Agreement and Due Diligence Flashcards
Keys to Negotiating:
- Know the property and neighborhood inside and out
- Understand what is important to the seller
- Set your goals and rank them by priority. Don’t disclose them
- Decide your strike price and don’t exceed it
- Anticipate next moves and don’t avoid haggling. Just start lower, as seller feels better if you’re willing to compromise some.
- Remain calm and unemotional
- Build rapport and Trust. Try to learn about them in advance.
- Create a Win/Win environment. Ask what their goals are. Never assume.
- Remain Flexible and open to options. See if there is revenue you missed, don’t be afraid to walk away.
- When the seller speaks, listen closely and delay your response. Listen while making eye contact, process what the seller is saying, pause for a bit
- Demonstrate Empathy. “Feel, felt, found”
- Silence is Golden. Make offer, let seller digest it. Wait til seller responds.
Three categories of due diligence
Financial, physical, and legal. Don’t start physical and legal until you have verified financials
Financial due diligence documents needed
last 3 years of Operating Reports, Year to Date P and L statement, Balance Sheet, Last 12 months of rent roll
P&S
Purchase and Sale Agreement, outlines how you will buy the property and what the key dates will be
What price to start negotiating at?
10% below strike price
Whose P&S to use and what items to put in it?
ALWAYS use your own P and S even if you have to pay your attorney for a template.
1. Try to negotiate 45 days instead of 30 to complete Due Diligence and 45 days instead of 30 for closing also.
2. Try to negotiate for a smaller amount of EARNEST money.
3. Whenever possible, try to get a Third Party to hold the earnest money. Puts you in a weak negotiating position if owner holds it. Could take a long time to get it back if the deal doesn’t close.
Sign of an organized seller (re due diligence)?
When financial and other info is provided quickly
Due diligence documents needed
Last 3 years of Operating Reports (same as P&L?), last 2 years’ P&L statement, YTD P&L, Balance Sheet, last 12 months of rent roll. Don’t start physical and legal DD until you have VERIFIED all the numbers.
How to evaluate P&L?
Look at income and expense trends over last 24 months and see how NOI is trending.
How to verify rent roll?
Compare current rent roll with current year’s income to make sure they match. If they don’t, don’t be accusatory - act dumb and say you must be missing something bc you can’t reconcile the two.
Legal parts of due diligence?
Need an attorney to check the Title of the property to ensure accuracy
Look for what during property inspections?
Every property has a COMMON problem and it’s your job to figure out what it is (example: all the faucets/handles are 20 years old and keep getting maintenance calls, or all carpet needs to be replaced, etc.)
What to do if seller claims low expense ratio?
Ask for repair invoices and if owner doesn’t have them, ask for permission to call vendors to get last two years of invoices. Can also ask for last year’s bank statements to see who was paid and when.
- always verify
Watch out for signs of lipstick on a pig during your walk- through:
- If grass is greener in certain area, could be a sign of cracked pipes underground.
- If a lot of odd texture under paint, could be rotting wood that was painted over
- If board on bottom of siding that runs all the way around, probably rotted siding that’s just covered up
- Windows in working order
- For brick, long vertical cracks? Could be settling problem
- Corners of shingles starting to rise on roof? Could mean an aging roof.
- For buildings built on slabs in some portions of country, sometimes copper pipes react with materials in slab. Could be higher water bills than normal in this case as a warning sign
- Watch out for standing water
- Walk perimeter of property and look if there are surrounding business that could have leaking chemicals that could affect you - gas stations, laundromats, storage facilities (people storing barrels of toxic chemicals
- If empty lots next door, see who owner is and what permits have been pulled
- If pool on property, is water clean and concrete in tact? Don’t fill in pool on A or B property, for C property check if competitors have a pool before filling in w/concrete
- Investigate last two years of water bills for signs of leaks and repairs.
How to inspect for environmental issues?
Get familiar with Environmental Phase One report. Author recommends having it done on properties, even if smaller ones. Asbestos, radon gas, oil, run off contaminants, pollution in water, etc. Even if you close, may have problems down the road which may make it difficult to sell.
