Do Your Due Diligence

Note Date 20170526

Do Your Do Diligence

Long ago when the wife and I were in the Commercial Multifamily world, we learned that you cannot trust the sellers. It wasn't so much that they would lie to you, but they would paint a rosier picture that what was not reality. Maybe they had a move-in special to help boost the occupancy. Maybe they deferred some maintenance to lower their expenses on the books. It's a different world for sure in the Note world. I expressed my displeasure before with dishonest sellers. Now I stress the importance of Due Diligence.

I've encountered more sellers out there that straight out lie to you. I think one company's philosophy is to lie to you. I will not name them but if you know birds, think of the largest flying land bird in the Western Hemisphere. Anyways, I will not carry on with that. Let's get into Due Diligence. For me the most important part of the note cycle is the valuation of it. If you get that wrong, then you lose money. I've bought a couple of lemons so far. I cannot say I lost money yet, but I have had to make lemonade. And I still have one up in the air as to how it will impact my wallet. But that's how it goes in this business. We judge books by their covers because we are not getting inside most of these properties.

So what is my process? I start by building my teams. I have a realtor or a property management company I defer judgement to. It's hard to do, but I will not pretend to know Saint Louis better than my Realtor. She lives there. She rehabs there. She knows the people and the trends there. While I sit in Dallas, I can watch historic demographic trends in neighborhoods. It's not going to tell me if the neighborhood is trending up or down. So I defer to the locals. I'll go pick my properties off of a tape and I'll shoot them to her. She'll tell me yay or nay and I listen to her.

The other crucial person on my team is my attorney. They keep me out of trouble. They tell me if the collateral is junk or good and if I can get it corrected. There are vendors that do the same thing, but my philosophy is this. The locals know the local laws. Why would I pay a company in California to have their clerk review the collateral file for a property in Iowa? Does this clerk know what clauses need to be in on an Iowa Land Contract? Maybe. But I know my attorney knows the rules, and he charges the same or just a little more. So why wouldn't I use the local.

That is my team. I might have contractors here and there, but to buy a note I need a realtor and I need an attorney. That doesn't mean I stop my DD there. I hire vendors for a title searches, tax searches and additonal BPOs. I call counties for utilities and taxes. My goal is to get at least two sets of eyes on everything. I'll even order two BPOs if I am breaking in a new realtor. Trust but verify is that saying. I know others get a valuation off the internet and then get someone to drive by with a camera, but I'm getting two realtors to drive by and tell me what they think. And for what it's worth, I might have the seller's BPO in my hand as well. Then I am going to the seller and getting the collateral file, the payment history, the servicer comments and the case file if a BK has started.

With all of this information then I can get a picture of what this property and borrower is worth. Will they reperform? Looking at the borrowers comments, they promise a lot and never come through. They had a hard luck story 6 months ago? They were defaulting 18 months ago, so what's new? Then sometimes you do see the hard luck stories and the pay history matches what they say. Maybe I can work something out with this person. These are all just clues. It doesn't mean the outcome is predictable. People are the biggest variable. Why won't that borrower sign a Deed In Lieu on that vacant property? The borrower hasn't paid in a year, but once I get the legal started, they go get refinanced and pay off the entire debt on a property I was planning on taking. Even if all the clues point to a certain outcome, you'll be surprised sometimes by how things turn out.

So here is my due diligence. I spend more than most, but I think it is worth the extra money to get the right property. Or walk away from the wrong one.

Get Digital Collateral - Chain, Pay History, Servicer Comments

Order BPO, sometimes 2

Order Tax report

Order Title O&E

Call County for Taxes

Call Code Enforcement

Call Utilities

Have Attorney review collateral, O&E and tax report

All in all, that's about $450. It's more than what a lot of people want to spend. And when I get dishonest sellers sending me crap, then I wind up spending some of that $450 to not buy a property. Again I stress, to me the up front costs are the most important and that's why I spend money on it.