What happens as soon as you get in contract to purchase a property? What are some of the things that you need to keep in mind? What do you need to do and how do you need to organize yourself?
Before we go over how you should prioritize your timeline and what do you need to do when you are in contract, I'll go over what you need to make sure that you negotiate before you go in contract which is your timeline for the due diligence on the property, the timeline for you to be able to get a loan, and then a timeline for closing on the property. A really nice to have would be 45 days for due diligence and then after that, another 45 days for getting a loan and then typically another 15 days after those 45 days to close and make sure you have everything in line.
These timelines can vary greatly based on the size of the property, the size of the deal, and how competitive the market is. Sometimes you can have a month long due diligence and then another 15 days for financing, and closing at the same time. Sometimes it can be two months for due diligence or more, if it's a huge property that you are purchasing.
Now that you have the property under contract, you probably already have a folder with all the documentation that you have already received before making an offer. And this could be a folder with the OM (the offering memorandum), the profit and loss statements for the last year, it could be rent comps, sales comps, the rent row forward, a property with the leases. And when these leases were signed, when they are expiring, what are the terms of the leases and any other document that you may have already received before making an offer on the property? With this in mind, the first thing that you will have to do is to create a timeline and make sure that you put that in your calendar. For example, if your due diligence expiration date ends on April 15th, you want to make sure that you put April 13th on your calendar just in case, and add a few more reminders so you do not miss that deadline. If you do miss your due diligence deadline and then you find something that is wrong with the property at a later time. There is nothing that you can do and you might lose your deposit if you go out of contract. These deadlines are really, really important to keep track of.
The next step is to have something really simple, like a word document where you will have all of the information on the property in this word document. You're going to put all of the pertinent information on the property and all of the links to where to get the information. My document has:
- The contact info for the real estate agents.
- The timeline for the deal.
- The link to the property listing.
- How many days I have until closing.
- A link to all of the documents for the due diligence.
- All of the information from the lenders that I have so far and that I have contacted.
- A list of potential property managers for this property.
- My to do list for the next week.
- Things that the real estate agent owes me in terms of documents.
- A list of things that are outstanding that I need to take care of in terms of hiring people, or asking for recommendations for lawyers.
- A list of "surprises" that you find out during the due diligence process.
These surprises can be costly surprises, or just surprises that are not costly, but they do make an impact on the bottom line. The costly surprises could be something like the roof is old and you need to replace it, or the inspectors found mold on the property and you need to remediate that. Or even worse, a deadly surprise could be some contaminated soil as a result of a Phase I report. And that could cost a lot of money to remediate. A smaller surprise could be, for example, you received the latest financial statements on the property, and the vacancy is now a little bit higher than it was in the OM. These are all negotiation points if you would like to proceed with purchasing the property, the next step is to break down your timeline by weekly goals. Some purchasing contracts require that you apply for a loan within 10 days of the executed sales contract, for example. And again, all of this is negotiable. You want to make sure that in that first week you get lender referrals from your real estate agent if it's in a location that you're not familiar with. Reach out to these lenders and apply for at least one loan within those 10 days, again, if this is in your contract.
Now, I'm going to break down the weekly goals by what tasks are due and when. Just so you have an idea of what kinds of items you may need to have to get done or ask for, etc. And this really depends on the kind of property that you're purchasing, how big it is, what asset class it is. So this list can vary and you really want to make sure that you cover everything, depending on the asset class that you are investing in. In this example, we have a 10 day deadline to make at least one loan application.
Week 1
- Reach out to a couple of lenders and finalize a loan application.
- Look for a few more lenders that are local to the area, as well as about three national banks.
- Break down the finances for the lender, and this is going to be breaking down what you're going to do to the property to increase value. For example, we can increase rents on the property by about five to 10 percent (this is self-storage). We can also decrease vacancy. This is going to have to be completely broken down into an excel sheet, by unit.
- Pick a shortlist of inspectors for this property that are local and that can deliver the inspection within a few days of having it done.
- Review a copy of the existing management contract.
- Find a lawyer that is local and familiar with that states laws.
- Find a copy of the state's lease which is a standard lease for that state.
- Get all the documentation for that income and expenses for the last two years for this property. And this will also be for the lender.
- Look for potential new property managers, if that is our plan.
Week 2
- Have the lawyer review the management contract and make any adjustments for the actual lease contract for the units.
- Finalize the profit and loss statement and our projected vacancy for that first year.
- Finalize how we're going to structure the payment for a potential contractor that will work on renting the vacant units.
- Finalize the loan packages for the banks.
- Call the remainder lenders that are on our list that we found on the first week.
- Look for an insurance company, and we might just continue using the same insurance company that is insuring the property to make things easier. So we need to get their contact information.
Week 3
- Make sure that we get the final inspection reports from the inspectors.
- Start narrowing down the list of lenders that will move forward with this property.
Week 4
This week is currently open for the items that will come up during weeks 1, 2 and 3. We're going to be dealing with whatever we uncover, or still need at that time.
At the same time, I also have a list of all of the things that the real estate agent owes us, and I'm crossing the things that they have given us already. This is really important because in the back and forth of email exchanges, things can get completely lost and you can easily forget that they owe you X, Y, Z. For example, if there have been any insurance claims on the properties for the last couple of years. These are all important things to have.
I also have a list of things that we need to do as soon as the property closes. For example, we may need to install some cameras on this property. We need to create a Website for this property.
Week 5
- Finalize things with the lender and we will be looking at the miscellaneous things that we need to get done after we close on the property.
- Find phone centers that are familiar with taking calls for self-storage properties.
- Find an insurance company that will insure the actual things that are inside of the units for the renters.
- Get a website going and give people the ability to rent these units online and a few other things as well.
A couple of things to keep in mind:
1. This may sound overwhelming for some people. However, a really good way to look at this is that these are just the things that I have to do and that's it. These are not problems. These are just the circumstances. This is what needs to get done, and we're just going to power through them. A friend of mine said that the way that you need to look at it is this is just the dance of the deal. This happens with every single property and you're just going to deal with it. You just go through it and you take one thing at a time. When you are going to be closing on the property and when you will start having that cash flow coming in, You will be so grateful that you went through all of these things and you will see that that was just what it was. Another thing that is really important to know is that getting started with applying for loans as soon as possible is really important. Apparently, quite a few people leave this for the last minute and it's really hard to get a loan in two weeks. So that's something that you really need to get started very early on the process.
2. If you are going to be doing syndications, there are other things that you need to be doing on top of the things that we've discussed. And you will start to get the signed contracts from the people that are going to be investing on the property. You're going to have to create all of the documentation for the syndication, etc. In this particular property, we are not going to be a syndicating it, and that is why I'm not going over all of those details. If you have partners, you can delegate things, you divide and conquer whatever each one is strong at: that is what you're going to be doing, and this is what I will do.
Every single property is different. For some properties, you may find that there is an issue in the title and you need to deal with that. There could be all kinds of things that could show up that I'm not talking about just because it's really unlimited what could happen throughout this process. Again, there is nothing wrong. This is just what it is if you're out there doing something. It is what it is.