Many beginning commercial real estate investors are shocked at how much it costs to perform due diligence for a deal and how high the closing costs are.
While the latter are usually paid for at closing, the former must be paid with hard cash while doing due diligence.
In the video below, I review the “Acquisition Cost” tab of the Syndicated Deal Analyzer which gives you some rules of thumb for estimating both of these costs.
Watch Video and leave me your comments or questions below!
Photo credits trenttsd
Let me know what questions you have about estimating closing costs! Every city is a bit different, but with a few calls to the right people you can get more accurate. The main point I’m trying to make is: make sure you factor in the closing costs, which can be substantial!
Hey Michael! Yeah, I don’t think the $200/unit Lead Paint Inspection cost is required in my target market, Texas.
What about the EMD? How much is that generally, since I’m sure it’s another up front out of pocket cost (I assume that’s bundled into the down payment line item in your spreadsheet). Thanks!
WRT the EMD, the less you can do the better of course. But you have to balance that with getting the contract ratified. A good rule of thumb I use is 1% of the purchase price, and then go up and down from there. You don’t want to have such a low EMD that you won’t be taken seriously, but on the other hand, you don’t want to tie up more of your cash than you need to. Another idea is to stagger the EMD, i.e. half at contract signing and the rest once you waive the due diligence. Hope that helps!
What are the typical costs for a 3rd party doing all of the due diligence (lease audit, financial analysis, market analysis, etc.) and managing the other 3rd parties (appraisal, environmental, property condition)? Thanx.
Royce … I’m not sure about the costs of a 3rd party doing all of the due diligence, I’ve actually not heard of this. I can imagine if you’re a larger company then you could have a junior person or even a virtual assistant do some of this for you. The 3rd party reports are normally driven by the bank, and they can give you guidance on what those costs will be. An appraisal, for example, will cost $2500 for a smaller building to $3500 for a larger building. A phase 1 environmental report will cost around $1000. Again, these vary widely by geography, deal size, and lender, so ask your lender early on re: their 3rd party reports. Hope that helps …. Michael
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So the expectation is that the syndicator pays for the due diligence and other up front costs out of pocket? Or can these funds be pulled from the investors input?
Hi Jeff,
Yes to both essentially. You’ll probably need to pay for those due diligence items out of pocket. Unless you find an investor to put up risk capital and you refund them at closing and/or write them into the deal. You typically get refunded for out of pocket costs at closing from funds raised from investors.