Due Diligence Training - Part 3

There are a number of contingencies. So number one is earnest money. So with most of these there's two questions. How much and when? How much earnest money? When is it due? That's the question. So sometimes you'll go in on a deal and if it's very preliminary, you're very hesitant about the deal, the seller is super motivated, then maybe I don't put down much earnest money at all. If I'm competing with an on market deal and there's a broker, they're going to expect a lot of earnest money. Off market deals, typically you don't have to put as much earnest money. Why? Because they're not taking that property off the market for you. So if you've got a public listing with a broker, they've got the clock ticking. They've got a six month listing agreement, whatever it is, they've got six months to sell that property. You put it under contract for three months, they've lost half of their time to you. That's why brokers are so particular about who are you, is it going to close? Because the clock is ticking. They have to take an offer from somebody who's going to close inside of their listing, period. Okay. And so they're getting earnest money to make sure that you're real, make sure that you're going to close, make sure that, that you're the one that they're going to get the deal done with. Otherwise they'll put it under contract with somebody else. They're spending a lot of money on advertising. Off market, not so much. You put it in a contract, you don't buy it. They haven't lost anything. It's business as usual. So you hear me lean into off market properties constantly. And that's a big part of the reason why. So earnest money, how much and when. Then we have our contingency, so we have inspection, we have finance, appraisal and title. These are the big five, big five contingencies. When we're going in and making an offer on a deal, when we're negotiating a purchase and sale agreement, and again the question around most of these is how much you win. The two most common for canceling a deal or walking away from a deal are inspection and finance. Normally a contract will say something like, I have 30 days to do my physical inspection. The property at the end of the 30 days, my earnest money, we call it going hard or becomes non refundable. So like a contract might say, I've got 30 days to do my inspection and then it'll close. In 45 days, something like that. So inspection contingency is typically very broad. It means anything related to the physical condition of the property. In my sole and subjective discretion, that's the kind of language I'm looking for. Sole and subjective discretion, meaning it's subjective. I acknowledge it's subjective, but it's my personal discretion by choose to walk away from a property I can. So that's the kind of language that I like to use. Sole and subjective discretion. Finance contingency is if I can't get the loan approved, if I don't like the interest rate, whatever the case may be, if I can't raise the funds, if I'm syndicating, etc. So these are the two most common. Now typically the inspection contingency, I would want at least 30 days. And with the finance contingency, I want 30 to 45. Now the reason is that with the finance contingency, you have to submit the application, you have to submit the underwriting, you or your loan sponsor, and then it goes through underwriting. And that takes a while, right? They have to go to their loan committee, they have to come back to you and ask for more financial documents, et cetera. If they come back and the loan's not approved and you're two weeks into this deal, you need to have the ability to walk away. And that walk away power is what these contingencies protect. It protect your ability to walk away from the deal, get your earnest money back, and the only money you lost was the money that you spent on due diligence. So with the inspection contingency, we're going in and we're looking at the physical condition of the property. Now these are the things that I always inspect with the inspection pieces, taking notes about the inspection contingency. These are the things that you should write down. So what I don't like to do is I don't like to send out an inspector. Sometimes I will, especially if I'm not local to that property, I will send out an inspector. But generally what happens when you send out an inspector, Inspector comes back and says, hey, you should get that looked at. Inspectors typically aren't licensed in most states. Right. So you have an inspector who used to be a roofer and, and went into property inspection. And so I'd be very confident him looking at the roof, but I wouldn't be confident in him looking at the plumbing. Right. Not everybody could be an expert in everything. So I'm not against inspectors. It's just not something that I, that I typically will Use unless it's somebody that I respect. Also, they tend to do more residential. Here's what I do. I send out a roof inspector, some. So I spent send out an actual roofer, Call up a roofer, got this property. Can you go look at it? What's the condition of the roof? I'll ask them. Hey, can you tell me how old the units are, when they need to be updated, if they've been serviced? And by the way, especially with H vac, you don't want to use the person that they're already using. Okay. Because guess what happens if you hire the H Vac guy that that property manager already uses to look at their H Vac. He's going to come out and be like, yeah, perfect. The best H Vac system that's ever been had. Roof, H vac, electrical, plumbing. And I will say that the parking lot and the structure, I kind of put them in as one. And that's something that I may or may not actually send out, depending on how old the property is, what the condition of it is, et cetera. And then also under the plumbing, I would put kind of a subcategory of sewer. Scope the sewer line. A lot of plumbers won't scope the sewer line. A lot of times it's a different contractor. So roof plumber, electrician, H Vac, and then physical, structural, whether it's the foundation, whether it's the parking lot. And that's kind of a case by case basis. But I always send out H Vac, I always send out a plumber, I always send out a roofer. I do like to do sewer scopes, et cetera. If the parking lot's rough, I'll have a parking lot guy I go out and look at. Now, when I'm doing those inspections, what am I looking for? That sounds like a lot. It's like, oh, man, I got a banner. Bucks. Got to pay this guy 200 bucks. Now I'm at a thousand bucks. Why am I doing all this? Well, guess what happens. The roofer says, there are some roof leaks. It's going to cost $50,000. I say, write me up a proposal. Take pictures, give it to me in a formal format. Send me a proposal. The H Vac guys like, yeah, these all need to be updated. When you new filters, whatever you need, new AC units. I say, great, send me a proposal for your best units, the nicest ones you got. Same thing, sewer, scope, all this kind of stuff. Because then, guess what I do with those proposals? I compile them and I do an inspection objection within 30 days. I go back to the seller and I say, hey, Mr. Seller, love the property, love the financials. Everything looks good. I was happy. The number we were at. This property needs $200,000 worth of work. Needs $100,000 worth of work. Needs$50,000 worth of work. Well, guess how much the inspections cost you. Maybe at most. They cost you a couple thousand dollars at most. And the thing that sometimes does get expensive is the H Vac inspection, because they'll have to go look at each H Vac unit, et cetera. That can get a little price. But let's say it's $3,000, and I can do an objection for $50,000. $100,000, $150,000. Talk about a return on investment, right? If I can get $150,000 better deal by spending a couple thousand dollars on inspections, it's worth every penny. That's what you can't do with a property inspection. Can't do that because they don't put. They're not giving you proposals. They're not putting numbers on there. They're not like, H Vac is going to be two grand, whatever. It's just, you should get that looked at. That's what the inspection reports say. So that's why if I do get an inspection, then I try to do it early on, and I immediately send inspect. I immediately send contractors out to give me proposals on all of those items that the inspector found, knowing that in my mind he may have missed certain things, et cetera. And so it's worth sending contractors out. I think it's worth every penny of whatever they charge you. And you can develop relationships with those contractors, and they will send you deals. I've had H Vac people send me deals. I've had plumbers send me deals. I've had electricians send me deals because they. They're going out inspecting properties that are rough, and people are like, oh, man, I can't afford to fix all of this. And this is such a headache. And they say, hey, you thought about selling? My buddy Jackie is an investor. I give him a call. That's a great connection for you to build within your network is at a commercial contractor. So inspection is 30 days. Finance contingencies, 30 to 45. Oh, the earnest money is typically seven to 10 days, but earnest money is very much negotiable. So a lot of times I'll go in and I'll do like $5,000 earnest money five business days. And then at the end of my due diligence contingencies, let's say the end of 45 days, then I put down $50,000 additional earnest money deposit at the point that it becomes non refundable. So you can break it out like that. I like to do that because everybody knows the earnest money is fully refundable up front anyway. And there's no chance that they're going to get to keep it until it becomes non refundable. And so to keep the earnest money down up front, I'll do like $5,000 up front, $50,000 in 45 days or whenever these contingencies expire. These two appraisal and title. When. So typically an appraisal contingency will be like 30 days and a title contingency will be like 15 days. So appraisal is if you're getting a bank loan. If you're not getting bank loan, probably don't need an appraisal. Some private lenders will require an appraisal, but not all. An appraisal, the lender uses a CHIN system to keep it separate from you and your lender. For them to call an appraiser, a third party appraiser come out and appraise the property. An appraisal does not determine actual market value. So appraisals are done in reverse. Appraisals are done by being the appraiser, the price giving them the contract. Are appraisals always at the buyer's expense?