Ep #145 Learn how to properly conduct due diligence –
Rod Khleif & Brian Hennessey
Ep #145 – Brian Hennessey – Learning how to properly conduct due diligence saves investors a ton of time, money, and headaches. Brian is author of The Due Diligence Handbook For Commercial Real Estate. Brian shares the vast majority of investors, real est
Brian Hennessey – Learning how to properly conduct due diligence saves investors a ton of time, money, and headaches. Brian is author of The Due Diligence Handbook For Commercial Real Estate. Brian shares the vast majority of investors, real estate brokers and commercial real estate professionals barely scratch the surface conducting their due diligence when purchasing real estate investments.
Here’s some of what you will learn:
- What brokers look for in due diligence (it’s often different than what investors look for).
- How and Why Brian wrote The Due Diligence Handbook.
- Why it’s important to have a Due Diligence Checklist, (we need reminding as much as we need learning).
- When to begin due diligence.
- A great way to ask for due diligence information early on.
- How to develop relationships with Brokers.
- What it takes to get on the map with Brokers.
- The biggest problem with due diligence, (you don’t know what you don’t know!)
- Book recommendation: The Due Diligence Handbook For Commercial Real Estate by Brian Hennessey.
- Book recommendation: The Leasing Handbook For Commercial Real Estate Investors by Hennessey.
Our Guest
You can learn more about Brian Hennessey at:
http://www.impactcoachingsystems.com/
Full Transcript Below:
Ep 145 – Brian Hennessey – Learn how to properly conduct due diligence
Welcome. This is the Lifetime Cash Flow Through Real Estate Investing Podcast. This is where you’ll learn strategies to help you achieve lifetime financial freedom through real estate investment. Your host, Rod Khleif, has owned over 2,000 homes and apartments. And he brings experts in all aspects of real estate investment and management on to the show. Now, here’s your host, Rod Khleif.
Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing, I’m Rod Khleif, and I am thrilled you’re here. I know you’re gonna get a ton of value from the gentleman were interviewing today. He’s a licensed real estate broker, and his name is Brian Hennessy.
He’s a Senior Vice President with one of the largest real estate brokerages, in really, in the world, Colliers International. He’s an author, and I’ll tell you, there’s a funny story around that, and I’ll tell you, in just a minute.
He’s recognized a real problem in commercial real estate that people don’t like to talk about, and it’s due diligence. It’s probably one of the most important things you deal with when you’re buying commercial real estate. So we’re really lucky to have him on the show, and I’m excited to dig into this. Brian thanks for being with us buddy.
Brian Hennessey: Rod, thanks so much for having me on.
Rod Khleif: Absolutely. So take a minute and tell us a little about your history in the whole real estate field ‘cause I’m sure it’s very impressive. Let’s talk about that first.
Brian Hennessey: Well I’ve been in the industry for over 31 years now. I’ve been fortunate enough to work in some different aspects of it. And after the first18 years, I became an acquisition person for an investor and his investors. That’s where I really got to learn the nuts and bolts of investments. Because, as a broker, you’re really looking for all the reasons why somebody should buy a building or property as opposed to when you’re buying a piece of property you’re looking for all the reasons why maybe you shouldn’t be buying it.
Rod Khleif: Right.
Brian Hennessey: So that’s where I really went to school and learned as much as I ever did in that short period of time, than in the first 18 years I was in the business.
Rod Khleif: Okay. And so you’ve been in the business 31 years. Now, I will tell you, just my listeners, Brian sent me a couple of copies of his book, which is called The Due Diligence Handbook For Commercial Real Estate. It’s not necessarily multi-family specific. It’s commercial real estate in general. But what’s funny is, I already had a copy, and I shared that with him.
It’s a very informative book about the importance of due diligence. Like Brian said, it’s sometimes the deals you don’t do, are the best deals. Because people make mistakes, and this is where they make them. This is where investors make mistakes, in the whole due diligence realm.
So talk about why you wrote the book, and why you thought it was so important? ‘Cause you shared that with me ahead of time, and I want you to share that with my listeners.
Brian Hennessey: Sure. When I first became an acquisition person, we were starting to do some fairly sizeable transactions. I was overwhelmed by the amount of information that I had to review, the questions to ask, the issues to visit. And what happened was, I tried to keep a bunch of checklists, and legal pads around me, writing things down to remember.
What happened was, by the time we finish the transaction, my nerves were frazzled. I realize once we owned it, “Oh my gosh, I should have asked about this, should ask about that.” Finally, I just decided, “You know what, I don’t wanna reinvent the wheel every time I do this. I’m gonna create a little reference manual for myself, so I don’t have to remember every little thing.” There’s just too many things to remember here.
Rod Khleif: Sure.
Brian Hennessey: So that’s what I started to do. Every time I learned a new lesson, and we were buying property all across the country…
Rod Khleif: I know. If I read it correctly, you’ve done over a billion dollars in transactions. Is that accurate?
Brian Hennessey: Yeah. Over nine million a square feet we bought.
Rod Khleif: Wow.
Brian Hennessey: It’s a lot of square footage.
Rod Khleif: Right.
Brian Hennessey: We would buy them in very short periods of time because… We even bought a couple of portfolios, one from equity office, which was Sam Zell’s company.
Rod Khleif: Wow.
Brian Hennessey: And Transwestern, and that was 1.8 million square feet. Just in that one, was five buildings in Dallas.
Rod Khleif: Wow.
Brian Hennessey: And then the Transwestern one was to 2.2 million square feet. They still gave us 30 days due diligence, 30 days close.
Rod Khleif: Wow.
Brian Hennessey: So you better be on your game.
Rod Khleif: Right.
Brian Hennessey: When you’re doing that kind of due diligence. We had a very small, little group that we worked within. We all had to know all our roles and have a system to work. And that’s how I created this system that I teach in The Due Diligence Handbook For Commercial Real Estate.
Rod Khleif: Right. Right. Like I told you before we started recording here, I got some really good stuff from your book. I’ve got a checklist, about a 30 paged checklist for due diligence on properties that we look at. You have to have that. You have to have a resource like your book or a checklist that you create, that you live by.
I mean it’s the gospel because otherwise you’re gonna miss something. There’s so many factors involved from calling the… Evaluating the area, evaluating the demographics, making sure you’re checking all the systems.
Speak to some of the things in the book that are covered, Brian.
Brian Hennessey: Sure.
Rod Khleif: Because I know it’s very comprehensive.
Brian Hennessey: To your point there, there’s just way too many things to remember. We need reminding as much as we need learning, and that’s why airline pilots still have a checklist when they go through their…
Rod Khleif: Right.
Brian Hennessey: It just makes good sense because having and adhering to a proven system allows you to conduct a due diligence faster, easier, more efficiently, and you’re less likely to miss something.
Rod Khleif: Right. Right.
Brian Hennessey: So some of the things that you started hitting on, when you’re going into an area, now once you’re in your own area and you’re buying property, they become second nature to you.
Rod Khleif: Sure. You understand that the microcosms of that area, at least from an area standpoint you’re in good shape. But you bought all over the country, didn’t you?
Brian Hennessey: Right.
Rod Khleif: Which is kind of why this was a necessity.
Brian Hennessey: Right. What would happen is I’d get a set up or an offering memorandum from somebody, regarding a piece of property. If I wasn’t familiar with that area, or that suburb, or the city, or whatever then I’d have to drill down, and start finding out, is this a deal worth looking at.
Rod Khleif: Right.
Brian Hennessey: Which means, I’d have to start doing some homework, which… Thank God now, you can go on the Internet and find a lot of information.
Rod Khleif: Oh, you can do it all online, yeah.
Brian Hennessey: Yeah.
Rod Khleif: When you and I first started…
[chuckles]
Brian Hennessey: Right.
Rod Khleif: It was on a stone tablet with a chisel.
Brian Hennessey: [laughs]
Rod Khleif: Right. Yeah. Right now, you can just, you could do so much on your laptop anymore, with the websites that are available. In fact, you can even drive down the street on Google Earth, and look at the type of cars that are in the parking lot just so you know the businesses around a bit, a potential acquisition. But, yeah.
Brian Hennessey: Absolutely. So you could find a lot more, a lot quicker, but the important thing is that you know the questions to ask. You know the things that you’re looking for so that you don’t waste a lot of time on things, deals that are really not doable or you shouldn’t be doing. You don’t wanna spend a bunch of time on something that you could have found out early on that it wasn’t a deal that you’re really not interested in doing.
Rod Khleif: Exactly.
Brian Hennessey: So there’s some things that you can do but let’s just say you find something that sounds like a good deal. Your initial investigation tells you, “Hey, you know what? This is worth investigating.” Well now, let’s say you get into the nuts and bolts, and you say, “I wanna make an offer on this property. Done enough homework here, I wanna get the process started.”
Rod Khleif: Right.
Brian Hennessey: What I try to do when I first, am trying to get a piece of property under contract is I’ll ask them, “Can you please send me some of the due diligence materials for me to start taking a look at.”
A lot of times, they would say no. “No, we’re waiting for us to get under contract, well then get you all you need.”
Rod Khleif: Right. Even in the LOI stage, letter of intent stage, for those of you that don’t fully understand the process. You’ll send a letter of intent, an LOI, that’ll have the major points on the deal and that’s not under contract, that’s just an intent.
Sometimes, like Brian says, to get actual real financial historical numbers that you need to accurately assess a property, they’ll hold off until you’re under contract. Which like he says right now that the due diligence period is typically 30 days. You don’t have a lot of time.
Now, I will tell you, we typically have in the contract that that 30 days starts once you have everything. Well they may or may not allow that but we do recommend that. You’ve got to have historical financial data
Sorry, I didn’t mean to interrupt Brian, but I just wanna throw that in.
Brian Hennessey: Oh no, not at all. No. It’s a good point.
Rod Khleif: Okay.
Brian Hennessey: But what I would ask is if they’d say, “No, we’d rather wait.” I’d say look, “Don’t you want me to find out before we spend a bunch of money, and time on this, and legal fees, whether or not there’s a problem?”
Rod Khleif: Good. Oh, good. That’s good.
Brian Hennessey: And I said, “It’ll just speed up the process here.”
Rod Khleif: Love it.
Brian Hennessey: A lot of times, they would say, “Sure, we’ll get you those.”
Rod Khleif: Right.
[00:10:00]
Brian Hennessey: It’s, if you don’t ask, the answer is always, no.
Rod Khleif: Now, that’s a great way to frame it. I’m really glad you said that because I haven’t even done that myself. That’s a very good way to frame it because you’re saving everybody time, and legal fees, and everything else. So when you guys encounter that, use that one. That’s brilliant. Okay.
Brian Hennessey: So anyway, I’ll tell you a quick little story to emphasize that. I was going under contract with 150 units in this area of Golden, Colorado.
Rod Khleif: I know it well.
Brian Hennessey: A great, great town.
Rod Khleif: Right. Coors Brewery.
Brian Hennessey: Yep. So we’re going under contract, and I said to the seller, “Listen, I’m only gonna be here a few days, would it be okay while we’re negotiating the contract, if I get the guys over there to start inspecting?” And he says, “Well, you don’t have insurance, and I wanna get under contract.” I said, “Look, it’ll save us a bunch of time. If there’s any problems, I’d rather find that out now so we don’t spend a bunch of money on legal fees and whatever.” He said, “Fine, give me an insurance certificate, whoever is gonna be helping you and I’ll let you in the property.”
Rod Khleif: Right. And guys, just so you know what he’s talking about there is, they don’t want people walking around the property, doing things, looking at things, climbing on roofs, uninsured for that particular tasks, so that can be a hurdle. Especially with the big institutional seller or broker representing a big institutional seller. So that’s what he’s talking about.
I wanna interject one other thing, an LOI is something you can typically do yourself, but you’re never gonna wanna right your own contract. You’re always gonna want a real estate attorney, and that’s gonna cost you. So what he’s talking about getting, as much of this done ahead of time is it saves you money, and time, and brain damage… Anyway, continue.
Brian Hennessey: I show up there with four or five guys from this inspection company I’m using. They’re crawling all over the property and I get a guy that calls me over and says, “Come here. I need to show you something over here.” He’s got a shovel in his hand. He went underneath an outside stairwell. He was looking at some footings and he says, “Somebody’s trying to hide something here.”
He says, “See that plywood there with the dirt covering it? There’s some structural problems here that they don’t want people to know about.” I said, “Do me a favor, now we know that red flag, look real carefully at this spot.”
Rod Khleif: Right. Dig in. Right.
Brian Hennessey: Right. I spent a couple hours there, then I had to take off. I told the head guy, “Do me a favor, I have to catch a plane this afternoon but please call me as soon as you get through here so I can at least get the verbal from you what’s going on.” And so I’m sitting at the airport, and I get this call. He says, “Well we’re finished. I got some good news and bad news.”
I said, “Well give me the bad news first.” And he said, “You’ve got some major structural problems here.” I said, “Well give me a dollar amount or at least a range.”
Rod Khleif: Right.
Brian Hennessey: And he said anywhere from one and a half to $4 million depending upon how bad it actually is. I go, “That’s all I needed to know. Thanks very much. Send me your bill.” Called up the attorney and said, “Stop all work on this.”
Rod Khleif: Right.
Brian Hennessey: Then I called seller and said…
Rod Khleif: We’re done.
Brian Hennessey: “We’re passing.”
Rod Khleif: Yeah.
Brian Hennessey: But I could have gotten under contract, could have had some legal fees…
Rod Khleif: Oh sure, you could have been tens of thousands of dollars into it. You do your Phase 1 Environmental Reports, all the reports. The lender or the buyer are gonna require, that all cost money, and then of course the legal fees with the contract.
Brian Hennessey: Right.
Rod Khleif: Yeah, that’s the value in this guys, there so many little details that you have to remember when you’re looking at a property. You really need a checklist… You wanna call the Chamber of Commerce, “How’s business in the area?” You wanna call the Economic Development Office, “Are there any incentives?” You wanna call the Assessor’s Office, ask them about the property planning, zoning. You wanna talk to contractors that have been there. Tenants that live there, and on, and on, and on.
You’re gonna wanna make sure that every aspect of that property is checked out, like you did with that inspection company. Or you guys can use specific mechanical and vendors. You can use plumbing vendors, you can use contractors to come out and check a lot of this stuff as well. Structural engineer, if there’s any question there.
So all of these thing, and it’s very easy to overlook things if you don’t checklist them. That’s why I went out and bought your book Brian, and just to make sure that my checklist had everything that it would need in it. It definitely added a lot of value.
Now, I know you’ve got a new book coming out as well, The Leasing Handbook For Commercial Real Estate Investors. Talk about that a little bit. What’s in that book?
Brian Hennessey: I wrote that book because over the years, I’ve seen investors making the same types of mistakes over and over again. I thought, “Okay, if I were a new investor, what are the things that I’d wanna know about, so I wouldn’t have to go out and learn all these mistakes, or make these mistakes. Just shortcut the whole process.”
Because look, there’s two ways to learn, you can learn from your own mistakes or others mistakes. I always say it’s a lot cheaper and easier if you learn from others mistakes.
Rod Khleif: Yeah.
Brian Hennessey: Not only do I talk about those, but I talked about tips, and strategies, and techniques you can use to get your properties…
Rod Khleif: Leased up?
Brian Hennessey: Leased up. Right. And then I talked to different experts in different genres about what they found to be the best successful tips that they could give in order to get this done.
Rod Khleif: Fantastic.
Brian Hennessey: It’s really an overview, it’s not a micro study but what I wanted to do was it included all the sample leases, and LOIs, and proposals, and things in the book. But the book ended up being 300 pages. I was like, “This is not what I wanted to do.”
Rod Khleif: Sure.
Brian Hennessey: So I decided to reference those… I have some of that in there. I referenced those to my website which if you buy the book, you just get access to the website and you could go look at…
Rod Khleif: Okay. Right. So you get access to a document library. Awesome.
Brian Hennessey: Right. Exactly right.
Rod Khleif: Awesome. Fantastic. Well let’s shift gears for a minute. Let’s talk about your brokerage experience. I know you’re slowing down on that but I think you could add some value to my listeners, as it relates to their interaction with commercial real estate brokers.
‘Cause I talk about in my training, and on this show, about the value of having long term, comprehensive relationships with brokers that are in your area, and in your market, and in your sector; your sector being residential multi-family versus maybe retail or something.
You want brokers that are in multi-family, and you wanna develop relationships with them. For a new investor, that can be a challenge because as you know, a broker doesn’t get paid unless the property closes. I’m sure you included have had situations where people will tie up properties, and really don’t know what they’re doing, and waste everybody’s time and money.
Can you speak to maybe, what you looked for when you were more active in the brokerage? What suggests you might make to a new investor when they’re developing those relationships?
Brian Hennessey: Absolutely. It’s important that you build a good trust and rapport with the brokers out there. Look, it’s like any other business. It’s a people business, really.
Rod Khleif: Right. Right.
Brian Hennessey: Real estate happens to be that commodity that we’re dealing with, but people buy people. If people think you’re trustworthy and that your word is good, and you do what you’re gonna say and say what you’re gonna do, that type of thing.
Rod Khleif: Right.
Brian Hennessey: They’re more likely to wanna spend time with you even if sometimes, the deal doesn’t happen. Well, at least they know you made your best effort. But in a market as it is today, with multi-family, buyers are tripping all over themselves to get…
Rod Khleif: Try to find deals.
Brian Hennessey: Right. Try to find deals and the most important thing they wanna know is do you have the ability to get it closed?
Rod Khleif: Right.
Brian Hennessey: So it is a little bit of a challenge to get those first deals closed. Once you start closing deals you’ll be on their list.
Rod Khleif: Right.
Brian Hennessey: You’ll be getting calls but what you should do is try to find two or three brokers that you really resonate with, that you like, and they like you. You’re looking at deals together. You’re talking regularly.
Rod Khleif: Right.
Brian Hennessey: ‘Cause it’s out of sight, out of mind.
Rod Khleif: Right.
Brian Hennessey: Because you’re talking to so many people. And if you spend the time, talking with them and doing what you say you’re gonna do, that will support…
Rod Khleif: Right. It’s a small world.
Brian Hennessey: Oh, my gosh…
Rod Khleif: You screw people over and you’re done. I would add one thing, and we talked about this in my book and training, that that you literally, you respect their time. Most people… A lot of investors be in a lot of investors will go in and they’ll say, “Hey, send me deals”, and then they’ll never respond to the broker, and give them feedback. Would you agree with me here, Brian?
Brian Hennessey: Oh, that’s…
Rod Khleif: You have to give them feedback. Say, “Hey, this isn’t gonna work because of this” or you know… So they know, not only can you rehash, you can reintroduce your criteria to them, but they see that you’re really taking the time, and respecting their time. Would you agree with that?
Brian Hennessey: Yeah. I would say that’s probably one of the more common issues we run into. People wanna see deals and then you go through the trouble. You’ll get it over to them or you go meet with them, drop it off, have a big discussion about it, and then they never call you back…
Rod Khleif: Right.
[00:20:00]
Brian Hennessey: Or answer your calls, or anything. That’s kind of the death knell. If you’re doing that then you’re just out there alienating brokers.
Rod Khleif: Right.
Brian Hennessey: You’re better off…
Rod Khleif: Would you agree with regular follow up as well?
Brian Hennessey: Yeah. Absolutely.
Rod Khleif: Yeah.
Brian Hennessey: Absolutely. “Hey, I haven’t talked to you in a couple of weeks.”
Rod Khleif: Right.
Brian Hennessey: “Just wanna let you know that we’re ready. We’d love to see some deals. You got anything going on out there?” I even would say to them, “If you have anything off market you wanna talk to me about, I got you covered. I’ll sign your commission agreement. I’ll pay the fee.”
Rod Khleif: Right.
Brian Hennessey: To me, it didn’t matter because it just got factored into the deal. If three or 4% or 5%, whatever it was on the deal was gonna make it a bad deal then I shouldn’t be buying it anyway. It’s the way I looked at it.
Rod Khleif: No. No, absolutely. Guys, just to rehash what he just said, you wanna let the broker know. They’re gonna write the contract for you, and so if they’ve got an off market deal, they’re gonna get both sides of it. They’re gonna get the listing side and the sales side if they bring you deals.
For those of you that don’t fully understand the real estate process, one broker will list the property; it’s very likely or possible that another broker will sell the property. Now, every broker wants to have both sides because both sides equate to a double, larger commission, the full commission. So if someone sends… you wanna let the brokers know that that they’ll write any contract on any deal that you pull the trigger on, including off-market deals, because that’s the sweet spot for them.
Then you follow up, you’re respectful of their time, and you stay in front of them, and that’s how you build those relationships. Guys, those of you that have never bought a deal, you probably have to pull in a sponsor. Someone that’s got, for the financial wherewithal to take the deal down, and I’ve talked about this before, even if you end up giving up a good chunk of the deal. That’s what it takes to get on the map, and get on the map of these brokers, and lenders, and everything else. That’s a common sequence.
Brian Hennessey: Yeah, that’s a good point, Rod. Because once you are on the map, once they know you bought a property in the area, don’t worry, they’ll be calling you.
Rod Khleif: Right. Exactly.
Brian Hennessey: “Hey, saw you bought this property over there, I’ve got one over there and it’s similar and I think you might like.” Once you get the momentum going, you’ll probably have more business you know what to deal with. But to Rod’s point further, on the getting a sponsor, if you can get a sponsor that is credible, that’s closed deals, you’re gonna get pushed way up to list.
Rod Khleif: Thank you. Okay. Well listen, as you know a lot of my listeners are fairly new to the business. Are there any words of wisdom you’d share with an aspiring multi-family real estate investor? What tip might you tell them?
Brian Hennessey: Well, the main tip would be, just be a straight shooter out there, and build those relationships, because those relationships take time but they pay off huge dividends, if you do that.
The other thing is, by learning how to properly conduct due diligence, you’re gonna save yourself a ton of time, money, headaches, and find values out there you probably would never found had you not known this information.
Rod Khleif: Right.
Brian Hennessey: I think the biggest issue with this, with due diligence, Rod, is that people just don’t know what they don’t know.
Rod Khleif: Right.
Brian Hennessey: That was my problem.
Rod Khleif: Right.
Brian Hennessey: Once you know it, it’s like anything else, you keep adding to it, and you get better at it, and it becomes just part of your routine. Once you have it, it’s yours and it…
Rod Khleif: Right.
Brian Hennessey: It’ll make all the difference in the world. I’m just telling you, because I know. Because I had to start from some place…
Rod Khleif: No, absolutely.
Brian Hennessey: I started from square one.
Rod Khleif: Absolutely. This is just one of those critical systems that you need, in your multi-family investing business. You need systems, and due diligence is definitely one of those systems that’s critical.
Well listen, Brian, I just wanna thank you for being on the show. You’ve added a ton of value. I very much appreciate it. We will have all your contact information on the show notes. Again, recommend his book, The Due Diligence Handbook For Commercial Real Estate. And keep an eye out for his new book, The Leasing Handbook For Commercial Real Estate Investors.
Brian, thank you so much for your valuable time today.
Brian Hennessey: Absolutely. It’s been my pleasure, Rod. Thanks for having me on.
Rod Khleif: Alright. Take care.
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