LOI Underwriting / Due Diligence
How much time/effort do you guys spend underwriting a typical acquisition, assuming there are no major issues (i.e. environmental contamination, etc.), before submitting an LOI compared to your post-DD underwriting? Let's keep this discussion to as is income producing acquisitions, not development since I'm not in that space.
I know this is a broad question and answers will depend on the deal, but I'm just trying to understand how much effort other put into uw'ing prior to getting access to all the DD materials.
I would say that my team's underwriting used to make an offer is nearly as detailed as we can get considering the limited DD material available to us and without spending money on consultants (although we often call a contractor to get a rough estimate on any meaningful capex items we saw during the tour). Is this pretty standard?
Idk whether my firm's approach is overkill, but it's bc my manager is super adamant about not retrading on things we could've/should've known about. I can appreciate his philosophy, especially if I were a seller/broker, but it seems like not everyone else is putting in that much effort until they have control.
Based on the most helpful WSO content, the level of effort and detail put into underwriting before submitting a Letter of Intent (LOI) can vary significantly depending on the firm's philosophy, deal type, and available resources. Here's a breakdown of the general approach:
Pre-LOI Underwriting Effort:
Post-LOI Due Diligence:
Standard Practices:
Philosophical Differences:
In summary, your firm's approach of detailed pre-LOI underwriting is a best practice for maintaining credibility and minimizing retrading, though it may require more upfront effort. This philosophy is particularly valued in competitive markets where reputation matters.
Sources: Overview of Sell-Side M&A, Overview of Sell-Side M&A, Life in Acquisitions (Analyst/Associate), Advice for New Analysts Seeking PE Exits
This is an interesting topic. I don’t think my feedback is relevant here since I’m a note buyer but we honestly don’t do much. We aren’t able to do third party reports really and sometimes you just need to make best guesses. Financials and rent rolls sometimes aren’t truthful so property visits are necessary. But for an LOI or first round, we just do a rough UW and chuck a # in that is probably on the conservative side. For best and final we will visit because 1) we need to see the asset 2) a seller wont give it to you if you haven’t seen it
It depends on the state of the market. There was a time where you could wet your finger and feel the wind to know if a deal would work. Hell, there was a time that you didn’t even need to do that.
Right now? You probably want to do as much diligence as possible.
I'm from the standpoint you want your LOI to actually hold value. As such you should have at least toured/shopped the deal and have a model going on it.
I am a data center developer that also invests in small multifamily (2-10 units) in the greater DC/Baltimore/Richmond area on the side.
For my side investing, I know these areas pretty well. I have a well-defined investment standard (that is incredibly conservative where sometimes I am amazed at how many opportunities actually pencil out). It generally takes me ~1 hour of "desktop" work and 1 site visit to get to an LOI. I can tell pretty quickly if something is worth my time or not. I will fully diligence once we get a signed LOI, but for these types of deals, there really isn't that much diligence that is needed.
Hi jl12 just want to thank you for keep posting here, your words has given me many insights!
May I ask what advice would you give to people start their first job in a debt fund focus on core+ / value-add lending? I found lending less interesting than REPE / Operating, but this is the best opportunity I have so...
Thanks in advance for anything!
For me it depends on the purpose. Am I trying to actually compete? Then I spend a lot of time going over the information I have and tour the site before I paper an LOI. Probably 5-6 hours of underwriting and market research to ensure all my assumptions are sound.
Then other times I'll just lob LOIs to get on bid sheets knowing its overpriced, and wait for the market to speak to the seller - and hope brokers reach back out to interested parties after the seller has lowered expectations.
I’ve worked at both ends of the spectrum. One institutional place required sub-IC approval of a third party reviewed model to submit LOI. Another place let everyone VP and above submit LOIs without approval. Different strokes for different folks. Higher kill rate at the first place, but a lot less volume.
I think some level of verification behind the LOI provides credibility. I hated the spraying LOI approach - brokers were divided on it (some loved getting more bids, others just assumed we were never real).
Finding out where the cutoff will be is key. I hated doing a whole process to find out we were way off the mark, though that was less embarrassing that over promising in the first round only to back out.
Yeah this is pretty standard, not overkill. I'm from resi/hotel development side. We're basically in the same boat so pre-LOI model is like 80% there, we're just missing real financials/rent roll and whatever the DD reports turn up (PCA, environmental, etc). We'll always get a GC out for a walk if there's obvious capex, same as you.
Post-DD is really just "swap in real numbers", actual trailing financials instead of broker-normalized ones, verified rent roll, PIP/PCA scope instead of eyeballing it.
Your manager's instinct is right imo, some shops intentionally lowball effort pre-LOI knowing they'll "true up" (aka retrade) during DD. Works fine until you're dealing with a broker/seller who remembers you did that last time. Tighter underwriting up front just means fewer surprises although it is a little slower. You'll lose the odd deal to someone willing to bid loose and fix it later, but that's a fine tradeoff (depending on the market). When market is more fast-paced it will be a more back of the envelope to gauge if initial numbers work and then dial it in while speaking to the broker.
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