The 5 Minute Deal Screening Checklist

Mar 28, 2015 | Entrepreneurship

In my role as the VP of Acquisitions, a lot of deals come across my desk. However, 9 out of 10 aren’t worth looking at. If I couldn’t sift Real Estate Acquisition Checklistthrough those deals efficiently I wouldn’t get anything done.

A frequent question I get from aspiring real estate entrepreneurs is how do you quickly screen deals and avoid wasting valuable time analyzing deals that are over-priced. While I’m by no means great at it and it takes repetition and strict investment focus to hone the skill, I put together a scratch deal screening checklist which can serve as a good starting point:

1. Did the deal come from a trusted source or someone with aligned incentives?

By trusted source I mean a person who will go out of their way to help you. It could be a broker who you’ve worked with in the past and who is representing a seller that wants a quick close and values surety of execution. It may be a broker who’s looking to do more deals with you or who wants to sell a few of your other deals. Perhaps it’s a mortgage broker who wants to line up the debt package or a 3rd party property manager whose client is exiting.  You never know where the next deal will come from.

2. Does the story of the seller add up?

Contrary to popular belief, real estate is not always sold to maximize value. The owner could be going through a divorce or partnership dispute. A REIT owner could be strategically exiting that market for portfolio purposes. It may be part of a fund that is coming to the end of its hold period. If you can’t answer the question, ‘why is the seller selling’, move on to the next.

3. Is it owned by a mom & pop owner? Mis-managed? Ability to add value at the property level?

We specialize in the $5M-$30M deal size space, allowing us to avoid institutional competition. Deals of that size are typically owned and managed by mom & pops and oftentimes are mis-managed. This allows us to immediately add value at the property level through improving the brand (and online reputation), implementing a well-defined capex scope, maximizing tenant bill-backs, improving occupancy etc.

4. Is it located within a market that we like long-term?

We take a long-term perspective on all deals and target submarkets with strong local demand drivers, such as employment and transportation hubs, that are also aided by favorable macro drivers, such as population, employment, and income growth. We also target supply-constrained sub-markets with high natural barriers to entry.  We always ask ourselves, do we want to own here for the next 10 years?

5. Can it be managed by a high-quality 3rd party property management firm?

Quality 3rd party property management is a bit of a misnomer, but we think there’s typically a single best management firm for each asset within each submarket. Is there a quality property management company that specializes in that asset class within that submarket? Are there creative ways for us to further align interests? Is there a management company that doesn’t have a presence in that market, but could bring in a fresh perspective to stale market? The success of the deal comes down to execution and the day-to-day property management is a big component of that.

6. Below replacement cost? Good in-place cash-flow?

The riskiness of an asset is driven almost entirely by its price. There’s no asset so crappy that it can’t be bought cheap enough where it becomes a good deal and there’s no asset so nice that can’t be priced too expensive that it becomes a risky deal. Make sure you’re buying at a good basis, often defined by discount to replacement cost and the in-place unlevered cash yield (cap rate).

7. Is it a story we can sell to our investor base?

We typically syndicate deals to a group of high-net-worth investors for whom real estate is an emotional investment. They are investing in us as the sponsor and the story behind the deal, the rest is secondary. Does the deal have a story that is easy to pitch to investors? It doesn’t have to be a sexy asset to be a good deal, just solid risk-adjusted returns.

In addition to the checklist, you should be able to confidently answer the following questions:

  • Why has this great opportunity fallen into my lap?
  • Why am I the best buyer for this asset?
  • What is my competitive advantage?
  • What are the potential downside scenarios?

Running through this exercise will allow to quickly weed out the bad deals. However, the only way to hone this skillset is practice.

What do you do to quickly screen deals?