Due Diligence: It Changes Everything

So here we are after a very simple and easy negotiation. We have this lovely mobile home park locked up under contract at a 14.6 cap based on the stated income and expenses. We have 60 days from the day we receive our entire diligence list that we submitted to the sellers to complete our full diligence and 30 days after the period ends to close on the property.

Remember when I said the cap rate was based on what was stated? Well what was stated and what we can verify end up being 2 different things (which is par for the course as best we can tell). So the stated income for the property was $62K the income that we could verify ranges anywhere from $10k all the way up to 45k. Just a small variance right? So let's break down what that income means from the prospective of the cap rate as that's what is most important to us.

So we have an agreed to purchase price of $429,000. With the 62K in income it is a 14.6 cap. With the 42K it is still a 9.9 cap which isn't bad but it is certainly not what we agreed to. If we go to the low end of the spectrum and count the NOI as 10k we are looking at a 2.3 cap...YIKES! The income of the property has increased year over year for the past 3 years and we believe that we can accurately give about value to $40,500 of the income that is being collected. Due diligence is all about making sure you have a good deal and protecting that good deal. So what happens next? Well we told the broker we are working with that we still love the park however we believe some sort of an adjustment needs to be made in order to maintain our interest in purchasing the property. So we suggested that one of two things can occur: 

1. 1. We adjust the price to reflect the income and keep our current cap rate the same at 14.6 this leads to a price adjustment that moves the purchase price to $277,397. 
2. 2. We can lower the price less and they can agree to some seller financing. 

Does this mean we will acquire the property at a lower cap rate? It sure does. However the seller will make more money through payments and we will have to come up with less down on the property. In my eyes that's the best way forward. Either way though it works out great for us!

I will keep everyone posted with news as we get it and move towards closing on this property. I was also thinking after the deal is done posting the P/Ls and looking at exactly how we broke down the property and why we gave it the value we did. Also after closing I was thinking about doing a management blog to show how we are going to add value and really take this property to the next level. You could be doing anything in the world with your time and I certainly appreciate you spending it reading this blog. Hopefully we are creating value for you and if there is any way we can help please let me know.

Ryan