Caveat EmptorWhy the doctrine of ‘buyer beware’ is costing the seller millions of dollars!

Presented by H. Blaine Strickland, CCIM

Presented to ECS / Attorney Charles Castellon

February 8, 2012

Goals for the presentation:1. Review the basic decisions any buyer / holder of real

estate makes

2. Examine the current / typical role of due diligence in the transaction process

3. Consider a different interpretation of the transfer process, and thus, a new role for due diligence

4. Consider the impact of this new strategy on today’s participants

Part 1: DecisionsEvery buyer has to make 3 decisions:

• When to buy

• How long to hold

• When to sell

Part 1: DecisionsEvery buyer has to manage 4 questions:

• How many dollars go in to the investment?

• When do the dollars go in to the investment?

• How many dollars come out of the investment?

• When do the dollars come out of the investment?

Part 1: Decisions

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Part 1: Decisions

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Cap Rate

Part 1: Decisions

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Internal Rate of Return(IRR)

Part 2: Current Role of Due Diligence

Typical Seller attitudes:

• I had to go through the DD process when I bought

• This is a ‘buyer beware’ situation

• The buyer has a ‘free look’ inspection period

• We’ll negotiate any items that come up

Part 2: Current Role of Due Diligence

Typical Buyer attitudes:

• I want my team to look at the property

• I have a budget for due diligence expenses

• Sometimes you gotta kiss a lot of frogs to find a prince

• We’ll negotiate any items that come up

Part 2: Current Role of Due Diligence

Typical outcomes:

• Issues almost always come up

• The treatment of the issues takes expertise and money

• The contract is usually extended – if there is agreement

• Positions often harden; deals become harder to make

Part 2: Current Role of Due Diligence

There must be a better way!

Is this really the most efficient way to get this done?

Part 3: A New Interpretation

For your consideration:

• The pendulum of legal weight is swinging toward the buyer

• The seller is losing money needlessly by allowing the buyer to dominate the due diligence process

• The seller chooses the time of sale: to capture a rate of return; to ‘perfect’ the investment

• The focus should shift from the property’s suitability to the buyer’s capability

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Part 3: A New Interpretation

Professionally managed by the ‘owner’

Part 3: A New Interpretation

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Professionally managed by the ‘owner’

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Part 3: A New Interpretation

Professionally managed by the owner? Or, abandoned to the new buyer?

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Part 3: A New Interpretation

The Seller can’t capture his IRR without the sale; why would he want to delay? What risks come with delay?

Part 4: ImpactA new approach:

• The Seller conducts almost all due diligence before placing the property for sale• Identifies and fixes issues – at the most manageable cost

• Assembles his team if needed

• Insists on quicker, smoother progression to closing

• The Buyer receives all of the Seller’s due diligence information before making an offer• Thrilled to find one that can be evaluated quickly

• Realizes that his team will have parallel teammates

• Willing to offer proof of funds more readily

Part 4: ImpactFor your consideration:

• ECS assumes the role of advisor to the Seller• Spreads the gospel, builds a budget, builds a team

• Readies the information for dissemination

• Offers a pre-emptory approach

• Most efficient cost structure – preventive

• Changes the expense from cap ex to op ex

• Builds a stream of income, greatly enhances control

Part 4: Impact

$(Initial Investment)Cash FlowCash FlowCash FlowCash FlowCash Flow + Sale Proceeds

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Progressive due diligence performed over time as operating expense?

Part 4: ImpactFor your consideration:

• Charles Castellon, PA, pre-empts the closing process • Title and survey completed in advance

• Letter of intent created as a subset to the pre-formed contract

• Assumes ‘proprietary’ control of the schedule

Goals for the presentation:1. Review the basic decisions any buyer / holder of real

estate makes

2. Examine the current / typical role of due diligence in the transaction process

3. Consider a different interpretation of the transfer process, and thus, a new role for due diligence

4. Consider the impact of this new strategy on today’s participants

Goals for the presentation:1. Review the basic decisions any buyer / holder of real

estate makes

2. Examine the current / typical role of due diligence in the transaction process

3. Consider a different interpretation of the transfer process, and thus, a new role for due diligence

4. Consider the impact of this new strategy on today’s participants

Questions? Comments? Reaction?

Caveat EmptorWhy the doctrine of ‘buyer beware’ is costing the seller millions of dollars!

Presented by H. Blaine Strickland, CCIM

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