Becoming the Sherlock Holmes of Commercial Due Diligence

One Jacksonville, FL apartment complex that I had to find my own numbers on.
One Jacksonville, FL apartment complex that I had to find my own numbers on.

Where to Find Due Diligence Info When the Bank Has None

What many commercial note investors don’t realize is that the bank that is selling the note doesn’t usually have financials or rent rolls to provide.  As a note investor, you are buying the debt and not the actual property.  Now while you are buying the mortgage, you should still evaluate it based on the underlying real estate.  But how do you do that on an apartment or retail center without having the rent rolls or financials?  Apartments are hot right now with it being hard to get traditional real estate financing for consumers.  Rent rates are up along with decreased vacancy rates and values of apartments are climbing across the country in just about every market. 

You will have to do a little bit of work on your own to find the information that you need.  It’s not that hard, and you will be surprised at the amount of information that you can find via the internet for free.  All that the bank usually provides is the property address and sometimes the apartment complex.  Now the tricky part is to get your information without violating any non disclosure agreement that you would have had to sign with the lender.

You should start off by just simply using Google to search the address.  This will usually give you a map of the property along with giving you a photo from Google Maps of the property.  This helps you take a look at the neighborhood and seeing what’s near the property such as schools, parks, businesses, and other things.  Google will also pull up any Loopnet listings that might be listed on the commercial website such as current or previous listings. 

If the property is currently listed on Loopnet in some sort of fashion, it will give you the number of units, a brief description of the property, photos of the property and it will even give you the cap rate and allow you to contact the listing agent.  The listing agent will often have rent rolls and as long as you just call the agent as a potential buyer of the property (without informing them that you are buying the note) you aren’t violating the non disclosure agreement.  Hopefully this is the case for most of your deals.

Unfortunately, we aren’t always that lucky with getting financials and rent rolls in one spot.  When that happens, I use the address to search for ratings of the complex on different apartment locating or rental websites.  Many of these websites will have the complex information for the units like number of beds and baths, square footage, pictures of the individual units and even phone numbers for the complex.  Sometimes you will even get lucky enough to have the name of the apartment manager.  

You can often call the apartment complex and get their average occupancy rates, specials, and amenities of the complex.  Sometimes they will even have floor plans and a website for you to look at.  If the property is listed, you can often get information from the manager on what needs to be fixed and what has been fixed.  I often have my realtor call the complex so it is from a third party. 

If there isn’t a phone number for the manager, I will use Whitepages.com and do a reverse address search and it will often give you the name and phone numbers of tenants that live at that address.  I’ve had success calling the tenants to get the off sight apartment manager’s name and number to reach out to.  I also ask the tenants info on the complex.  They will definitely give you the good and the bad data on the complex. 

By using the websites and doing this due diligence, you will have what you need to put together a basic Performa.  For those that don’t know how to put one together you take the number of units and multiply that by the monthly rent.  You then multiply that number by twelve months to calculate the average gross rents.  Take that number and multiply that number by the occupancy rate.  After that you will subtract the expenses (45% expense ratio for no bills paid and 55% for all bills paid).  If you don’t know if the complex is all bills paid or not, just figure a 50% expense ratio.  This will be high, but it is better to go high on this number instead of shooting low. 

Once you’ve subtracted your expenses, this will give you the Net Operating Income or NOI.  You can calculate your NOI by dividing that into the sales price to calculate the cap rate or divide what you want your cap rate to be by multiplying that into your NOI.  If you are buying a note, you will want to multiply that number by 65% as your maximum allowable offer.  This will help you determine what number you want to submit into the bank on your letter of intent or LOI. 

From there, the bank will either provide more due diligence documents if they accept your offer or you will counter back and forth from there.  Some banks will allow you to contact the property owner at that point or they will have more information if the property owner is cooperative.  Either way, you should have enough information to figure out what the property is worth to get the ball rolling. 

It’s not always the easiest thing to do, and you often feel like Sherlock Holmes tracking down numbers, but sometimes you have to get creative to find the information that you need to make a deal happen.  Remember that most people will give up at the first hurdle that they experience and let good deals slide through their hands when all you needed was a few minutes online and to think outside the box.  The real juicy deals and low hanging fruit is out there waiting for you to pluck it from the proverbial money tree that is growing rapidly with the huge amount of defaulted commercial loans plaguing banks all across the country.  It’s going to get worse before it gets better and there are millions of dollars to be made from those investors that are creative enough to turn information into dollars in your pockets.

Performing Due Diligence with No Docs

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Comments 1 comment

edwin 5 years ago

Great article, Scott.

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