Due diligence generally refers to the care a reasonable person (or company) should take before entering into an agreement or a transaction with another party. When dealing in the arena of private notes, the terms due diligence and underwriting are used interchangeably. To note brokers, it's often seen as the barrier between them and their commission check.
A broker should be the helping hand when an investor is proceeding with due diligence. Too many times the broker sees investor requirements as unnecessary and senseless. They grumble at having to chase down this document or that pay history for the investor. Then again, their only investment in the transaction is a fee that only gets paid when the investor is satisfied the deal passes muster.
Granted, some investors' requirements can seem unrealistic. Getting back to the Golden Rule (He Who Has the Gold Makes the Rules), you can either abide by their processes or take your business elsewhere. You can minimize the headaches caused by the due diligence process by being proactive and doing these things:
· Create a due diligence checklist. Provide this checklist to your note seller once they have agreed to a price and are ready to move forward. This checklist can be customized based on your different investors and their requirements.
· Explain the process to your sellers. Set their expectations early in your communications that due diligence takes time, and no money will trade hands until the investor is completely satisfied there are no 'smoking guns.'
· Bring the seller along with you. Show them you want this deal to close as quickly as they do. Having a common goal and a mutual timeline will prompt them to supply whatever is needed to move closer to the funding table.
· Put the file together yourself. Collect as many items from the due diligence checklist as possible before sending the file to the investor for underwriting. Constantly faxing & e-mailing follow-up documentation creates chaos, and the investor will quickly tire of trying to match everything up with what has already been supplied.
· Respect the investor's decision. It is not your money buying the note. You are in no position to determine what is and isn't reasonable. Besides, having that investor make good underwriting decisions benefits you in the long term, because they're still there to buy your notes two, five, even ten years down the road.
The quality of due diligence is generally the difference between companies that are profitable long-term and those that are flash-in-the-pan; here today, gone tomorrow. Try to see your investors as your partners and not your adversaries. You'll both be the better for it.