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What is due diligence? How important is due diligence when assessing a property? To answer that, Dan Deppen sits down with Dickie Baldwin from Baldwin Advisory Group. Dickie has 40+ years of experience in the industry, and he went through in detail some of the reports that note investors can purchase as part of their due diligence process. We covered a lot of ground in this episode, and Dickie went through what to look for in a Broker Price Opinion (BPO), Property Condition Report (PCR), Ownership and Encumbrances (O&E) report, and a few others. Don’t miss out on these expert tips for a thorough due diligence process on your next property.

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Due Diligence With Dickie Baldwin

I’m joined by Dickie Baldwin from the Baldwin Advisory Group. How’s it going, Dickie?

I’m doing great, Dan. How about you? You’re smiling.

I’m doing good. It’s been hectic, all kinds of little things. Thanks for joining even a couple of times, you had some BPOs and O&E reports to walk through. Maybe you could tell people a little bit about your business and what you do.

I’ve been in the real estate finance world for many years. I have done everything from being a real estate agent to a loan originator, broker lending, wholesale lending, correspondent lending and respondent lending. I’ve set up several net branch operations for the mortgage industry around the country. I’ve been in the title business as well as being an investor. I’ve been in your shoes. I understand some of the hurdles that you’ll be facing to become successful.

After retiring in 2018, because I had turned 70, Dan was at a mastermind where I kicked a Baldwin Advisory Group off for investors, especially new investors that don’t know where to go to get something done, plus I heard terminologies of BPO and O&E. I was like, “What is all this stuff?” Baldwin Advisory Group, after being retired for 3 days in 2018 and being 70, I reached out to the different vendors that I have worked with throughout the years and put BAG together. That’s Baldwin Advisory Group. Our slogan is, “One bag for all your real estate services.”

The concept was a brand-new investor may do 3 or 4 BPOs, Broker Price Opinions in a year. BAG does hundreds throughout the year. That gives the brand-new investor and even the more seasoned investor such as yourself to come to BAG to do a Broker Price Opinion, a title search or a property condition report. If you need collateral review, a servicing company or if you want to open up an LLC, all of these services are part of the BAG network.

Let’s talk about what some of these different items are. When you go to the BAG website, you can do a title search. For instance, what is a BPO? BPO is a Broker Price Opinion that’s done by a licensed agent within the subject area. You can get online, pull up a city and try to find a realtor that will go out and do a BPO for you.

A BPO is where actual pictures are taken of the subject property and then 3 sold comps within the neighborhood through the MLS, as well as 3 current listings, are put into the BPO. With all of that information, the BPO will give you an as-is value. We’ll go through a sample of one. If there are any visible exterior damages that the agent sees, then they’re able to give what’s called an ARV or After Repair Value. Keep in mind that a real estate agent is not a contractor but through their experience, they’re able to give an estimate of what the repairs would be.

How does that differ from a Zillow estimate that somebody would pull up?

Number one, it’s great for a glance but in my experience, it’s not always up-to-date in information, whereas BPO is real-time. You order it on Monday, they go out Monday or Tuesday, take the pictures and put the product together. It then goes through a quality control review. If the appraiser review board doesn’t agree with what the agent has come up with, they will send it back for revisions. That’s the great part about utilizing BAG versus trying to get on the internet and find a local realtor. Most agents don’t like doing a BPO. Most of them don’t have the forms to show everything about the property properly. They can do an automated CMA but it’s not quite a BPO.

The key with the BPO is they’re going out, taking photos and getting their eyes on it. It can be massive variability in conditions.

If Zillow is not updated, then it doesn’t know if that property has been sold or not. The other thing about utilizing BAG is these agents are vetted through our third-party vendors. Their job is to go out and do one thing only. That’s to get a value, not to try and get a listing. That is huge in the fact that you have an extra set of eyes also by going through the third-party vendor because it goes through the quality control.

For example, you have a sample of a Broker Price Opinion that was done for a client. This happens to be in Indiana. This is the one thing I want to emphasize on a BPO. With COVID and the agent’s safety, many of these properties may be vacant. An agent is not going to walk up to the windows and see if it’s occupied or walk into the backyard. They are instructed, primarily for their safety, not to approach the property.

That’s a good call-out. A BPO that you’re ordering on a property where you’re looking at buying a note is quite a bit different than getting an appraisal on a property you’re going to buy as your primary residence. You can’t go inside anyways. COVID or not, there are limits on what they can do.

In the note industry, maybe an interior Broker Price Opinion is done 1 out of 100 times. You don’t have access to the interior.

The only time I’ve had access to the interior is if the property was vacant and had been secured by the existing lender but those are corner cases. I’m not targeting vacant properties anyway. It doesn’t come up for me.

With the Broker Price Opinion, pictures of the property come up with an as-is value for a 30-day quick sale or a 90 to 120-day estimated sales price in list price. The After Repair Value will be increased by what the agent estimated the cost of visual exterior repairs would be. How does a value get determined? As you can see, the BPO gives the general breakdown, the market conditions, the subject marketability and then three sold comps within the neighborhood.

You’ve got to be able to compare apples to apples. It’s very difficult to have a 3-bedroom subject and a 5 to 6-bedroom comparable. Some adjustments can be made for those things to derive value. If you’ve got a 3-bedroom, 2-bath on 2.3 acres, hopefully, there’s something within that neighborhood that is comparable. Here are 3 comparables that have sold hopefully within 6 months and not more than 1/2 mile to 1 mile out. Here is 1 comparable that they had to go 8 miles away to compare this particular property.

You’ll have all the information about the subject and the comparables. The adjustments are made for differences between the properties. The BPO will also have three current listings, hopefully within the neighborhood. 2 listings are within 1 mile and another had to go outside of what generally is acceptable. If it’s explainable in the comments, then it’s able to be utilized. With the information on the sold and the listings, this is how we derive the as-is and After Repair Value. Any comments that are made about distance are addressed by the agent.

What’s the 30-day quick sale value that it mentions there?

If you are an investor and you want to get rid of the place, then this is what it would go typically do overnight. Continuing on the comments, the QC along with the agent, will put in the different reasons and activities and how they derived the value. You also have a location map showing where the listing and the sold comps are in relationship to the subject.

Is this one in Terre Haute, Indiana?

Yes.

That’s not my favorite town. It’s just as a sideline. I rolled through there years ago. The university was nice but there were parts of that town that were fairly sketchy.

Sometimes that’s why you have to go outside what the norm is on comparables. Part of the Broker Price Opinion will have as many pictures as they can take from the street. This particular property happened to be on a corner. The agent was able to get a side view. It gives you a pretty good idea of the street view. The BPO will also have pictures of the comps that were utilized for the sold comparables, as well as the listings. You can compare it to the subject. A BPO is a great tool, especially when you want to purchase an asset and not rely on Zillow or RealtyTrac. These are real eye visuals.

For Zillow in particular, especially for sub $120,000 properties, I found any of those online estimates to be wildly inaccurate. A lot of times the value depends heavily on the condition. Some of them are beaten down. I’ve seen examples of properties where Zillow will say it’s worth $100,000. In reality, because of where it is and the condition, it could be worth $20,000 or $30,000 potentially. You’re going to be careful with that for a higher value. If you’re talking $500,000 plus properties, it seems like it gets pretty accurate. On that bottom end, especially sub $100,000, it’s almost useless.

Let’s say that you’re purchasing an asset. There’s enough spread in the deal from the unpaid balance and what you’re purchasing it for. You feel comfortable with the value of Zillow. I also have another product that can be utilized with a property condition report and that’s an AVM, Automated Valuation Method, which will give you a confidence level on the subject property.

The AVM is all automated and takes all the listings and sales in the area to come up with a comfortable price. Interestingly, this AVM came up with $55,000. If you take a look at the BPO on its value, the list price happened to come in at $55,000. No one has gone out and looked at the subject property. This is an estimate of what they feel is happening in the neighborhood.

It’s assuming the average condition or the same condition as the comp.

This particular client ordered the AVM along with a property condition report, which you’ve ordered multiple property condition reports through BAG for your assets. When you get the combination, the AVM in the PCR, these are pictures of the subject. In the AVM, it will show different listings and sold within the neighborhood. What I like about the AVM, along with the property information, is sometimes it will even have borrower information.

The subject sales history map of all the comparables is all automated but in the AVM, you have your subject. It will list multiple properties that have been listed and sold. You’ve got to do a little leg work looking at the listing date, the sale date and the comparisons. It’s not like a BPO where adjustments and everything are made. There’s massive AVM on this particular property. Sometimes it’s not available but when it is, it’s part of the AVM and you can see they’re all over the place.

You got to pay attention to the dates too. I noticed this subject property has a low sale price but it was in 2010. If something’s sold in 2009 or 2010, that’s many years ago and the market was so distressed. There were so many REOs on the market. You got to take those with a grain of salt.

It’s much cheaper than a BPO but it’s also a quick reference to the neighborhood.

If I have a go-to realtor in the area, somebody I’ve worked with before, sometimes I’ll have the realtor cruise buy, give me their quick opinion and then pull an AVM as a second. That can be helpful.

This one’s pretty massive. Sometimes the pictures are available and sometimes they’re not. On this particular one, 39, 42, 45 and 47 properties have sold throughout the years. Here’s one in April of 2021. This was all done in February 2021. In the property condition report, that is just the pictures of the subject, it’s not the AVM attached to it but this report comes with a property condition report that answers an overview of questions, “Does it appear that a property is visible? Does it appear to be occupied, yes or no?”

It’s a brief description of the person taking the pictures of what they visually see while they’re in front of the property. It will also show market conditions, prior sales movements, the charts to substantiate everything and the actual pictures of the property. These are pretty clear crystal pictures. You’ve had orders coming into BAG of property that you own that you haven’t seen in 5 or 6 months and ordered the property condition report so you can see the condition of the property.

It’s not a bad idea, especially if you have a nonperforming note. Maybe it’s going through legal to periodically get eyes on them, if nothing else, to make sure it’s still occupied. I’ve had loans before we were going through the legal process and the borrower takes off at some point. They don’t necessarily tell you. If you’re in a place like Indiana, depending on the time of year, you got to watch out for getting it winterized, dealing with potentially frozen pipes and things like that.

As I always say, 1 picture is worth 1,000 words. If you have this property, there’s trash in the yard and the grass is up to the windows, you better hurry up and get something done about that, which I can also assist you with. It’s called property preservation. The last thing you want is a code violation slapped on the property.

Especially if it’s a contract for deed or a land contract or if you buy it on the property, sometimes the local court code boards see that an out-of-state LLC owns it. They are hoping maybe you’ll be their piggy bank. I’ve had some interesting run-ins with local court code boards.

The property condition report is pretty detailed. BAG is able to offer you. If you need the value, we can go out. I do have vetted agents throughout the country to do BPOs. Sometimes an agent may be rural, 30, 40 and 50 miles away from the subject. There are additional fees to go in but a typical BPO is in the neighborhood of $100 for an exterior BPO, whereas the property condition report that we’re looking at is in the neighborhood of $45.

That can be good savings. If you’re comfortable reviewing your comps and you mainly want the photos, then the property condition report is nice.

BAG also works with a lot of hard money lenders that utilize our service to do appraisals. We can do a full-blown appraisal, which can get into the hundreds if not thousands of dollars but those are done by licensed appraisers versus licensed real estate agents. These are the three things as far as the valuation or showing of the property. You’ve got your BPO, PCR or Property Condition Report and the appraisal. If you are ever able to get entrance into the subject, then I either need a lockbox or a POC, Point Of Contact. We can do an interior which gives you a better valuation than what an exterior does.

That’s one of the big risks with notes and the thing that confuses people who are used to more traditional real estate transactions. They want to be able to see the inside and do more of a full-blown appraisal. That’s one of the reasons you can buy notes at a discount. There’s this extra risk factor. You usually don’t know what’s going on the inside.

Generally, if the property looks as clean as what this does on the outside, chances are it’s not going to be wrecked on the inside.

The other thing I’ve learned too is that if you do see bad stuff, damaged, trash or whatever on the outside, then usually whatever’s on the inside is worse.

The bottom line is, as an investor, it’s going to cost you a little bit of money to do the “due diligence” which is the BPO or the PCR, as well as a title search. The $200 that you are going to be spending on an asset to do the due diligence prior to purchasing could save you thousands and thousands of dollars.

That’s the price of doing business. In my pricing models, I’m going to have a few hundred dollars in due diligence costs. The thing that can be a little bit of a bummer and the other price of doing business is sometimes you pay for BPOs and O&Es, then you find problems and you can’t close. You have to budget a certain amount of money. You’re going to spend on these things on assets that you can’t close on.

The other thing I’ll do sometimes is to try to mitigate that, depending on who the seller is. If it’s a seller I know and trust and I know it’s going to be clean, I’ll order the BPO or O&E right away. If it’s somebody I don’t have a history with or they have a history of having assets you can’t close on, then it’s like, “I’m doing one at a time.”

I’m going to order the BPO. If that comes in, then I’ll order the O&E or vice versa. My time to close is going to be a little bit longer. That’s the way it is. I’ve learned the hard way. One of the things I did out the gate when I was starting is, “I got bids accepted on five assets from the seller. I want to order 5 BPOs and 5 O&Es.” You find out there are all kinds of problems. My strategy depends on who the seller is.

Going back to the $200 out of that 5, if you would have bought all 5 without spending the $200, you could be down $20,000 or $30,000.

If you’re even thinking about skimping on the due diligence expenses, then you’re not going to last very long. That’s going to go poorly.

It’s gotten to the point where realtors are so busy. They don’t have time to drive 3, 4 or 5 miles to try and help you out, unless you may already have a relationship with them. They’re going to ask for some money, especially with gas at $5, $6 or $7 a gallon. As an investor, you also have to understand that these people are there to support you but not for free. There’s the diligence cost. This pretty well covers the property condition, the Broker Price Opinion and the AVM. Look at that. I had to be the winner of the best BPO valuation in the country, supported by all the clients that utilized BAG. I might also mention that my PowerPoint doesn’t show that I won for 2022.

That’s the thing that Fred and Tracy Rewey put out here. They’ve also been on the show. That’s a wide swath of note investors voting.

You mentioned O&E. What is an O&E? An O&E is a title search or title report. O&E owner and encumbrances also can be an owner search, a two-owner search or a full search. The difference is when you’re purchasing a performing loan, a current owner search is good because it pertains to what’s happening now.

If you happen to have a nonperforming note or this asset has changed hands multiple times, it could have been a quick claim or a contract for deed, in other words, it’s got a lot of history, I would highly recommend a two-owner search because it goes back further into deed history to pick up any taxes, liens or judgments. That is what a title search or title report is all about.

You’re trying to find, “Does this property have delinquent taxes? Are there any existing liens on the property? Is it in a bankruptcy?” A title search or report will tell you anything that is recorded against the property. There are times when a water and sewer issue may be there but the utility folks have not filed a lien against the property. Although they’re trying to sell a property maybe, they could have an existing water statement due that some states can put a lien against the property.

Especially if it’s a contract for deed, mileage varies depending on the county and the city. You could be on the hook. I had to pay a $1,500 or $1,800 water bill. Chris Seveney told me he had 1 that was over $10,000 at 1 time. That’s why also I’ll make a phone call to the utilities as well.

One of the services that BAG has separate from the O&E reports is the water and sewer in code and municipality searches, which are a lot of times not recorded. We have to physically contact the utility district or the county for those types of violations. An investor will say, “I can pull a lot of this up online.” You can but the title search vendors have subscriptions that go even deeper into online information, which is not available at a glance on the internet.

There are also a lot of times when a field abstracter needs to be utilized. There are certain areas where it’s not online, so they physically have to go to the courthouse and obtain all of the documents that are involved in the search. I got a client that does a lot of tax sales. He’ll utilize the full search, which goes back to when they laid the slab. That could range from a 30, 40, 50 or 60-year search, depending on the state and the county.

The title search will show ownership. It will give you the tax information and the deed information about the changes from one hand to the other and any liens or judgments that are recorded. I supply a quick synopsis of the tax information and the documents directly from the county about the taxing situation. We mentioned documents. In this particular report on this one, we had probably 50 documents that were part of the search. A lot of it on this particular one is the deed history. Here are all of the different copies of the quick claim deeds showing one owner going to the next owner.

A lot of these land contracts that were originated by home opportunity, which looks like this one was or Harbor Portfolio, they’ve been traded several times over the last years.

That is where I would recommend the two-owner search because it’s going to pick up deep history. You can see and wonder, “Why is it important to have these?” If you’ve got a 6-month gap between 1 owner to the next owner, what happened in that 6th month? Not only do you have these documents but you need to, hopefully, at some point, understand them because that’s part of your collateral review.

If you do not have the ability, time or knowledge, one of the other services that BAG is able to help you with is a vendor that will do the collateral review for you. With the documentation that we’ve been looking at, they’ll tell you what you do have, what you don’t have and what you should have to make an intelligent decision on purchasing that asset. Are you doing your collateral review primarily yourself or are you outsourcing?

I’m outsourcing. I’ll order an O&E report and then go through it myself. I’ve done enough for these that I tell people enough to be dangerous. I can spot most flaws. I still always like to run it through an attorney to double-check everything. Sometimes you have weird nuances in particular states that I may or may not be familiar with.

I’m glad you mentioned that because if you’re dealing in Texas, you don’t want a licensed attorney from Ohio telling you about the practices of Texas.

Hopefully, they won’t do that, even if you ask them. If I had an attorney that was willing to review something in another state, I would run away because that’s not a good sign.

We have a lot of new investors coming in. I feel that it’s a responsibility to try and help guide, especially new investors. Some of the things that they say are, “An attorney is an attorney. A realtor is a realtor,” but it’s not. As you can see in this report though, there are multiple documents and all of these documents could affect the viability of this asset.

Let’s assume that you’re looking at an asset and it’s got an O&E report that is only six months old. You can also do an update where we will take the O&E report that you have in the file as long as it’s not over six months old. It used to be a year. Sometimes we can go up to a year but because there’s so much happening in the marketplace, we try and cut it down to six months. An update will show you anything that has been recorded since the date the O&E report was last done. You can see in the update the property information, the parcel number and what items were found as being recorded since the date of the last O&E.

Dick, give me the hook. Do you have any quick final thoughts?

This has multiple documents. Let’s assume that you have a title search. It shows that there had been delinquent taxes. All of a sudden, they’re paid. In many instances, you don’t know who paid those taxes. There’s another product available called a tax deep dive that can go into the taxes and let you know if a possible tax sale has been done.

I find these to be valuable statements. I run these on my portfolio about every six months or so as a double-check to make sure. I’ve had issues where taxes are being escrowed, the borrower starts paying them and the loan servicer doesn’t necessarily let you know. I do that as a belt and suspenders on my other systems to make sure nothing’s getting away from me.

If you got a tax lien on a property or if it could have been a tax sale, this is where the O&E report may not show that somebody bought those taxes. This little report will give you how much is owed and what is the last day to redeem those taxes. Those will vary from county to county, state to state. This little report only runs $35 plus any hard cost. The hard cost would be any documents from the county that are charged. Those are the two items that are at the beginning of your due diligence period that is a must to let you know if it’s something that you want to buy or not.

Dickie, thanks so much for coming on. We covered a lot of grounds. We had the BPO reports, the PCR, the AVMs, the tax reports and the OES. There’s a lot of stuff in there. This might be one for folks to go back through more than once.

Please tell folks that they can go to BaldwinAdvisoryGroup.com. These are all of the different services which we didn’t even touch that are needed by investors. I appreciate it. If anybody needs me, please feel free to reach out to my phone number, (936) 447-4170 and my email, DBaldwin@BaldwinAdvisoryGroup.com.

Thanks again, Dickie. I’ll talk to you again. We’ll have you on again soon to talk about some of those other things.

I appreciate it, Dan.

Important Links

• Baldwin Advisory Group
• Zillow
• RealtyTrac
• Cash Flow Expo: What You Need To Know To Win With Fred And Tracy Rewey – Previous episode
• Chris Seveney
• DBaldwin@BaldwinAdvisoryGroup.com

About Dickie Baldwin

With decades of experiences of real estate experience as a realtor, loan originator, mortgage wholesaler, mortgage correspondent, and mortgage warehouse professional in addition to setting up multiple national mortgage net branching operations, Dickie has a unique ability to provide expertise for investors in today’s various real estate market opportunities. Having created these long-term business relationships with service providers over the years, he shares his strength in numbers & knowledge.

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