The process of due diligence holds paramount importance when purchasing a property. While a deal may appear promising and receive endorsement from brokers, it is crucial to thoroughly assess whether the value of the property aligns with its price.
- Review financials and documents, assessing condition and performance.
- Reduce investment risks and ensure accurate underwriting.
- Review financials and documents, assessing condition and performance.
- Reduce investment risks and ensure accurate underwriting.
- Verify income and check expenses for potential savings.
- Confirm property suitability and review key documents.
- Inspect property, anticipate repairs, and assess physical condition.
- Seek value-add opportunities like expense reduction or curb appeal improvement.
- Trust but verify information, especially from brokers.
- Address issues upfront to avoid post-purchase problems.
Why Due Diligence Is Critical Before Investing In Self-Storage - with Jeremiah Boucher - Transcript
Due diligence actually is the most important part of buying a property. So a deal might look great on paper, the broker might sell it to you, they might love it, but during this process, you really need to make sure that the value you're getting is worth the price.
So you need to take time to go through all the financials and property documents. This way you have an accurate assessment of the property condition and its performance. So as you go through everything, the main thing you're looking for is red flags.
These are landmines that could really hurt you on your investment. So maybe the expenses are higher than you expected. A lot of times the income might not match the bank statements and you must focus on the income. We're buying storage to generate revenue, and by going through the due diligence process, I mean you're greatly going to reduce the risk of any surprises later so that when you update your underwriting model, you know that your assumptions on the deal are accurate.
So it's not always bad news. If you find something, I mean, you might find that income was underreported or that more money is actually there and uh, they're collecting more money than they even knew.
Or sometimes the expenses are too high and you can cut some of those expenses. So due diligence done properly, it'll reduce the chance of you getting burned, making a bad investment, and it will increase the chances of you making money on the deal.
It really mitigates risk. So let's run through a few of the things to watch out for. There are five main areas that you need to check. Number one, verify the reported income is accurate.
You gotta know how much income is really coming in. So number two, next you want to check if the expenses are correct. There could be some great savings here, or you might be locked into some really long-term contracts with vendors.
You gotta make sure that you can actually operate a storage facility on this site and you review all the key documents. Number four, you must arrange a property inspection and a site visit so you really understand the physical condition of the roofs, of the roads, of all the different pieces of property.
You wanna understand what repairs are gonna be needed, the capital expenditures that are likely to occur in the next five to 10 years, because you need to budget for those items. So number five, finally, while reviewing all the documents, you've got your income, your expenses, you visited the property, you wanna see if there's any potential value add to the deal.
So maybe expenses are very high or you can do a quick paint job and you can greatly improve the curb appeal. So we wanna cover all that in the due diligence process in this part of the course.
So I just wanna emphasize to you it's very important to do the due diligence on the property. In the beginning, it was very easy for me to skip over some of these items because I was so excited to get a deal.
But you gotta really be aware not to break the cardinal rules that we're giving to you right here. And the number one rule when buying anything is buyer beware. In business, you can trust the seller, but you always trust and verify.
You always have to check and validate the information that's being given to you, especially by brokers. You wanna avoid finding issues after you've purchased the property so they don't pop up and they burn you. It's better to know any issues up front, and then you can either renegotiate the deal or get creative to mitigate through that risk.