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Due Diligence - Why We Walked

"Real estate investors are ultimately defined by the deals we do but just as important are the deals we don’t do."


With that in mind I want to share a recent experience...


I arrived in Macon, GA on Feb 5th excited for due diligence on a promising 241 unit apartment community. Due diligence is where the rubber meets the road.


We walked every inch of the property, read all the leases, mystery shopped competing properties and performed many other activities to uncover any reasons why NOT to move forward with the purchase.


Despite our optimism and excitement going in, there were too many risks to move forward confidently, and by Friday we decided to terminate the contract. While the outcome was a disappointment I enjoyed working with the team to maintain our commitment to high quality investments. There are always other opportunities to conservatively invest for passive income and long term wealth creation...


Below are the details on what we did and did not like about the deal.


What We Liked:

  1. The deal had a lot of potential upside, including a 25% rent bump

  2. Vacancy rates in the area are very low with little new inventory being built

  3. The Broker told us the property is in North Macon which is more desirable than East Macon

  4. There is a lot of economic activity in Macon, so we felt that there was potential for population growth in the area

  5. Amazon is opening a new distribution center in early 2019

  6. Irving Customer Products is building a new plant in Macon

  7. Geico Insurance employs more then 5,200 associates in Macon

  8. FedEx opened a new 248,000-square-foot distribution center in 2017

  9. Tyson foods is expanding putting $59M into their Macon distribution center

  10. There are plans to expand the runway at the Macon airport

  11. Kumho tires opened their only U.S. factory just a few miles away in 2016

  12. Savanna harbor's port expansion grows Macon's role as a distribution hub


 

Pre-Due Diligence Concerns:

  1. The population has been flat, or slightly down, for a decade. We prefer growth markets, or sub-markets.

  2. Median family income was on the lower side. We needed visit the area to see if the subject property was isolated enough for us to preposition it from C- to C+


 

Additional Post-Due Diligence Concerns:

  1. There were significant structural and drainage issues that were not disclosed

  2. We suspected possible mold issues that were not properly re-mediated

  3. Our inspector found electrical issues where old aluminum wiring was improperly re-mediated

  4. After reading all 241 leases we concluded that the tenant class was far lower than we'd been led to believe

  5. The property is located just on the border between the more desirable North-Macon and less desirable East-Macon. The local people we spoke with (shopkeepers and tenants) all said this was really East Macon.


 

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Steeve Breton often speaks at national real estate conferences and has been interviewed on numerous podcasts. He has invested in over 3,000 apartment units and has diverse real estate experience. His conservative approach and analytical skills enable him to clearly assess risk and invest wisely to maximize client returns while preserving their principal. About Steeve | Mentorships with Steeve