Due Diligence Training - Part 2

So I'm making initial contact with property owners. After I make initial contact with property owners, I'm running a napkin now, the napkin analysis, again, it's in school, it's in phase one. It's a very simple analysis of what the properties were. Okay, I'm reaching out to property owners. I'm running a napkin analysis. If the napkin analysis makes sense or if it's an off market property, then I'm writing an aloi. Now notice that on my timeline here, the letter of intent comes after the napkin analysis. The letter of intent does not come after the T12 and the financials and the rent roll, et cetera. So you do not need a T12 financials and a rent roll in order to produce an LOL for a napkin analysis. As a reminder, the napkin analysis only requires you to know what market rents are. And that goes back to the demographic data and, and the comps data that we were talking about earlier. So if I know what the units, if I know the unit mix, if I'm talking to property owners, that's typically the first thing I ask them. It's a mistake to ask them, what do you want to sell it for? Whatever. I always ask, what's the unit mix? How many units do you have? How has it been going with getting rented, do you have a lot of vacancy, etc. But really all I need is the unit mix and I need to know what the market rents are and I can write an loi. And so for those of you who are having trouble hitting the target that we, that we recommend of three to five, otherwise a week, probably what you're doing is you're analyzing the properties before you write another one, right? You're getting the T12, getting the rent roll, you're thinking about it, you're underwriting, you're messing with the numbers. All you need at that point is a napkin analysis. If the deal work, does it not work? If it doesn't work, move on. The only way that you're going to be successful, especially as a beginner, is if you're looking at a lot of deals, and if they're good deals, and if they're not good deals, move on. Stop looking at bad deals. Stop spending time underwriting and analyzing getting married to one deal. Some of you need to hear this. I, I don't have anybody in mind, but I know that there are people in the community who are getting stuck on one deal. You're married to one deal. Look, this is just dating. You don't get married until you find the perfect one. And so when you're on the dating phase, like you want to, you want to look at a lot of properties. So I'm still the acquisitions director for South Core Capital Group. I was in a larger private equity group before. Our rule of thumb was that we would look at 100 deals before we would go to the trouble of underwriting one. When I say underwriting, I mean T12 financials, all that stuff, actually going through the intensive underwriting process. So we would look at 100 deals. This might mean, you know, simply looking at the property, looking at the unit mix, etc. And we would underwrite 1 out of 100. We would underwrite 100 before we would close on 1. We would underwrite 100 deals before we would close on 1. And we had to look at 100 to underwrite 1. So now that doesn't mean when I say close at the closing table, we own it. So we go under contract on more than that. We would make offers on many more than that. But most deals don't close. So we need to set our expectations. And we're going to have to make a lot of offers in order to get a deal done. And that means we have to move quickly. And so we don't have time to underwrite a bunch of deals that we're not moving forward on. Do the napkin analysis. If the numbers don't work, move on. Don't get married to it. I have people come to me and they'll come to me about the same deal three times, like, maybe that works. Look, it doesn't work, move on. I encourage you to go ahead and make an loi, especially if it's an off market property. We Write Lois on 100 of the properties that we look at that are off market. But if the numbers don't work, then don't spend time trying to make it work. The deal has to work on its own merit. For a mobile home park deal, would you still recommend that order or would you wait for financials? I would still recommend this order. So let's get into that. That's a good segue. I don't, I don't think I've done a lot of mobile park deals, and I don't think that the. That it's dramatically different. Now, your napkin analysis might be a little bit different because you do have. Instead of the unit mix, you'll need to get in a little more granular with the unit mix because you'll have lot rent and you'll have own units, et cetera. But the Philosophy is the same. Once you know how many units and the general unit mix what the market says they should be renting for, you should be able to produce an ali. So what happens after an alloy? Well, presumably once your LOI is accepted and it looks like we've got a deal, this is worth moving forward on. Then we're doing a purchase and sale agreement, right? We're going under contract. So after I have an accepted loi, now I'm doing a purchase sale agreement. Depending on the contract, we're using state mandated contract. If you're using attorneys to draft your contract, which of course is is a good idea, there's going to be a gap of time in between these two. Okay? For those of you who are syndicated, for those of you who are raising capital, you want to use this time wisely. So when we do the NAP and analysis, we don't need T12, we don't need financials when we do the LOI. This is the point that we do P12 financials and rental, right? So between once I've got an accepted LOI then, right in between here. Now I'm starting to do a deeper dive now that doesn't mean that I shouldn't look at the T12. That doesn't mean I shouldn't use the financials. Remember what I said at the beginning, we're doing a lot of things congruently, we're doing a lot of things at the same time. So if I have the T12, if I have the rent roll, great. I'm not saying if you have the T12, just ignore it. I'm just saying if you don't have it, don't let that hamper your progress. Keep making progress. Okay? My concern is always that I'm taking action and that I'm making progress and I'm moving forward. We don't want to get stuck at any one of these levels. Okay? So if I have the T12, I have the financials, great. But I absolutely want to have that information before I do my purchase sale agreement. I'm not going to go and into a purchase and sale agreement blind. But here's an important point that I want to impress upon many new investors especially feel like the letter of intent is a contract. They feel like it's a binding agreement. They feel like it's a big deal. It's not a big deal. Now I don't say that to discourage you. For those of you who haven't sent out an LOI yet, when you do, we want to celebrate that with you. That's amazing. That's a big step. But eventually we want that to become routine. We want to make Lois a part of your daily process, part of what you're doing on a regular basis. That comes from knowing your market, knowing your demographics, making initial contact with property owners, and being able to quickly do a napkin analysis. We call it a napkin analysis because you should be able to do it on the back of a napkin from memory. Should be able to quickly analyze the property and know what that property is worth from memory. Because you know your market and you know the naked analysis arithmetic. Then I can crank out an loi. Now remember, the LOI is non binding. Okay? I was working with a client one time when I was a broker and they came from a residential background and they didn't want to send an ally until they had all of the information in the world. They wanted to know everything about the property because they felt like if they were going to put their name out there, they were going to put out a document. Even though the document says this is non binding, this is just for the sake of conversation, etc. They really wanted to be committed. So on one particular deal, they submitted a letter of intent. The seller signed the letter of intent. There was mutual agreement. While they were drafting a contract, somebody else came and bought that property. And they were upset. They were like, well, don't they have to sell it to us? Because we had a letter of intent. And I said that's what non binding means. Because they can, they don't have to sell it to you when you have a letter of intent. A letter of intent is just a conversation, not even a handshake. It's just a discussion that you're having in order to lay out the terms for the sake of the purchase and sale agreement. That seller, if you have a signed letter of intent, can absolutely go sell that property to somebody else. And so that cuts both ways. So be more aggressive with the number of letters of intent that you're sending out. Don't be so particular about all the details of the letter of intent. It can be very simple. I've sent letters of intent that are literally one page. So don't feel like a letter of intent is, is a huge deal. If the LoI gets accepted without financials, wouldn't you potentially be at risk of retrading the seller? No, because, I mean, it's a valid question. So. So I think what you're asking is, let's say that I came in and I submitted an alloy at 5 million on a deal. It needs a new roof. The, the expenses are high. Whatever. I say, my letter of intent was submitted based on the information that I had at the time. Send me more information. I'll adjust my price. So, yeah, you will have to modify. But I want to, I want to communicate that it's not a retrace if you're going in with limited information. So here's what will happen. This has happened to me many times. You call a property, I say, hey, I'm an investor interested in making an offer on your property. They say, send me an offer. At that point, they want to get off the phone. And the reason they do that is that's what brokers say. Brokers call them all day, say, hey, I have an investor. And they say, send me an offer. And the broker never does because they don't really have an investor. So it gets them off the phone. So they kind of put you into that category. They say, send me an offer. So I do send them an offer. If I can keep them on the phone long enough, I'll find out the unit mix. I'll find out, you know, a few details about the property, but I don't ask the price, you know, I don't ask what they're trying to get for it, et cetera. I ask very simple, basic questions about what I actually need in order to move forward. The number one thing is unit mix. So I get the unit mix, put together an loi, send them in the loi, they call me up, and you would think that they would be upset, right, because I'm offering, you know, a discount, whatever. I find that the vast majority of the time they're the opposite of upset. They're very friendly, they're very agreeable, even if we're way on price. Because I shown them I'm real. I've shown them that I'm genuine investor, that I'm actually doing what I said. I said I was going to make an offer. I did make an offer. Now we move forward with that discussion. If they do call upset, which has happened to me once or twice, that's exactly what I say to them. I say, look, I had limited information. All I knew is how many units you had. Send me the details, I'll modify the offer. But at least you're moving forward. At least you're making progress. At least you're having a conversation that's getting you closer to getting a deal. If you hadn't submitted the LOI because you had limited information, you would not be having that conversation and you would never have a chance to buy it anyway. So we're trying to create more opportunities for acquisitions so that you can grow Your investment portfolio, etc. Not writing Lois is hampering you from growth because you're stuck in analysis paralysis.