What happens once a property is under contract and why should an investor care?
Once the purchase and sale agreement (PSA) is signed, thereby placing the property officially “under contract,” the clock immediately starts ticking to complete the due diligence process. This phase is a critical opportunity for SCI, the operator, to collect, analyze and review the finer details of the property which could potentially affect the deal and any assumptions made during deal sourcing. During due diligence, Saorsa Capital Investments (SCI), will take a fine-tooth comb approach to review the physical, legal and financial details of the deal. This is the moment when our team gets “hands-on” with the property. Note, the seller only becomes obligated to release and provide supporting documentation once the PSA is signed. SCI appreciates and is sensitive to the investor’s stake in the deal and, therefore, we double down during this phase to meticulously vet the property top-down and inside out - as a future father-in-law might vet a prospective son-in-law! Often, the best deals are ones you’re forced to walk away from, and it is during due diligence where these difficult decisions are made. As such, our approach to comprehensively vetting any property during due diligence includes the following:
Request all relevant documents and artifacts detailing the following:
All renovations to the property
All legal proceedings and claims
All financial reporting against the property including but not limited to the proforma, rent roll, and T5/12 etc.
Source and employ 3rd party assets to support unbiased property inspections and provide fair and reasonable estimates for any future updates to the property
Source and finalize the best debt product to ensure optimal returns for our investors
The time frame to complete due diligence proceedings is deal specific, but is usually set at 15 days. Additionally, due diligence occurs as part of the effort to close the deal and, as such, the time to close typically is set at 90 days. We have a fiduciary responsibility to work in the best interests of both our investors and tenants. The key factor here is that due diligence enables us to strengthen our business plan and gain insights into how to improve the living quality of current and future tenants. Below, we detail the two prime objectives of due diligence: reviewing the physical asset and legal/financial documentation.
Physical Inspection
Due diligence generally starts with an inspection of the property. Once the PSA is signed we immediately look to schedule the inspection of the property. During inspection, we are joined by our property management partners who provide a certified inspector and also participate in the formal inspection. However, in efforts to ensure no bias by any parties involved we also bring an experienced third party inspector and contractors to help assess the property. These contractors may include members of the property management team, inspectors, general contractors, structural engineers, HVAC specialists and roofing specialists. To effectively assess the current state of the property the entire team will inspect each and every unit with extreme scrutiny and capture our findings in an inspection report. This report is used to adjust our business plan based on our findings. For example, we may learn a utility room has been underutilized and therefore could be converted into a revenue generating laundry facility or a green area that can be repurposed as a common space. Both ideas create new value that could likely improve curb appeal and offer amenities that would justify rent growth in efforts to drive up the value of the investment thus increasing investor returns. It's extremely important to understand that if we discover something that poses a significant risk to executing the business plan and your investment, we will always back out of the deal.
A few months ago, while conducting an inspection on an investment opportunity located in Cincinnati, OH we raised a concern about the state of the foundational structure of the property and determined that a structural engineer was required to adequately inspect the buildings. We hired an independent and certified structural engineer to inspect the foundation and produce an unbiased report. The structural engineer’s report confirmed that a significant amount of work was required to make the property safe for the tenants. After reviewing our business plan with the updated cost estimates to repair the foundation our model could no longer support desirable returns for our investors forcing us to walk away from the deal. These physical inspections are critical to ensuring we understand the property’s conditions and to accurately deliver on our business plan to investors.
Financial/Legal Inspection
During the same time we are conducting the physical assessment, we’re also requesting and reviewing the financial, legal and operational documents of the property. We can request well over 50 different documents from the seller; some documents require multiple years of reporting. For example, we would collect lease agreements for every tenant, all contracted service agreements, last 12 months of utility bills, all previous renovation approved permits/licenses, any and all tenant correspondence, etc. Not only do we review what the seller gives us, but we do our own research as well. We scour county and local municipal websites looking for anything from liens to pending litigations. Once we collect all the documentation, we review and compare each document line by line and ledger by ledger looking for any discrepancies or red flags. We have a primary and secondary teammate assigned to each document so nothing is missed or left uncovered. The late-night candle for Saorsa Capital is burning bright; late nights and multiple daily meetings are the norm during this phase of due diligence. One can only imagine closing on a property only to find out a contractor has placed a lien on the property on work for the previous owner (Guess whose problem it is now)!
Due diligence is only one but a very important part of evaluating, acquiring and operating these investments. There are many hours of work put in to identify these opportunities, ensure the process is being followed for each property we have under contract and operate these investments. Rest assured you can trust SCI’s relentless drive, grit and determination will protect and continuously grow your investment for many years to come.
