Due dilligence question

[Scott Bowles]

Good morning everyone,

Quick question on financial due diligence, we have an accepted offer on our first actual commercial property (8 units), the financials they sent looked good, but how do you guys verify what they sent is actually the revenue and expenses for the past years? Do you make them provide bank statements? Any info is appreciated thanks!

Best regards,

Scott

[Anthony Dooley]

@Scott Bowles part of due diligence is gathering financial information. If they don't provide what you ask, you can back out of the deal.  I do my own math and I talk to the tenants, once under contract. The tenants tell you all kinds of information that the seller may not even know.

Historically, my expenses are about 35-40%. So I take the gross rent and multiply x .60. This gives me the net operating income (NOI). NOI divided by acquisition cost = Cap rate. Is that acceptable to you? NOI minus debt service = cash flow. Cash Flow divided by my cash out of pocket = cash on cash return. Is that acceptable? If everything is good so far, then the physical inspection of the property would be done. If you see any major repairs, submit an amendment to the contract to ask the seller to repair. If they agree, great. If not, you can walk if it is part of your contingencies during due diligence. No deal is perfect, but they need to meet certain criteria that you set based on what you expect from your market.