During the due diligence period of the contract on a multifamily property, you are doing a financial inspection and a physical inspection. Some lenders require an environmental inspection as well. During this important phase of the contract, you will need to request and inspect the rent roll of the property, copies of all current leases and the inventory of personal property. There are some important items to keep in mind during the due diligence phase.
The due diligence period is also known as the feasibility period. In this section of the contract, you state the length of time that you need for due diligence. You may have a statement such as the following, “buyer may terminate this contract for any reason within 45 days after the effective date by providing seller written notice to terminate”. You can ask for anything but 45 days is typical. If you have a dilapidated property, you can ask for more time.
It is very important that you have a coach or an attorney when completing your contract and going through each of the due diligence items. You also want to hire an inspector to inspect the property and flag any items that need attention as a part of the physical inspection.
You may stipulate in the contract that the seller has 10 days to provide you with rent roll, leases and inventory. These items are necessary for the financial inspection of the property. You want to check out the financial statements as well.
You’ll look at whatever financials they send to you in the context of how you can improve the situation. So you play “what if”. If the occupancy went from 72% to 85% how would I increase my cap rate? If it went to 95% how would it increase my cap rate? How would I run this property today to make it a real winner? You’re doing that by wearing your asset manager goggles.
Brokers will typically have this information ready for you. There may be things they don’t have but you want to ask for everything because this is where you make sure that you understand what you are getting into.
It is becoming more and more common for lenders to require the environmental inspection. Basically, this is where ground samples are taken from around the property. It actually is beneficial because it can protect you in case there are any underlying problems discovered.
The due diligence phase of a contract really allows you to examine every aspect of your multifamily deal. Do not try to take shortcuts and neglect any aspect of the due diligence phase. Your ability to analyze the information from the physical inspection and the financial inspection can greatly assist you in making money on your multifamily deal.
The second step in the three step process of contracting and closing a multifamily deal involves composing a letter of intent for the seller. A letter of intent is a principle of understanding. It is a general agreement of what you plan to do so that you know you will not spend a lot of time on a contract.
A letter of intent that is well-written conveys to the seller that you are a serious buyer. The letter of intent basically lays out the terms that both you and the seller agree upon. Not only does the letter of intent show that you are a serious buyer, but it shows that the seller is serious as well.
You know that you are not wasting your time because the seller is telling you that they can agree to the terms in the letter. A contract takes time and legal fees are involved so the letter of intent helps take the uncertainty out of the deal.
The letter should include the price that you agree upon along with the financing terms. For example, if the property is $1.25 million you would include that and then break it down further. Let’s say you are offering $100,000 cash; assuming the first mortgage at 5.06% and you then would like the seller to take a second mortgage of $360,000.
An inspection period, or due diligence, is included within the letter as well as a finance period to raise your financing. Typically, the due diligence period is 45 days and the financing period is 60 days. If you think you will need more time for financing you can increase that period another 30 days.
You also include the amount of earnest money that you are putting forth. A general rule of thumb regarding earnest money is 1%. So if you are doing a $1 million dollar property, your earnest money will be $10,000.
Be sure and play by the rules on earnest money because the seller will be looking at whether that money will make a difference to your or not. If the 1% is a big deal at the moment, find a partner that will put up the money because you do not want to be looking like a non-serious buyer at this point.
The letter of intent is an important part of the three step process because it signals to the seller that you are a serious buyer. Your whole objective is to get the multifamily property under contract because then you control the deal. An effective letter of intent can expedite the whole contracting process.
So you have found a multifamily property and you would like to close the deal. How do you close it if you want to hold it? Do you know the process that is involved? There is a simple 3 step process to follow to wrap up your multifamily deal. It involves qualifying the deal, due diligence and closing.
Qualify the Deal: This is the first step in closing your deal. It actually has a two part phase: validating the income and expenses and driving by the property. Up until this point, you have just been talking on the phone with the seller and you have not even seen the property. Now you need to validate income and expenses.
You need to look at whatever financials they send you in the context of how you can improve the situation. For instance, if the occupancy went from 72% to 85% how would you increase your cap rate? If it went to 95% how would that increase your cap rate? You need to wear your “money goggles” because you are looking at the property with regard to making money on this deal.
Once you have seen the numbers and it looks like a potential deal, you need to visit the property. Again, you want to make an evaluation as to how you can make money on this deal. What could you do to make it more appealing for leasing? Does it look like a lot of deferred maintenance? Look at the property as the asset manager to determine what needs to be done to generate more NOI.
Due Diligence: Now that you have looked at the property and confirmed that it is indeed a good deal, you want to issue a letter of intent to get the property tied up. The letter of intent is basically a statement that the seller is looking to sell the multifamily property and that you are looking to buy the property and that you agree on the stated terms within the letter. The letter allows for an inspection period which is due diligence. It also allows for a financing period.
Closing: Once you have your letter of intent signed by yourself and the seller, you move right into the contract. You can use any formal contract that you and the seller can agree upon. You will be signing the contract as well as additional legal documents. Money will change hands and you will take the title and you are now the proud owner of a multifamily property!
Once you are aware of the process that needs to be followed when putting together a multifamily deal, it becomes much less intimidating. Again, educate yourself on the process and not only will you be more confident when dealing with the seller but the seller will be assured of your knowledge and ability.
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Be inspired by what this student of Lance Edwards’ Multifamily Success LIVE has to say:
“Hi, I just finished Lance Edwards’ Multifamily Success LIVE and it was an absolute success! Lance delivered on every single point that he promised and I feel like that I can go out and do the business comfortably. And I also will enjoy the ongoing training that’s gonna happen afterwards. If you can do it, do it now – not later!“
There are many terms that are thrown around in the real estate investment arena. One of these terms is bird dog. A real estate bird dog, much like its canine counterpart, is out hunting deals. A bird dog is someone who finds something that looks like a deal and then hands it off for you to do the work. If you choose to bird dog deals, there are some things you need to know.
If you want to bird dog a multifamily property deal, the minimum you have to do is submit a deal on a submittal form. That at least shows you have done some analysis. Any sophisticated buyer wants to at least see there is some analysis behind the lead.
If you choose to bird dog deals, you can benefit from working with other bird dogs. Not only can you learn from their experience, but you can team up with them. For example, let’s say you are out scouring the area for apartments and you come across an office building. At present, you don’t have any buyers but you know another bird dog who does have buyers.
You can call up that bird dog and offer to split the deal with him. You are then building a relationship where each of you knows that you can rely on the other to keep an eye out for deals that fit your niche. Teaming up with another bird dog could also allow you to split marketing costs.
You could agree to do a massive mail campaign, pool your resources and then agree to take turns on the leads that come in or to split whatever profits you make on the deals that come in.
Accountability is also another benefit of teaming up with a fellow bird dog. You can build momentum together and hold each other accountable for doing things so you don’t lag and fall behind.
If you are working with other bird dogs, concentrate on those who are consistent and deliver on their promises. Don’t waste your time on dreamers. You need to be ethical and legal but be persistent and focused. Always deliver on value. The more value you deliver, the more money you make.
The more information you take to a buyer, the more you can expect in compensation. If you don’t know what you are doing, the buyer isn’t going to pay for that. To get maximum value, you need to demonstrate that you know the deal.
As with every other aspect of multifamily investing, bird dogging is about networking and alliances. If you concentrate on building not only your reputation but on building relationships, bird dogging can be very profitable. The key to bird dogging is to be knowledgeable and to give the buyer the information they are looking for.
If you are using a direct mail marketing campaign to reach potential sellers of multifamily properties, you need to have an effective call script in place for when the inquiry calls start rolling in. You need to keep three objectives in mind when speaking with an interested seller. You need to build a rapport, qualify that they are a motivated seller and then qualify if it is a deal.
You can accomplish all three objectives with a simple, 10 minute phone call. The caller will say, “I received a letter saying that you want to buy my property.” The first thing you need to do is to get them to talk about the property. Be sure and repeat their answers because this helps to build a rapport.
To build a rapport, you need to ask at least some of the following questions:
1. How many units is it?
2. How many vacancies do you have?
3. What is the rent?
4. Is it a flat or pitched roof?
5. How long have you owned the property? If they have owned the property for a long time, there may be a lot of equity or it is free and clear and then you can do some seller financing.
6. Where is it located? What is the address?
7. What type of deferred maintenance does it have? You want to find out the condition of the units, roof and foundation.
8. Who manages the property?
That short list of questions should enable you to develop a good rapport. Now you want to find out more about their situation.
The potential seller’s response to the following three questions will tell you if he is motivated to sell or not. You should ask the following questions:
1. May I ask why you are selling? Their response to this question can assist you in how you package your deal to them.
2. Do you know how much you would ask for it?
3. Is your price flexible?
4. Do you owe anything on the property?
Once you have gathered the above information, the seller may ask you to make an offer. You do not want to make an offer. You need to ask to see the financials.
Looking over the financials tells you whether it is a deal you should pursue or not. You should tell the seller that you base your offer price on the income of the property. If possible, have the seller fax you the financials.
Having a call script in place can not only help you get as much information as you can quickly, it can also take the intimidation out of speaking to a potential seller. You will speak to many different types of people but the key is to remember your three objectives of building a rapport, qualifying the seller and then qualifying the deal.
A student at Lance Edwards’ Live Event has an Aha Moment regarding extra equity built into the deal:
“When you showed that how that equity is built into someone that is coming in as an investor because I’m thinking “Okay, they’re giving me 20%” so they’re looking at me like “Wow, man, I’m giving you, I’m leveraging the hell out of this property for you.” And I’m sitting here and if I take it back, I’m 100% leveraged but they’re not. Man, how did you do that…extra equity built into the deal…yea, that was just wild.”
Once you decide to begin a direct mail campaign to a targeted list of owners of multifamily properties, you need to have a specific message that you want to deliver. How do you get responses to your letters? Here are some tips to not only get your letter opened but read and responded to.
First, it is important to hand address the envelopes. You may want to do the first letters you send out yourself, but you are the marketing manager of your business and not the marketing assistant. You need to hire someone, possibly a high-school student, to address the envelopes for you.
You can hire someone to hand address the envelope, fold and stuff the envelopes for $.75 a letter. That price even includes the ink, paper, the envelope and the stamp. So if you have 1000 letters to send out, you will end up spending $750. That’s a cheap way to market your product.
Your first goal is to make your letter personal. That begins with the handwritten address. Your return address can be a label. You should have a street address with no name for the return address. Do not use a PO Box. Theme stamps also add a nice personal touch.
It is not necessary to add your name to the return address. You have created interest because the address is handwritten and so you increase the odds that your letter will be opened. Also, do not use “windowed” envelopes because that looks like a business envelope.
Once you have gotten the recipient to open your letter, you need them to actually read it. You should use colored paper for your letterhead. Two good choices are Goldenrod or Gray. Goldenrod has been tested and proven to generate a better response. Statistically, yellow is a “selling” color.
The top of your letter needs to have a headline. The headline needs to grab their attention and draw them into the letter. The body of the letter needs to explain that you are interested in buying their property. It should contain a phone number where they can reach you directly.
You should use your personal name on the letter. Do not use a company logo. Your response rate will plummet if you use a company logo. People are not interested in dealing with companies. They want to deal with individuals. Again, personalization is the key.
The letter does need to be signed and you can have the person that you hired to address and stuff the envelopes sign the letters as well. It needs to be in blue ink so the recipient can see that it was written and not printed. Also be sure to include a P.S. at the end of your letter.
The important thing to remember with a direct mail campaign is to have a system in place. Do not send out so many letters that you are swamped with calls but instead send out smaller numbers so you have time to analyze and respond to the inquiries you receive.
A successful direct mail marketing campaign will generate a response rate of anywhere from 2 – 5%. As with any marketing campaign, you need to analyze what works for you and what doesn’t. By using the tips described above, you are well-equipped to begin an effective direct mail campaign to target multifamily property owners.
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