How to Make a Bad Real Estate Investment
Author: Haydn Zeis, October 25, 2019
Skip the due diligence! It’s that simple. If you want to make a bad real estate investment, purchase your property without getting into the nitty gritty of the deal’s details. If you own your home, you’ve likely had a professional perform a home inspection to make sure the house is in good order. Purchasing a new car, you’ve taken it for a test drive and asked to see the vehicle records. Think of real estate investment due diligence the same way, just a little more intense. One of the Pros of investing with a real estate investment fund, is having experienced real estate investors performing due diligence for you. When you’re investing alone, we highly recommend that you speak to an expert to help you through the process. Missing something in due diligence can be the difference between double digit returns and losing money.
When Lonicera searches for an asset to purchase, hundreds of man hours go into the acquisition of a single property. Harvard’s acceptance rate is higher than Lonicera’s property acceptance rate! We have several levels of standards a property must pass before it’s purchased.
The process starts with searching for properties through Brokers and listing service sites. Once a property is identified for a possible purchase, our data crunching begins. Typically, we sign non-disclosure statements and the Seller’s representative will provide us with the property financials. These numbers can sometimes be high level and will always need to be analyzed later, when we go into contract. Using the provided information, we enter numbers into a proprietary financial model that analyzes the profitability of the property. The model is designed to look at current and future income, anticipated expenses, and projected appreciation. We use this tool to understand the different outcomes that could happen during ownership think best and worst-case scenarios. This portion of the due diligence process is particularly important because it’s our first in-depth look at the prospective property; not only are we getting an understanding of the feasibility, we’re learning what the purchase price needs to be to maximize profitability.
Once properties pass our initial screening, we then start forming our offer. This is carefully considered based on information that has been provided by the Seller, to this point. Once the offer is accepted, the real fun begins. We review leases, tax returns, tenant and owner financials, and more. Depending on the transparency of the documents shared, we decide how deep we need to dive into the analysis of the items we receive. Sometimes, we must spend several hours analyzing financials, many times poor bookkeeping practices result in bad information. Bad information passed on by the Seller doesn’t necessarily mean they were fraudulent; it could just mean they’re unorganized.
When you hit a snag during your due diligence, it’s important to take a step back to fully understand the significance of your findings. Lonicera has a process that first assesses whether the finding impacts cashflow. In the event cashflow is negativity affected, a price adjustment or solution to the situation causing issues is likely required. In most deals, you’ll come across a situation worthy of being addressed.
All in all, real estate investing is one of the most rewarding and exciting types of investing one can partake in. Due diligence is a necessary step to obtaining quality investments.
Haydn Zeis - Principal
Lonicera Management, LLC
October 25, 2019