How to Build the Most Effective Acquisition Process

The Process Starts with Sourcing

The acquisition process begins by sourcing your deals. You’ll decide what asset you’re going to purchase, and where you’re going to buy it. While I focus on multifamily properties, this process works for almost any asset, from mobile homes to commercial real estate.

We start by developing a list of websites where we source our deals. The list includes brokers in markets where we’re looking to buy properties, which in our case is Texas, Georgia, and Florida. Deal sourcing is a weekly activity, as we continually check with broker’s websites to see if any new properties have been posted.

Analyze the Neighborhood

Once we have a list of properties that are under consideration, we analyze the neighborhoods where they’re located. This includes a look at household income, which should be greater than $40K, crime statistics, demographics, and school ratings. You should set up your own criteria, but make sure you are comfortable with them. To find information on neighborhoods, we have access to Yardi-Matrix, but that can be costly. You can also find all of the items to analyze for free on www.citydata.com.

Initial Underwriting

If your neighborhood analysis indicates a positive area, you can move on to the initial underwriting portion of the process. This involves a phone call with the broker, where you’ll conduct preliminary underwriting based on current financials and general rules of thumb.

For us, those rules of thumb for a Proforma include income and expense assumptions on the property, renovation costs, premiums we could gain by doing value-add improvements, and financing. (Premiums is the amount expected to be gained over the existing rents after the renovation and upgrades are completed).

During the initial underwriting, we also perform sales comps and analyze recent sales in the area. If you don’t have access to databases like CoStar or Yardi, ask the broker for comps, or even from your property management company.

Property Manager’s Budget

If the Proforma looks good and the deal makes sense, we send the property manager out to tour the property. Once they complete their tour, the property manager will provide us with an operating budget and a CapEx budget based on what he or she has seen. If it appears that a new roof is needed, or the parking lot requires repaving, the CapEx budget may exceed what is feasible for that particular property. Based on the findings, we adjust our underwriting accordingly. Just be sure to have the property manager confirm the premiums proposed in the budget.

Get a Property Tax Assessment

Another key to putting your budget together is getting a property tax assessment. This often requires contacting a property tax expert to conduct the assessment so the underwriting can be updated based on the projected assessment. You should be aware that this step is one of the most expensive line items in the entire expense budget, so you want to be sure that you can rely on the expert’s findings.

Loan Quotes

After the underwriting is adjusted based on the property manager’s input, it’s time to get some loan quotes. Send your Offering Memorandum and financials to various lenders and ask for preliminary quotes. Based on their response, you’ll need to adjust your underwriting if needed.

Determine Rent Comps

Finding comparable rents is a key step in assessing a property. We call various properties that are located in a 1 to 3-mile radius of the property under consideration that is of similar vintage and with similar amenities. The calls are done in order to verify current rents, premiums, and the scope of renovations we’re planning.

Having comparables is particularly important in order to determine if the projected premiums in our proposed budget are achievable when the value-add is completed. If necessary, this is a point where we’ll adjust our underwriting accordingly.

Submitting Your Letter of Intent 

After all of these steps have been taken, it’s time to contact the broker to discuss price and submit a Letter of Intent (LOI). Even if you’re not planning on paying full price, you should still submit an offer.

If the broker determines that your LOI and your credentials warrant it, you will be invited to the best and final round. That’s when you can refine your offer based on input and an actual tour of the property on your own. If for some reason you’re not invited to the best and final round, call the broker and ask for feedback. Was it the price? Previous deals? It’s important to know why you didn’t make that round, so you can adjust for the next property you bid on.

Tour the Property

If you’re in the best and final round, you need to tour the property. That might mean you will fly to the property, or drive if it’s close enough. Either way, you should NEVER purchase a property without seeing it first. When you go, it’s best if you take your property manager with you.

Your tour is critical in the process. You can look to see if, for example, there’s room to add a washer and dryer in the unit, or if a carport can be added to the parking area. Both would increase rents, so seeing first hand what is available to you is important.

Submit your Best and Final Offer

After your tour, do your final underwriting. Adjust your income, expenses, premiums, and other numbers as needed based on our tour findings. Now it’s time to submit your best and final offer. You can use the same LOI you submitted originally, but now you can adjust the price or the terms of the deal such as how much hard money you want to deposit. If you win the bid, the deal is yours. If you didn’t get the deal, always ask the broker for feedback, and get as much feedback as you can. If you did win the property, it’s time to negotiate. This is where your lawyer will send a Purchase and Sales Agreement (PSA) to the seller, where they’ll hammer out the fine points of the contract negotiations and both parties will sign the PSA.

Summary

The key to property acquisition is having a process in place. Creating a defined and consistent process will help make every step easier to track and complete. Start by sourcing deals from brokers in areas you want to buy-in. When looking at properties, do a neighborhood analysis based on demographics, income, crime stats, and schools. If the deal looks good after initial underwriting is done, have your property manager tour the property and develop a budget, which will include CapEx and operating budget. Get loan quotes, and begin doing rent comparables. Once you’ve revised your underwriting, submit a Letter of Intent.

If you’re invited to the best and final offer round, tour the property in person. Make sure you’re comfortable with the property, the value-add plans, and the condition of the asset. Submit your best and final offer, and if you win the bid, the deal is yours! If not, call the broker and get as much feedback as you can as to why you didn’t get the property. If you were awarded the deal, have your lawyer submit a purchase and sales agreement and negotiate the finer points of the deal.

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