Rental Property Investor · Orlando & Submarkets · Member since 2019 · 49 posts · 15 votes
Hello everyone, where and how have you acquired funds for conducting due diligence inspections after signing a purchase agreement? If you plan on syndicating or getting a partner who can be the loan guarantor -- and you want to do multifamily using other people's money -- where and how have you acquired the money necessary to pay all the inspectors that goes along with due diligence. It seems that for someone just starting out with little money to put down, that would be a big hurdle...especially if the due dillingence inspections finds something major enough to stop the deal or make it so buyer and seller cannot agree...Then, the new multifamily investor would need to find MORE money to do due diligence on the next multifamily property put under contract, with nothing to show from the first. So, how does the newbie multifamily investor not get into a debt hole right from the start with due dillienge inspections before sealing the deal?
Where did YOU get the cash for your first due diligence period??
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
The sponsor pays for it. If the deal closes then the sponsor is compensated from the money in the raise. If the deal falls through then of course you lose that money. That's part of the risk of this business.
But to be blunt about it, if you can't afford to even pay for due diligence then you should not be syndicating deals and handling other people's life savings. There is a reason why the banks require the sponsors to have a certain amount of net worth and liquidity because they want to know that you are willing and are able to step forward to temporarily fund with your own money if the property requires it. How will you do that if you barely got past the due diligence costs?
Real Estate Coach · Chicagoland · Member since 2013 · 502 posts · 101 votes
6y
@Robert Carlson I might be speaking outside my wheelhouse here, as I haven't done a syndication yet, but I believe you just include it in the raise from the limited partners.
If I understand it correctly, you raise all the money needed to acquire the property in terms of the down payment, due diligence costs and closing fees, as well as (at least a portion) of the rehab budget, from limited partners and then make sure the numbers work to pay them back a handsome return over 3-5 years or so.
I'm interested to see what others says on this, who are actually experienced in syndications, but that's what I believe to be true.... sorry if it's not that helpful lol!
Rental Property Investor · Orlando & Submarkets · Member since 2019 · 49 posts · 15 votes
6y
Thanks @Jaren Barnes! That would be great if true...But if true, it would seem investors would be giving the deal finder money that may be lost without closing on a deal at all - if due diligence finds things that make the deal unworkable. If the whole point of due diligence is to make sure everything is in order from what was advertised and offer an opportunity to re-state terms or back out legally from a deal, then it would seem those contractors that did all the engineering/appraisal/inspection work would still need to get paid somehow -- which would then come out of investors pockets on that deal that did not close. So, my big concern is what if the things found in due diligence are so bad that the deal doesn't go through (either by the deal maker, or the seller if he/she does not come down on price) that someone still needs to pay those contractors -- and there will be no closing or windfalls of monthly cash flow as the deal did not close. SO....to me it seems like a chicken and egg thing with securing money for this due diligence phase of the deal making...That is why I was thinking perhaps deal makers need to get due diligence $ from bridge loans or their own personal coffers....
Thanks again for chiming in, and hopefully we'll get some of our fellow BP members to help us out! And happy holidays!
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
The sponsor pays for it. If the deal closes then the sponsor is compensated from the money in the raise. If the deal falls through then of course you lose that money. That's part of the risk of this business.
But to be blunt about it, if you can't afford to even pay for due diligence then you should not be syndicating deals and handling other people's life savings. There is a reason why the banks require the sponsors to have a certain amount of net worth and liquidity because they want to know that you are willing and are able to step forward to temporarily fund with your own money if the property requires it. How will you do that if you barely got past the due diligence costs?
Rental Property Investor · Orlando & Submarkets · Member since 2019 · 49 posts · 15 votes
6y
@Michael Le, thanks! That is what I thought the answer would be...cost and risk of doing business. Appreciate the perspective. Just to be clear though, my question is hypothetical -- to see what the realm of possible is to using other people's money. My hypothetical is not indicative about my own personal ability to put "skin in the game" or close/make deals.
Investor · New York & TN · Member since 2019 · 325 posts · 219 votes
6y
I just tried to put a deal together, spent thousands of $$$ and deal fell apart. I was planning on rolling the expenses into the total cost, but obviously this isn't going to happen now. The way I see it, this is a loss for me that I hope does not get repeated often.
@Michael Le, thanks! That is what I thought the answer would be...cost and risk of doing business. Appreciate the perspective. Just to be clear though, my question is hypothetical -- to see what the realm of possible is to using other people's money. My hypothetical is not indicative about my own personal ability to put "skin in the game" or close/make deals.
Got it. The reality of it is that a lot of hot markets, including Orlando, require that you also have hard earnest money you need to put up and be comfortable losing in order to be competitive on deals. So the reality is that the due diligence costs is by far the smaller amount as EMD can be hundreds of thousands of dollars.
Real Estate Coach · Chicagoland · Member since 2013 · 502 posts · 101 votes
6y
Really great insight on this thread. @Robert Carlson, so hypothetically, it seems if you REALLY wanted to use OPM at all cost, someone else in the general partnership could put up the cash for due diligence, but they'd be paid accordingly if the deal pans out.
But I would probably want that risk shared by the entire GP.
Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
6y
You as the Sponsor/GP/Manager will need to front those expenses or you can bring on a partner who can put in the funds. Then that partner would get a portion of the Sponsor/GP/Manager ownership.
Hello everyone, where and how have you acquired funds for conducting due diligence inspections after signing a purchase agreement? If you plan on syndicating or getting a partner who can be the loan guarantor -- and you want to do multifamily using other people's money -- where and how have you acquired the money necessary to pay all the inspectors that goes along with due diligence. It seems that for someone just starting out with little money to put down, that would be a big hurdle...especially if the due dillingence inspections finds something major enough to stop the deal or make it so buyer and seller cannot agree...Then, the new multifamily investor would need to find MORE money to do due diligence on the next multifamily property put under contract, with nothing to show from the first. So, how does the newbie multifamily investor not get into a debt hole right from the start with due dillienge inspections before sealing the deal?
Where did YOU get the cash for your first due diligence period??
Thanks for any/all help!
Looks like you received some good answers and information. It’s all on the sponsor and is part of the risk of doing deals. The first step would be to thoroughly educate yourself on the space before contracting a deal or raising funds to cover the upfront GP capital (that’s what the DD money is called in the biz). With the right education and experience you will be able to know whether a deal even warrants next steps including how to handle things that pop up in the DD phase. When you know the business and the numbers on an intimate level it’s pretty easy to know if the deal will pass muster or not even if the numbers have been fudged a bit.
Rental Property Investor · Orlando & Submarkets · Member since 2019 · 49 posts · 15 votes
6y
@Jaren Barnes, thanks, yes, it appears the general partnership accepts the risk as a cost of doing business...Appreciate your and everyone else's input to the forum!
Boca Raton, FL · Member since 2014 · 23 posts · 10 votes
6y
@Robert Carlson adding to what @Greg Dickerson said..
Education comes first, and it never hurts to have a good broker on your side who can help identify a potential deal for you. A good broker will absolutely work in your best interest, and help identify properties that match your criteria. You’ll probably look at more properties than you’d like before you can even get to that inspection stage.
Reality is that MOST multifamily deals that you’ll be able to find without a broker have likely been underwritten improperly or poorly..which means you may waste your time looking at “deals” that turn out to be duds in the end...or you might miss “easy” money.
If a broker can help you identify and structure a deal that will make you look like a stud in front of your business partners and make everyone money, he’s doing his job.
While it's good to receive advice on BP, I suggest you take the time to educate yourself through books, podcasts and more of in person networking at REI events and conferences on the topic.
Start with "it's a whole new business" book by Gene Trowbridge.