Due Diligence Cost

Hi, i was wondering how do you other investors come up with the funds to pay for your due diligence cost (soft cost), which on commercial real estate deals can be substantial.

the reason why i ask this question is because most banks that will finance your deals will not pay for your due diligence cost or will let you roll it over into your loan (i guess they want you to come out of pocket for these cost).

i know about private funds, but right the money the private lenders lend go straight to the closing table and not in your hand or acct to pay for due diligence cost which are due right away

or is it simply just getting an equity investor to pay for these cost (which the banks won't mine, because its not adding any more debt to the property). or it is getting all due diligence cost rolled into the closing (make them wait for their payment) down payment cost and then using your other funds to pay them off.

i just wanted to know how all this works, because i always hear people saying they bought this and that with no out of pocket money, but i figured if your going through the due diligence process and something doesn't check out correctly and you don't purchase, somebobdy is gonna be outta money, right.

Edited: 06/26/2010 at 05:51AM

Jon Holdman

Real Estate Investor · Denver, Colorado

11859 posts
75537 Influence
15 Awards

Icon_minipost Sep 07 '08, 01:55 AM

The bottom line is that is VERY difficult to invest in properties you intend to buy and hold with no cash.

Further, its extremely dangerous. If you're going to own an apartment building, and you have zero cash, what are you going to do if the boiler shoots craps on Christmas morning, or you need a new roof?

That said, one way to do it would be to form a company and get other folks to invest in the company. Then, you use the company's money for due diligence, reserves, and down payment.

Tough to do with no track record.

If you look closely at Dave Lindahl's approach (for example), this is essentially what he's doing. I don't know all the details of his approach, but it sure looks like he's forming companies, getting his students to invest in those companies, and the buying properties for the company. He has already established credibility. As his students participate in the deals, they establish credibility, too, and learn the ins and outs of the process.

Edited: 06/26/2010 at 05:51AM

Jon Holdman, Flying Phoenix LLC

John Quebedeaux

Real Estate Investor · California

81 posts
11 Influence

Icon_minipost Sep 12 '08, 05:55 AM

Investors do not pay your due diligence
cost. You do. You need your skin in the game.

Edited: 06/26/2010 at 05:54AM

N/A N/A

Real Estate Investor · vineland, NJ

11 posts
14 Influence
1 Award

Icon_minipost Sep 12 '08, 04:59 PM

Thanks for the help guy's, but I found out exactly how to do this.

Edited: 06/26/2010 at 05:54AM

John Thompson

Banker · Clearwater, Florida

20 posts
10 Influence

Icon_minipost Oct 16 '08, 08:27 PM

We work with a capital partner that does not charge any up front diligence fee's; however their rates are not a friendly as others that do charge...We are closing most commercial deals right no around 8% with up front fee's, however if you did not want to pay anything substancial up front, we may be able to get you funded in the 11(ish) range.

Hope all is well with you and yours.

Edited: 06/26/2010 at 06:09AM

Jon Valones

Developer · Teaneck, New Jersey

10 posts

Icon_minipost Oct 16 '08, 09:24 PM

Further, its extremely dangerous. If you're going to own an apartment building, and you have zero cash, what are you going to do if the boiler shoots craps on Christmas morning, or you need a new roof?

This is one of my top concerns.

What about putting money aside (assuming available from cashflow) for repairs / capital improvements in a separate fund that is distributed to the partners at the close of the deal.

If not enough there, then repair costs would be distributed amongst partners with relation to their equity interests.

Third line of defense is if I am not liquid at the moment, to use a low interest business line of credit set in place for contingencies.

Also, like contractors that spend around 80k in providing a bid, due diligence is the cost of doing business and think it should be in overhead.

My question is, some contractors finance their estimating and first few months since they do not get paid usually until the second month. Would it be a good decision to use the same principle when performing due diligence in financing it perhaps again with a line of credit?

Edited: 06/26/2010 at 06:09AM

Stephanie Tautkus

Real Estate Investor · Seligman, Arizona

23 posts
1619 Influence
4 Awards

Icon_minipost Oct 19 '08, 03:51 AM

lifestudent...What did you come up with?

Edited: 06/26/2010 at 06:10AM