Property Failing Due Diligence

The Real Estate Espresso Podcast

Property Failing Due Diligence

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Property Failing Due Diligence

Welcome to the Real Estate Espresso Podcast, your Morning Shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about a property that we placed an offer on, and it’s failing in due diligence. Failing in due diligence is one of two ideal outcomes. Of course, we would prefer if a project met all of the criteria for investment, we would buy it at a substantial discount to market value, and we’d have lots of upside potential. Anything less, and we would rather pass on the opportunity.

Well, this particular property has a number of intriguing characteristics. Let’s start with the most important. We know that real estate starts with location, location, location. This property is well situated in a mature neighborhood in a top five Texas market, has excellent distance from major highways, and is in close proximity to major employers. It was built in the 1980s and was sold to the current owners in 2018. Visiting the property shows that it has been partially renovated, with about 60% of the units having already been upgraded. The property was purchased in 2018 for 40 million and it was financed with debt that would have been favorable at that time. Right now, the property is listed as a bank short sale as the owner has stopped making loan payments. According to the latest financials, it’s easy to see why the current owners let the property go. They clearly paid way too much for the property, and the property was deeply into negative cash flow territory, and there was no way to cover that shortfall. They also failed to generate sufficient value from the improvements and they were unable to bring the rents up to market rates with the improvements to the units.

After completing a site visit, we can see the extent to which the current owners neglected maintenance and upkeep on the property. The property looks terrible and there’s no reason for a new tenant to even turn into the driveway, let alone choose this property compared with any other newer properties that are well maintained in the same neighborhood. This property looks like it has potential. It is currently listed as an expected short sale to be selling somewhere between 22 and 24 million. On the surface, with such a deep discount, it appears as though the property has the potential to be a good deal. In the end, though, we decided to pass on the opportunity for reasons that I’m going to explain here.

I wanted to share with you the lens through which we view this potential project or any potential project number one it starts with we don’t take what a broker says to us at face value it’s our job to perform due diligence and determine what’s a realistic projection for a value Add project.

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