs aren’t completed
- Credits consist of safety items and major items
- Safety items: Stair rails, broken steps, uneven pavement
- Major items: Furnace, water heater, roof, foundation
- Environmental items: mold, mildew, pests, termites, asbestos
- For any discrepancies found within your report, ask the seller for a written explanation or additional documentation and use this for negotiating credits
- For all negotiations credits at closings or reductions in purchase price, have your deal finder get it in writing via an addendum or amendment to the purchase and sale agreement
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