MIT 3.0: 3.2 Due Diligence Part 2

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MIT 3.0
3.2 Due Diligence Part 2
Cheat Sheet

1. Physical Due Diligence
  1. Once the financial due diligence is completed, proceed with verifying the condition of the property with the property inspection
  2. Have every physical aspect of the property inspected from the roof to the crawl space
    • Hire a property inspector (using the rule of 3) and require a detailed report of their findings
      1. If you’re in need of a property inspector and don’t know how to find one, you can find property inspectors (as well as settlement companies, appraisers, and deal finders) at networking groups or via asking other real estate professionals in your network (your deal finder should be a good source of information)
  3. Make sure the property inspector highlights the major items, safety items, and environmental items (mold, mildew, pests, termites, asbestos, etc) for you want to negotiate credits for these items
    • You can negotiate credits with the seller; however, it’s preferable to negotiate credits in one complete package for the financial and the physical due diligence. 
    • In other words, request credits after the financial and physical due diligence has been completed
      1. Credits can be requested in one of two ways:
        • Credits can be subtracted from the purchase price
        • Credits can be given at closing which will reduce the amount you’ll have to bring to the closing table
  4. Ask the property inspector to give you the lifespan of the mechanicals (Furnace, water heater, boiler). 
    • This way, you’ll know if it’s to your advantage to repair the mechanicals or replace them
    • If the mechanical has a life span of less than 2 years, request credits for the replacement of the mechanicals.
  5. The property inspection report should list everything wrong with the property along with the photos to match 
  6. Have your preferred contractor (or more than one contractor) provide an estimate of how much it’ll cost to repair the major, safety, and environmental items on your property inspection report
  7. After you’re finished with reviewing the report and tabulating your requested credits based upon the due diligence you performed for the financial and physical
    • Send an email with your due diligence findings and the requested credits to the deal finder
      1. Within the email, notify the deal finder how much time is left for the due diligence process to make sure you have enough time to structured to negotiate credits
      2. Advise the deal finder that you require a quick response
        • Simply say in the body of the email: “I completed the physical due diligence and here is a list of the financial and physical credits I’m requesting. Please have the seller get back to me within a 2-day time period. We have ____ days remaining.”
    • In this email, also include the due diligence findings report along with the photos, the bill from your preferred contractor over to the seller, and your due diligence findings report (including your requested credits for the financial due diligence).
      1. Let the seller know in an email what’s wrong with the property and the cost to make the repairs
        • The seller may suggest to complete the repairs, but it’s unadvisable to accept this offer being that the seller may not do a superior job. However, if the seller refuses to accept the credits at closing, then you can proceed with either attempting to apply the credits to the purchase price or settle to have the seller fix the repairs. If you have the seller fix the repairs, then make sure you have your contractor inspect it to make sure it was done adequately and up to code.
      2. Whether you negotiate a credit at closing or a reduction of the purchase for the major items and the safety items
        • The credits are to be listed on an addendum that will be signed by you and the seller
          1. The addendum can be used for an extension of time to complete the due diligence process
          2. If the addendum is not signed, then it isn’t a binding agreement, so make sure both you and the seller sign it
          3. Send the fully signed addendum to your deal finder, the mortgage company and the settlement company 
      3. If the seller doesn’t want to issue the credits at closing or a reduction of the purchase price, then consider backing out of the deal (while under due diligence) and have the deal finder terminate the agreement
2. Management
  1. On a weekly basis provide project management skills
    • Set calendar invites for team members
    • Document all conversations in your CRM for future reference and follow ups
    • Gather all documents required by the mortgage company
      1. Ask the mortgage company on a continuous weekly basis (until you get an answer) for a time frame as to when the mortgage commitment letter is due and when you can order the appraisal
        • Here’s a soft script: “Mrs. Mortgage Lender, is it time for the appraisal yet? Have I been approved yet? Can we move forward with the appraisal now? Are there any constraints, please let me know? Anything you need from me or the seller? Is there anything that can hold us back from closing on time, if so please let me know”
      2. If you received the commitment letter and received notification to order the appraisal, then make sure you inform your deal finder and partners (if any) of the details
      3. When ordering the appraisal, the mortgage company will provide three appraisal companies. Go with the appraisal company that provides the quickest turnaround time if short on due diligence timeframe
  2. Gather all documents required by the settlement company 
    • Ask for progress on the title work once a week. In fact, call the settlement company weekly directly after you finished speaking with your mortgage lender.
      1. “Hey Settlement Company, are there any tests that need to be done? Anything you need from me or the seller? Is there anything that can hold us back from closing on time, if so please let me know”.
  3. If doing a deal with Limited Partners, call them on a weekly basis as well and update them so they too will be informed on the progress (update them after you reached out to the settlement company)
  4. Regarding the insurance broker, contact him/her to see if they need any documents from you or if they have questions about the property
    • After the appraisal comes back higher than the purchase price (or if you negotiated a lower purchase price via an addendum being that the appraisal came back lower than the purchase price), then ask the insurance broker for the binder, which is the agreement to move forward with insurance 
  5. Reach out to the deal finder weekly, if not daily (after you speak with settlement company and/or limited partners
    • Ask if documents from the seller are needed
    • Ask if your requests are being relayed to the seller 
    • Ask if the seller is meeting all deadlines 
    • Ask, “Anything you need from me or the seller? Is there anything that can hold us back from closing on time, if so please let me know”.

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