Due diligence by definition refers to the investigation carried out by a business or person, before entering into a contract or an agreement with another business or person. It can be useful prior to "going on the contract" and even "post-going" on a contract, during due diligence or feasibility period. Due diligence provides clarity on the deal which you plan to purchase.
There are a lot of moving parts to due diligence; if you do not have a process along with checklist checklist to serve as a guide, you might miss out on some important things and little errors made might end up costing you.
Here are 11 items to check for when performing Due diligence on multifamily properties; you will find included, all important information a checklist should have. Depending on deal size the checklist will have much more items, however these are key ones to check into.
So coming in first on the list is the T12
A T12 is the trailing 12 months of profit and loss statement
The further back you go, the better; the deeper you go, will open your eyes to the necessary details required to decrease the expenses and increase the income. It will give you insight into how the property is being managed.
For some properties, the expenses are higher during the winter months and lower on other courses of the year. The T12 is very important in underwriting because it is expert at sensing and exposing mismanagement.
The second item is the rent-roll.
The rent-roll helps you negotiate rightly and it saves you the stress of future "re-negotiation" which might likely spring up should in case you leave it out of your checklist. A rent-roll showcases the actual rent, address, secure deposit, exact amount on payment, duration of the lease and the utility costs, paid by the residents. This along with T-12 are all that is needed to provide a solid offer from the start to seller.
Attaining all of the leases.
You have to match the rent-roll with the leases to make sure everything fits perfectly. Attaining the leases will also be of help in sensing mismanagement. It might be better to get a team involved; the property manager, financial manager, and others
Service contracts are a necessity because these tend to carry over to new owner. Laundry, landscaping, pest control among others are common.
The Unit inspections
Best to have a property inspector do this with you. The property inspector will make sure the roof is in good conditions by conducting thorough investigations. He will also help to eliminate as many red flags as possible like foundation damage, roof damage and all, so you would not have to shoulder unnecessary expenses. He will also decide what things you have to repair
If you can get the "contractor quotes" before going to contract for specific assets, it will pay off speaking from experience. On a 118 unit I estimated several roofs could be patched to address leaks and after inspections determined all needed to be replaced. The quotes from contractors were 3x the original budget. Had to walk away from the deal. Your construction manager can help you achieve this. These costs will go in your underwriting assumptions.
It has to be done prior to the purchase of the property especially if you are not familiar with the market. You can even go further into the submarket neighborhood for further analysis. You can do this through Google: you simply have to type in the name of the city of interest and assess the graph. One of my favorite sources is areavibes.com
You might want to check other surrounding properties and what they have to offer. Competitor analysis will give you more exposure to what you can do to push your property rents up to or value. You might also check out the rent per square foot.
It is an environmental report to make sure there are no contaminants near the property.
Delinquencies help you determine the rates that are currently old. Although it is managed by the property manager, it will show you "what tenant" is behind "what amount", and what you have to do to collect necessary funds.
It is simply to determine what the median income is—especially if you want to push up the rent. Also, it will help you compare "where your tenants are coming from", to "your property", so that you will be able to build the necessary structures to secure your tenant base.
Demographic Studies help you study the crime in the neighborhood as well because the crime rate, may be indicative of how bad the neighborhood might be for investment. Spotcrime.com is a great source to check crime.
Why don’t you utilize the items on my checklist and give me a feedback on how well they worked?