Why the last 3 deals failed our due diligence

Over the past 12 months, we've only brought out 0.73% of the deals we've analyzed. These are the most recent 3 that failed our due diligence tests and in this post I want to dive into the nuances that 99% of passive investors never consider, and you'll walk away with some elite questions to ask about future deals.

The Midwest Multifamily Deal

• Location: Columbus, Ohio

• Pros: Experienced with a substantial footprint

• Goal: Value add multifamily

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This deal was great on the surface with a strong operations team in the market. The deal made it through to our legal due diligence and that’s when we backed out. We found the operations team made a special class of shares for their investment that allowed them to pull their cash out before our investors. 

By doing this, they offload additional risk from themselves onto investors. 

The reasoning was so they could pull their capital out to put down deposits on future deals they want to do. This may be the case but it’s not as common of a structure that I’ve seen and it made us back out of the deal. 

We always want the operations team to have their capital sit in the same risk position as our investors. 

The Southeast Lease-Up Opportunity

• Location: Tampa, Florida

• Pros: New construction 60% leased

• Goal: Finish leasing and cash out the builder

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The deal seemed promising with quick lease-up and a waitlist of tenants with deposits already paid. 

We felt confident we could hit break even occupancy fast which would be around 70%. Once we did our market research, we found the builder was offering very aggressive move in promotions. Up to 2 free months of rent to prelease. 

Once we calculated the same concessions our break even occupancy climbed to 80%+ which was a longer runway than we were willing to take on. 

Removing the concessions we felt put the property too high in the comparable property set to be competitive with neighboring properties. 

The East Coast Value Add Fund

• Location: Philadelphia

• Pros: Great local footprint, lack of institutions due to politics in the area

• Goal: Purchase 6 - 8 properties in high income areas of Philly

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We typically avoid coastal cities, but this team's strong track record caught our interest. 

What ended our due diligence here was seeing how lean the operations team was.

They were taking on a brand new style of raising capital in a fund, as all their previous acquisitions were individual purchases. 

This additional legal burden takes away from their ability to manage assets effectively with their limited staffing. 

As a rule, I don’t want to be any operations team’s first for something, whether it’s legal structure or business plan. 

These nuanced reasons might seem overly cautious, but our patience and deal flow allow us to be selective. We ensure every deal checks all our boxes, not just most. This rigorous approach boosts our confidence in the deals we present to our investors.

Special Gift

For the first time we’re making our 9-phase due diligence tool available for passive investors. We’ve easily sold this tool for $99 to fund managers and individual investors in the past but are giving it out for free in the hopes it builds your confidence in our process to invest with us in the future. 

This tool eliminates over 99% of deals we see, is easy to use, and requires no investing experience.

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