Behind The Scenes: What Happens Before A Deal Makes Its Way To A Passive Investor

A ton happens before a deal makes its way to an investor in a syndication. First, the deal has to go under contract, and then the due diligence period happens, in this post we’ll talk about these 2 phases of purchasing a property, Finding the Deal and The Contract Phase, and what happens leading up to a property starting to raise equity.

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Step 1: Finding The Deal

The first step is getting a great deal under contract. This can be in some cases the most difficult part of the process.

Selecting a deal means selecting a great market and great neighborhood within that market. A few things we check before investing in a neighborhood:

What is the crime rate in the area?

What is the current income and income growth?

Who are the major employers nearby and are those employers sustainable or expanding?

What type of tenants are currently in the property and what type of tenants do we want in the property?

What’s happening to tenants in that market’s income? Is it growing at a pace where tenants can keep up with rental increases?

Once we’ve honed in on those items we start analyzing deals in the area. The best way to get great deals is to underwrite a ton of deals. This means creating proforma income and expenses for a property and pulling together property management, insurance, taxes, operating expenses, debt, and shopping comparable properties both online and in person.

Historically we’ve noticed we submit an LOI on 1% of the properties we underwrite.

After an LOI is submitted there can be another round of offers if there are multiple investors looking to purchase the property. In many cases some investors increase their offers and we still may lose the deal.

Historically we’ve continued the process to purchase a property 1 out of every 4 LOIs we’ve submitted. Once our LOI is accepted, we move onto step 2.

Step 2: The Contract Phase

After an LOI is accepted the legal team hit the ground running on creating the Purchase and Sale Agreement (PSA).

It can take 30+ days to finalize the details of a PSA and agree to additional terms that may not have been outlined in the LOI.

After a PSA is ratified by both the buyer and the seller, the deal is finally ‘under contract’ and the due diligence period can formally begin.

Generally speaking a due diligence period will be ~30 days and this is when we’ll take a deeper dive into the financials and bank accounts of the property, walk all the interior units of the property (this can even be hundreds!) and order any formal inspections we deem necessary.

Once the due diligence period is over, we can choose to continue on with existing terms or renegotiate pricing if anything has come up in due diligence.

Once the due diligence period is finalized and we’re continuing with the transaction, that is when marketing begins to bring equity from investors to the table to close the deal.

It can take many months from the start of the process to the finish, which is why many times operators aren’t offering tons of deals every year. Some operators may only select a few deals throughout the year depending on criteria.

As a passive investor, this is ideal for you because it means only the best and most vetted deals should hit your inbox as an opportunity.