Due Diligence question

I am a beginning/wannabe commercial property investor. I currently own two SFR but want to do some serious investing. I will definitely need an equity investor to back my projects but my question is that alot of the due diligence process requires more money than I can put down, will private investors only want to fund my projects if I have completed ALL the due diligence or is it understood that I can complete the financial aspects of it and then look to a private investor to help me complete the rest of the money costing due diligence i.e. property inspection, legal fees etc.?
In Buying Property - Asked by joseph c. - Mar 19, 2012
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Answer(s)

Alex J.
Broker/Agent
Plano, TX

An equity partner can invest in any aspect of the acquisition that has been agreed to. Everything is negotiable. It really will come down to what you are offering him for the risk in all of the pre-acquisition equity that you are looking for. You will also have to find an equity partner that trust you and your abilities enough to make that type of investment so early in the process.

Mar 21, 2012
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Brian D.
Belleplain, NJ

Great answer Alex. I have been doing due-diligence and rehabs on multifamily investments for 25 years+. It's a serious function Joseph that any investor is going to want to make sure you complete with a competent person or persons. Just as I have partnered with one of the best marketing/repositioning guys in the country, you may consider putting a team together that fills and holes in your plan.

Apr 1, 2012
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Brian D.
Belleplain, NJ

Great answer Alex. I have been doing due-diligence and rehabs on multifamily investments for 25 years+. It's a serious function Joseph that any investor is going to want to make sure you complete with a competent person or persons. Just as I have partnered with one of the best marketing/repositioning guys in the country, you may consider putting a team together that fills and holes in your plan.

Apr 1, 2012
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Matthew U.
Broker/Agent
Redondo Beach, CA

Joseph,
Where are you located and where are you looking to buy?
I think I understand your question. You want to know how to get everything done in the due diligence process paid for. In my experience this depends on your contracts. I have seen it often where the due diligence fees are items that are contracted. If you put them into the contract and then submit them to the escrow company then they should be able to be paid through closing by the escrow and considered closing costs.
For example you buy a $1 Million apartment building. You spend $500 on a physical inspection and $150 on termite inspection. If you are using reputable companies who really perform a lot of these inspections on the property type that you are interested in, then in my experience they will due the work up front and bill for their services to be paid through escrow closing. If you don't close the property you are still liable for their services and if you keep the same escrow officer and service providers you may be able to push the fees from the property that did not close to add to the total closing costs of the property that did close.
The final amount that is due from the bank to finance the property should cover the closing costs. However, I am assuming that you put a significant down payment into escrow in order to complete the transaction. It is crucial to purchasing investment properties to have some cash reserves to use as non-refundable deposit money for the escrow and due diligence process. The money is a refundable deposit during the due diligence process time period. When the due diligence time period has expired the money transfers from being refundable to the buyer to be nonrefundable to the buyer and can even be transferred to the seller. This is very common practice in California investment property.
Matt

Jun 1, 2012
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Matthew U.
Broker/Agent
Redondo Beach, CA

Joseph,
Another part of your question appears to be about down payment money. It is possible to receive what is called a "hard money loan." This type of loan is from a private investor and has larger interest rates than institutional banking money. The hard money loan can be used for the down payment and then the bank funds the traditional loan dollars. Hard money loans can range from 8-25% depending on the private lender requirements. But, the down payment is usually only 25-35% of the purchase price. The majority of the loan will be institutional type. It is important to take money for reserves or have a method to insure the hard money lender in place. More often then not the property will go through a period that it can not produce the money to cover the traditional plus the hard money loan and the main way to profit from such a position is to sell the property. If this is the scenario please take special consideration in planning the improvement of the property as well as the property physical improvements will be features that act to increase the property value. It is possible to get the hard money in installments to cover the purchase and the improvements. It may also be possible to receive credits before closing to cover the costs of improvements.
Hope this helps.
Matthew Udewitz
matt.u@kwcommercial.com

Jun 1, 2012
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