Eight A’s Of Due Diligence

In this episode and all week, Jill and I are talking about making the eight As, due diligence, which Jill and I devised over the years, work for you and your land business. In this episode specifically, we’re going to talk about Affordable. Before we go through episode one here, what are the eight As?

I’d like to say they’ve developed over the years, which is cool. When you and I first started doing deals together where there were four, you said, “Make sure they have these four As or we’re not moving forward.” They are Access, Acreage, Affordable, and Attribute. That was it. Do you want me to describe them or is that it?

Sure. That’d be good.

Access, back then, was, “Do I have legal or physical? What do I have? I need to know it.”

Can you get to it?

It is preferably both. We’ve gotten pickier over the years. I want both. That’s Access. It could be physical and legal. Number two is Acreage. It used to be bigger, the better back then. I’ll leave it at that because we’re going to talk about more this week.

That still very much applies but there’s an element of relativity. If you’ve got a 40-acre property among tons of 1-acre properties, you’ve accomplished Acreage.

Affordable is the price. Is the price right? Do you still want to buy it? Did the mailer go out and do its job? Are they agreeable? Does that price still work? That’s Affordable. The last one was Attribute. That was always the fun one. What’s special about it? What piqued your interest? Is it close to fill in the blank? Does it have a creek in the back? Is it you pull it up on the map and you go, “Look at those trees.” It was something like that. There are some attributes. That was always back then too when we were posting our own properties everywhere and selling them primarily ourselves. That attribute was what I always remembered. I say, “That’s what’s going in the description.”

When I’m running down the list of the eight As to see whether or not we’re going to buy a property and I get to Attribute, in the back of my head, I automatically write the title when I’m going to sell the property. It’s like, “22 miles from Las Vegas,” or, “Flowing year-round creek in the back of the property,” or, whatever is fantastic about it. What’s the reason that I’m buying it? What attribute would I buy this as an end user? What would push me over the edge over all the other properties that are around it? It might have a mobile home on it. That’s an amazing attribute. That’s the four.

Do you want me to keep going?

Yeah.

I added the number five. There was a point where I went, “We need this fifth A because it’s killing some deals.” That’s Alive. If everyone’s not alive and able to sign an agreement but it’s alive, then it could kill the deal. That was number five. Six were you. It came right after that, which was Adjacent. It was really easy. We had used that before but hadn’t thought about it as much. You made it an official A. It’s when you look around and see all these ranches and you could see, “This is what’s possible. They got water. They got power. Look what’s beautiful. Look what they’re doing with the slope.” Anything adjacent will often tell you what the property’s going to be and show your buyers what’s possible.

Anything adjacent will often tell you what the property's going to be and show your buyers what's possible. Share on X

In the case of an infill lot, you’ve got a house on either side. The houses are both valued at around $800,000, let’s say. Chances are, in the property that you’re buying, an $800,000 house is going to go on it. Adjacent is, “What am I going to do with this property?” or, “What’s the end user going to do after I sell it to them?”

The last two came along in the last couple of years with our members when it evolved. It was Abundance. Jack started asking them a lot, “What else is in your pipeline? If you have an abundance of deals and you can afford to kick this to the curb, we don’t care about it.” To move it down the list is what I like to do. It’s like, “Move it down on the list. See if you’re still excited about it. A week from now after all the other offers come in, you might have forgotten about it and found something else even better.”

What happens in reality is it’s always better when you have 10 deals or 20 deals that you’re looking at to choose the best 1 or 2. If you are looking at 1 or 2 deals because you haven’t sent enough mail out or for whatever reason, you’re going to start to see things in the deal theoretically that aren’t there in a really bad way. You never want to make a deal work. You’re like, “I’m going to overlook these three things.” It’s cheap. You’re going to get yourself in trouble there. We find that if we’re always in a state of abundance, those things don’t happen.

The last is Afraid. For me, it’s your gut instinct. How are you feeling about it? You’re like, “I don’t know.” Our members are really good on our weekly calls putting in the percentage of how much they’re afraid. They’re like, “I’m 50%. I’m 10%. I’m 90%.” That’s why they’re putting it to us to say, “I need another pair of eyes on this before I move forward. I’m 50% afraid.”

Land Academy Member Question

Each day this week, we’re going to talk about one of these or a couple of these that are similar in detail and apply how Jill and I look at it in our real lives and how we think and hope our members are looking at each potential acquisition coming on. Each day on the show, we answer a question from our Land Academy Member Discord forum and take a deep dive into a land-related topic at your request.

This one is from Jesh. He said, “I’m seeking a JV partner with a 50/50 profit split. I will manage the deal. You’ll bring the funds. It’s 80 acres and they’re 2 adjacent 40-acre parcels in Wisconsin. It’s a buy for $90,000 and sells for $148,000. This property is 60% loan-to-value. It’s non-controversial enough. There’s enough juice to be worthwhile for both JV partners.”

Why is there a 60% loan-to-value?

Did you already borrow it? I hope not. You bring the funds. It’s no loan-to-value.

We’re going to read through this and see where this goes.

He said, “The sell-through rate for this county is strong at 2.35% over the last couple of months. This county is on the south side of a big lake a few minutes from Duluth, Minnesota. This particular property has a great road frontage along the east side of the property and a river frontage along the back side of the property. Drone photos are in the folder. There are a couple of structures on the property, including a garage, a cabin, and an outhouse.

No utilities or utility access. There’s a well. The local agent says the structures are likely tear-downs and has factored them into his evaluation. He walked the property. Someone could salvage them with some work, but other buyers may choose to tear them down. He says that this makes a great hunting property for whitetail deer, bear, grouse, and turkey.

There’s a river running along the back of the property. That also adds value.” You could see his competitive broker’s opinion in the deal. He said, “The lower comps use our wetlands, which is why their value is much lower. All said, the agent said he’s confident the property will sell for $448,000 in 3 to 6 months. Here’s the deal folder. Let me know if you have any questions.”

This is on Discord. We have a sub-channel on the Land Academy Discord channel, which is closed for Land Academy members.

It’s closed to the public.

It’s for Land Academy members. This person posted a deal. They want to find a funder and split it 50/50. This, to me, is very complicated because of the eight As. I want to know what access it has. I want to know what attributes it has. He did a great job covering what attributes it had. A fantastic job on Attributes here. Five stars. I want to know about Affordability. That’s good. He brought a broker out. The broker said it’s going to take 3 to 6 months to sell for X. That’s fantastic. For Alive, we’re not going to be concerned about it. For Abundance and Afraid, it sounds like he’s got some confidence.

In general, this is a deal that I would look at pretty closely. He’s got some of his own terminology in here, like sell-through rate, which I understand. That makes sense to him, and that’s good. He or she probably has some experience. The eight As in this case were gone through. What happened with Jill and me is that we would look at deals forever in a not-organized way.

My point is this. All acquisitions need to be put into a system that you have bought into yourself that makes them comparable. Does this one have Affordability against this one? You could be like, “Property A has much better Affordability than property B, C, and D, so I like it the most so far. For access, It’s got great access,” and on and on.

All acquisitions need to be put into a system that you have bought into yourself that makes them comparable. Share on X

My point is to establish a template for your acquisition criteria and see how it does against the other properties. It’s too easy to have a lot of emotion. That’s what Afraid is for. It was Jill’s idea. Ultimately, put the emotion part of it in number 8 or the 8th A instead of having emotion all over the deal. Establish your acquisition criteria, first of all. Buy for $90,000 and sell for $148,000 in two forties in Wisconsin is not our acquisition criteria, Jill and I for a bunch of reasons. It doesn’t make it right or wrong, but it’s not ours.

I’ve been a professional acquisition person my entire life in one way or the other, both on W-2 and on my own. The first thing I learned the hard way was that when I was representing other people buying nursing homes, it didn’t fit our acquisition criteria. I’d be like, “What’s your acquisition criteria?” and then they would tell me. They would tell me the same thing every single time.

As an independent agent or broker, my first reaction was, “I know you only want to buy 90 beds or more. This is 78 beds. It’s so close. You can bend your acquisition criteria.” That’s what an agent wants. They want to get a deal done. We’re not doing it. This transaction is very far from our acquisition criteria, but I hope this is dead on for this person.

I have major flaws here.

I agree. If I was trying to get money to do a deal, the first thing I would say is, “I’ve done a bunch of deals. This acquisition is badass. It fits my acquisition perfectly with a couple of simple exceptions, and here’s why.”

There are a couple of deal killers I see in there. We can go on. I don’t want to talk about this deal for the whole show.

This is so important. I’ve seen new people not having an acquisition criteria. Jesh, we’re not making fun of you at all. We’re using this as a learning experience. I’m sure that you have raised capital because it looks like a pretty good deal.

The 60% loan-to-value is throwing me. You already have a loan on it and you need the other 40%. I’m guessing that’s the situation. Number one, that’s a flaw for me. I don’t want to be involved with a bunch of people on a deal this small. When it’s a buy for $900,000 and sell for $1.4 million, then I’ll get involved with other people.

I’m driving this point home. You’re exactly right. It doesn’t work for us. We don’t do debt. Jill and I don’t do debt personally and professionally. That’s been a controversy on its own forever. If I went to somebody and was trying to get some money to do a deal, I would say, “Every deal I do has low loan-to-value. Loan-to-value is something that I see as very important. This is why my career is moving forward, to which Jill and I would say as funders, “Congratulations. I’m glad you worked that off for yourself. It doesn’t work for us.”

Can I give you one quick answer?

This doesn’t make it wrong.

Whoever you brought this to said it’s worth 60% of $90,000. I’m going to argue they’re right. They’re only going to loan you 60%. Think about this, everyone. That’s what the purchase price should be. That’s flaw number one right there.

I don’t think he means loan-to-value. He means asset acquisition price to actual value. That’s what I think is going on here.

I thought he had some of the funding already done and he is looking for more money. I can’t even tell on this particular one. My other thing is there are some flaws in, “I can never get utilities.” Meaning, “I got to pay big bucks to get utilities out there.” That’s a huge thing when he says no utilities or utility access.

That’s not how I would phrase that. I would phrase that, and this is how we phrase it, as, “Sewer would be by septic or alternative septic. Congratulations. You’re off the grid. This is a positive thing for a potential buyer. Water would be by well. The water table is 40 to 80 feet as evidenced by wells that are nearby. Power would be by solar. You are off the grid. Your dream can be realized, buyer.” This is why we’re driving this point home to the point of somewhat nausea. You have to have acquisition criteria and a template to see if these deals fit in and the universal terminology. LTV or Loan-To-Value makes Jill and I run away.

Exactly.

Affordable

We’re like, “If you’re buying it for 60% of its actual value, let me hear more. I want to hear this.” In this episode’s topic, we’re going to talk about how to make the eight As work for you and your land business. In this episode, we talk about Affordable.

I love this one. This is my favorite A. You have to have an acquisition criteria. We have that. We have the eight As. Within Land Academy, we give all the members a free CRM template. There’s a free CRM template. They can use it for free through Airtable. It’s all set up for them, and there are the eight As. They put all their deals in on a line and they can go through, add a check, write notes, or however they want to personalize it so they can look at all their deals at the end of the week and go, “What do I want to buy?” They can then see how they compare with the eight As.

My favorite is Affordable, and here’s why. Alive could be a deal killer, so that doesn’t apply. Access could be a deal killer. There are other As like Attribute, Adjacent, Abundance, and Afraid that can be solved by Affordable. That’s why this is one of the biggest and, arguably, my favorite A. I’m doing a coaching or a session. My Land Gals group is going to be meeting. I wrote a whole presentation for them about not negotiating how to do this without lengthy negotiations.

One of the things I put in there is, “You need to come back to the table to your seller with two numbers. Those are the number you want or your goal number to purchase price and your drop dead number of, “I won’t go above period.” That’s your little Affordable range. In this situation, you’re like, “If I could get this for $50,000, I would buy it all day long because I know it’s worth $150,000. If we screw it all up and I sell it for $100,00, we’re doing great.” You have your, “I love it at $50,000. I cannot go above $75,000. I  can’t do it. I don’t feel good about it.”

You come back to the table with those two numbers. That’s how you look at Affordable. When you come back, you do your due diligence. You got a number from the seller anyway. You sent out your offer and they either agreed on it or they didn’t. Whatever it is, you’re going to make sure you still want to buy it at that price. It’s affordable. You come back and it better feel great. If it doesn’t, there are a few things I can say, “$90,000 is not working for me. I’m not feeling good about these three things. I can get it for $50,000.” That’s what you go for. That’s Affordable.

This all starts with what you can sell it for. Is it affordable for the person that you’re selling the property to? Let’s call them the end user. It’s not for you. If you know you can sell a property for $100,000 and that is affordable for the person you’re selling it to because maybe it’s worth $120,000 or $130,000, then you can pay $50,000, $60,000, or whatever you want your profit margin to be. Affordable is one of the easiest ones to figure out.

I agree.

It’s like, “I’ll happily buy it at $50,000. With $60,000 I’m not that excited. $80,000 is my tip top because I can sell it in 3 weeks for $100,000.” That’s the definitive, full-of-confidence statement you should be saying to yourself before you go on to the next day. If it’s not affordable, you can forget about the next seven As. It doesn’t matter.

You may ask, “How do I know if it’s affordable?” Look at Jesh. One of the ways is to get a broker’s opinion. I wouldn’t go with one. I want a couple of guys that are all in agreement. I take the lowest one and then I know I did well. If this guy came in and said I could sell it for $148,000, the next guy said I could sell it for $180,000, and then the 3rd guy said, “I’d sell it for $100,000 or $105,000,” then I would aim for the lowest one. My goal purchase price is $50,000 because I know if I screw it all up and this guy’s right, then I know I’m going to be fine. That’s one way to figure out if it’s affordable.

Another way is simply looking at comps. We look at not just what’s actively for sale in that area and the same size. It’s really easy to look around out there. How long have we been in the business? You for 30 years and me for 15 full-time with you. There are more land comps I can get my hands on. Years ago, we didn’t have them. There was a lot of guessing. There were a lot of, “I think this is what this sold for. I’m not sure.”

There are still some areas that you have to do deductive reasoning, like non-disclosure states, but you can do it. It’s not hard. You have to do a little bit of looking around to figure out if it’s affordable on your own as well. I would do that. I look at not just active, but how many days is it on the market? How many views does it have? You can go, “Here’s one for sale right now at the same price. Move on.” I’d be like, “Hold on. Let’s look and see. Has it been on sale for 3 years or 3 days? How many people looked at it? Is the pricing attracting attention? Is it a good price?”

Look at what sold. Go back three months. Go back six months. Go back twelve months. Is more property moving or is it going down? Look for some trends. Those are things that you learned. That all helps you know that it’s going to move and at what price kind of thing. What sells fast? You’re like, “Look at this.” With this 40-acre property, every 40 acres sold within about 6 months in this area as long as it was priced at this price point and it had this attribute.

Due diligence and these eight As are material, substantial pain points for many people in real estate and in general. I didn’t make these topics up. Our staff did because they got so many questions. What they’re really asking is, “Is this a good deal or not? How do I know?” One of the themes this week will be why Jill and I are, in detail, talking about this. It’s because I want you to establish some confidence. The way that you’re going to go through is learning from us from doing other deals on a Thursday call.

We review real deals from Land Academy members. We say, “This is affordable. Let’s move on,” or, “You can’t get to it.” You need to have some confidence. The reason that they are pain points is because you don’t have the confidence to say, “I’m not going to make $20,000 on this thing and spend this time, money, and risk. I will do it for $100,000,” or whatever your criteria is with conviction.

You brought up the Thursday call. I thought we’d end on this because I haven’t talked about it in a while. There are two things on the Thursday call. We go live for the first 10 to 15 minutes. We’re testing going live with the public to see some of the current events that we talk about before we deep dive into the deals, and then we close up the call. That’s every Thursday. Check that out. You can find it, I’m sure, on YouTube, Facebook, and things like that. You can also send a note to my team via Support@LandacAdemy.com.

If you’re really like, “I want to be on the whole call. Can I get a Zoom invite?” Sure. You can get a one-time Zoom invite and look at those deals again. Send an email to our team and they will hook you up. Join us in the next episode where we talk about Access and Adjacent. The whole topic this week is making the eight As work for you and your land business.

You are not alone in your real estate ambition. We are information and inspiration to buy undervalued property. Share on X

You are not alone in your real estate ambition. We are information and inspiration to buy undervalued property.