It has become very imperative to ensure you validate any information you receive from a seller, especially, as hands-free investing becomes very popular with busy executives and out of state investors who may not have the investment climate in their local market environments. Scams and misrepresentations are common in all businesses and real estate investing is not an exception.
DAVE VAN HORN could not have put it better: You must always verify seller information…….read on….
Probably one of the best skills to learn — and a way to really reduce risk — is to become proficient at not only knowing what data to trust, but also verifying that information.
Let’s face it: The most money that’s made in investing usually comes down to whoever’s best at due diligence and to whoever’s the most creative on the exit. That’s why we often hear people say, “You make your money on the buy.”
Even when you buy a car, it’s probably good to get a CARFAX report, run it through AAA, or at least get your local mechanic to check things out.
So, whether you’re buying an apartment complex, a note, or doing a simple rehab on a flip, our decision making is only as good as our information.
Fix and Flips
Let’s start with a simple rental property. The seller or real estate agents tell us what it’s worth. We run our numbers. We look at the seller’s motivation, market values, market rents, location, and needed repairs.
We make a decision, pull the trigger, and then it comes to financing, where either our hard money lender or a traditional bank starts their due diligence process, which for many of us is our due diligence process.
Sure, we can send out our home inspector to verify condition, but then the bank requires most other things. Not only do they perform due diligence on us for things like our credit, our job history, our residents, our backgrounds, our bank accounts, and even whether we have child support, they also verify title (taxes and liens), condition, value (through an appraisal), flood maps, termites, and even past insurance claims. It’s pretty amazing all that they look at.
Although I don’t live too far from Lancaster, Pennsylvania, where the Amish buy properties on a handshake, I can tell you that it’s definitely much different today with the banks. It’s more like they don’t trust anyone or anything, and they verify everything.
Commercial Real Estate
Now, with commercial real estate like apartments, it’s somewhat different. Whether you’re buying mobile home parks, storage centers, or office space, it’s all about the numbers and things like cap rates.
Sellers will juice their numbers to try and look good, and buyers will look for holes in the data for negotiating points. This allows for more creative financing and terms, like seller assists, repair credits, and lease backs to make a deal go through.
For example, I used to raise capital for a company that was investing in mobile home parks. There was one park in particular where the property manager actually ended up fleeing the state. After the sale, the company uncovered that certain units (marked as vacant in the books) were actually leased and the manager had been pocketing the cash from rent. The company ended up getting a better deal, as they had less vacancies than they expected. But this could just as easily not have been the case.
With notes, we always take as much data as we can get from a seller, but to be quite honest, we never take it as gospel. We rely on our own due diligence and data to make our buying decisions. But herein also lies all the opportunities.
With notes especially, it’s a data intensive business. Much of the data provided could have changed, been outdated, or maybe it was even unobtainable.
Sometimes, a note investor will tell us that our BPO (Broker Price Opinion) on a deal was wrong. This is fairly common, as roughly a quarter of BPOs are incorrect, but what some investors don’t understand is that they can be wrong both ways.
I’ll often say to them, “So you mean to tell me if the BPO was underestimated and you found a gem, you’d give me a call and we would split the profits?” You can see my point.
These areas of incorrect information are situations where data can be used in your favor to get a better deal. Maybe it’s higher back taxes or a detrimental property condition that pushes your short sale attempt over the goal line.
Sometimes it is creativity that wins. After you digest and verify the information on your deal, then the next consideration might be how to get the highest and best use out of the property.
For example, let’s say a property you’re looking at was listed and priced as a two-bedroom. You might go to the property to view it as part of your due diligence process and realize that the attic could be easily converted into a third bedroom.
Or, maybe the next step is getting creative financing terms after you’ve uncovered some valuable information about the goals of the seller.
So, let me ask you: What are some of your best ways to verify seller information?
Let me know with a comment!