My answer is based on 35 years acting as a Buyer's Broker. There are two stages of due diligence.
The first stage is pre-LOI. The second stage is post-LOI.
During the first stage it is important to find a property that meets your client's profile. The profile I establish for a client is: Type of property they are looking to purchase. General characteristics of the location desired. Price of property they are seeking. Tolerance level for value added consideration: vacancy rates, deferred maintenance and ground up development aspects among others. How much money they have to put down and ability to obtain financing for the loan portion. Length of time they see themselves holding a property.
Then I utilize this profile to search for properties that fit. I use a blend of all considerations, such as cap rate, cost per square foot, land value, current and previous owner information obtained from public records, value comparisons, operating statement analysis and a general determination of how much should be paid for the property in order to set an opening offer and a reservation line on the maximum that will be paid under any further negotiations.
My goal is to get the potential buyer to a point of making a legitimate offer through an LOI, which will begin the purchase process if it is to happen.
In the LOI stage the following items are asked for and carefully reviewed during the negotiated due-diligence period: a) Copies of current tenant rent roll, showing all tenant rental rates, security deposits, space occupied, length of tenancy, and any existing delinquencies. Copies of all leases or other rental agreements shall be provided. b) Operating statements for YTD 2010, 2009 and 2008. Including full year cash receipts and disbursements journals warranted to be accurate by Seller.
c) Copy of the most recent Tax and Insurance Bills. d) Copy of previous property appraisals, engineering reports, plans, surveys, or other environmental reports, if any, currently in the possession of Seller. e) Copies of any notices or directives received from any municipal entity or insurance carrier relative to the condition of the Property. f) Copy of Preliminary Title policy showing the legal description of the
Property, the boundaries of the Property and all easements and
covenants platted, conditions and restrictions and encumbrances and all
underlying documents on the Property. (The previous items have been taken from a recent LOI).
In addition there are often some additional special items included which is dictated by the property type. Most often these have to do with previous 3rd party reports or testing that may have been done on the property (if any).
I suggest that to be a competent Buyer's Broker or to otherwise represent a Buyer for a fee, that you must show a great deal of skill in selecting properties. I personally do not believe this is through many of the discounted cash flow programs or other esoteric formulas to many. I do a spread sheet analysis on each property I offer that includes those considerations that I believe to be important to the specific client, and in a form they can understand in their judgement of like or dislike a property. Many of the more "fancy" financial presentations are for REITs or other large property buyers.
My advice, get in the professional "game" and see if you can find a property that causes a buyer to buy; and to be happy with his buy while he holds the asset and until he eventually sells it. Then and only then will you have fulfilled your obligation as a "deal finder".
Rob Baird, CA RE Lic. #544165 (One of the oldest, active licenses in CA)
Oct 21, 2010