If you’re looking to invest in a multifamily property in this market, it’s just a fact: Expect to analyze and make offers on multiple properties to find the right fit.
So, having a system in place to do the necessary due diligence will help you not only move faster but also make fewer mistakes. Our multifamily due diligence checklist is your starting point; click below to download now. This is the curated list our commercial team leans on as we help buyers analyze potential multifamily acquisitions, but can serve both buyers and sellers.
We’ve broken the checklist down into six sections: Financial Audit, Rent Roll Audit, Building Inspection, Market Analysis, Legal Audit, and Marketing Audit.
In practice, this checklist would typically be used by a buyer who just put a property under contract. So, using information provided by a seller on an offering memorandum or marketing package, a buyer has run those details through their underwriting model, determined that this deal makes sense, submitted a letter of intent or purchase and sale agreement, and now has the property under contract. At that point, our commercial team uses this checklist to make sure we haven’t forgotten any important items as we move toward closing.
We review two years of income statements, vendor contracts, and various invoices to confirm the numbers we put together before submitting our offer. Quite often, the seller’s financials are inflated or incorrect, and we are looking not only for items that are wrong but line items that have been left off. For example, often the seller performs maintenance or landscaping, or manages the property, and these expenses need to be accounted for.
Rent Roll Audit
Putting a solid rent roll together means reviewing all leases, understanding what delinquencies look like, and making sure we know what prepaid rents and concessions will survive closing. Some lenders require estoppels—and it is not a bad idea to add this to your workflow. Many sellers won’t be familiar with estoppels, and if you plan on using them, you should add them to the purchase and sale agreement as a special stipulation, since they are quite disruptive to tenants and most sellers will not allow you to go door to door to talk to each tenant. See this article on estoppels for a template and background on how to use them.
We will also perform a rent study to understand what competing comparable properties are renting for, which will help you project where your rents should be. Click here for an article on rent studies and how to perform them.
The final step is to interview potential property management companies and select one that can help advise you on rent rates and the local market.
It’s important to thoroughly understand the condition of the property and future maintenance expenses. Roofs, electrical systems, plumbing systems and HVAC systems should all be included. A thorough review of the plat and deed should be performed to understand any easements across the property, the locations of water and sewer lines, and any potential boundary issues. Your lender may require you to have a Phase I environmental report and an appraisal—these items can be time intensive, so make sure they are ordered early in the process. Some municipalities are very strict when it comes to certificates of occupancy, permits and inspections, so ask for copies of past inspections, along with permits for prior work performed.
We could write a book on market analysis, but at a high-level, you just want to make sure you understand the neighborhood and general trends in the market. Are things getting better or worse in this area? Have there been new job announcements in the area?
We review insurance policies and exceptions, as well as five years’ worth of loss runs. It’s a good idea to ask if there are any unrecorded agreements affecting the property, such as neighbors driving across the property or using the dumpster, for example. The seller should disclose any potential lawsuits facing the property at this point. Also, we review the community rules, the lease form itself and the current application form. There may be fair housing issues or blatant errors in the forms, and these should be considered and corrected immediately.
We collect as much information as we can from the seller regarding their current marketing package. This includes floorplans, brochures, logos, and a review of their website and current management system. Often, we find a wide gap between the current rents and what the rent study suggests the market rents should be, and this could be attributed to lack of marketing. You will also want to review the property’s website and confirm that the domain and branding are a part of the sale and included in the contract.
We encourage you to use the checklist on potential deals you’re working on, but if you would like an advisor to help you in the acquisition process from start to finish, email us to schedule a time to discuss a buyer representation assignment with one of our brokers.
That’s it! Please also let us know how we can improve our process in the comments below. Are there any items we’ve left off the checklist? What are the biggest mistakes you’ve made in the past that could have been solved with one of these bullet points?
Copyright (c)2021 | This post originally appeared in Jonathan Aceves’s blog and is republished with permission.