Minimizing Acquisition Risk in Micropolitan Markets

Secondary Market Expansion and the Importance of Physical Due Diligence

According to ATTOM Data Solutions, secondary markets are the new frontier for SFR investors. Although the average annual gross rental yield across the US was up slightly from 2018 to 2019, the typical bottom-line gain from county to county “ranged from as high as 29 percent to as little as 3 percent” ¾ a staggering find when comparing potential profit between markets.[1] With that wide of an array, it is no wonder SFR investors are now looking to follow the higher yields and expand their footprint into secondary markets.

 Although these micropolitan areas were previously seen as being too risky due to lower population densities, population migration and urbanized suburbs have sparked new confidence in investors who are intrigued by the possibility of long-term income growth as populations and rental prices in these markets rise over time. Moreover, an increase in data availability, financing, and property management has also helped fuel interest as investors can now try out properties in these less flashy cities while SFRs in saturated markets see the lowest annual gross yields (Fig 1).[2]

With potential earnings higher in these once overlooked markets, it is imperative investors execute an adequate due diligence process and remember the fundamental factors that influence the rate of return when acquiring properties outside their normal market. Thorough due diligence on any property requires the investigation of three broad categories: financial due diligence, legal due diligence, and physical due diligence.[3] With new, highly-marketed technology like online portfolio marketplaces, AVMs, and other record-mining services, it is easy to forget physical due diligence is still a critical pillar that requires actual boots on the ground.

“Physical due diligence is commonly noted as the largest blind spot to real estate investors prior to closing” with many investors waiting until after an offer has been accepted to start the process even though findings directly impact their financial due diligence.[4] Hidden upfront expenses, delayed tenant occupancies, or even subsequent year improvements can quickly affect investment models, lower rates of return, and strain cash-strapped investors. Since a property’s marketing photo or occupancy status can be decieving of its true condition, it is imperative that an inspection be performed on the property prior to purchase. Although it may seem like an extra step (especially if financial numbers seem promising), a third-party inspection can point out necessary repairs and help budget a property’s actual holding costs. Even if a property is occupied, developing roof leaks and other damages steming from issues like occupant neglect are possible and can prove costly during tenant turnovers.

Because of the impact these potential expenses and delays can have on property profitability, investors need to find an experienced field service provider with a network that can perform the required physical due diligence tasks regarless of the property’s location. However, having coverage is not enough for a provider ¾ in an era when photos and reports are easily faked, investors must also find a true partner who has a reputation for data integrity.

It is due to these needs that when researching a field service provider, four main qualifying factors should be considered. They include:

 

  1. Cost– Are service fees in line with industry standards? Does the price for services align with expectations and deliverables?
  2. Capability– Do service offerings satisfy property needs? Does the provider have the capacity to handle cross country properties and/or portfolios of high volume? How can the provider support/demonstrate this? What technologies are in place?
  3. Communication– Is the provider available and responsive in initial conversations and follow up? How are time-sensitive orders and issues handled?
  4. Character– How trustful are the contacts you are dealing with? [5]

Note: It is important that the same questions be asked during the vetting process to each provider to be able to create a true comparative set of operational characteristics.

National field service providers like SGPNow.com, powered by Safeguard Properties, can help investors manage growth into secondary markets by providing their expertise regardless of an investor’s portfolio size. These companies are able to deliver benefits like nationwide coverage, best-in-class technology, and data reliability because of the operational investments made by their parent companies. For instance, SGPNow.com is able to let investors quickly order services from SGPNow.com and have them confidently completed through the vendor network of Safeguard (tapping into its 5,000+ contractor teams that cover all 50 states, Guam, Puerto Rico, and The US Virgin Islands). Additionally, SGPNow.com can also tout industry differentiators like proprietary mobile apps that result in more accurate data due to built-in geolocation QCs and encrypted photo/video-taking capabilities.

With “an estimated 13 million new rental households expected to form by 2030” continued SFR growth in secondary housing markets is inevitable.[6] Investors who are interested in the higher yields of these markets can better pose themselves for expansion by performing the proper due diligence and paying attention to factors that impact profitability. Acquisition risk can be offset by having a trusted field service partner who can perform physical due diligence and estimate a property’s needed expenses.

 

[1] https://www.attomdata.com/news/market-trends/attom-data-solutions-q1-2019-single-family-rental-market-report/

[2] https://www.forbes.com/sites/forbesrealestatecouncil/2019/11/01/where-is-the-new-class-of-investors-buying-single-family-rentals/#23cc7fe66c0f

[3] https://www.whhlaw.com/importance-due-diligence-commercial-real-estate/

[4] https://groundbreaker.co/real-estate-due-diligence-guide/

[5] Raquel Pasala; Director, Client Relations; USRES

[6] https://www.urban.org/sites/default/files/publication/72491/2000491-The-Demographics-of-Demand.pdf