Before officially closing the sale of an apartment complex, it’s crucial to be familiar with due diligence items. One thing’s for sure, conducting due diligence is one thing in the buying process that syndicators wouldn’t want to ignore.
Due diligence can be a pain to some, but it’s a bitter pill you will need to take. You won’t like the taste, but it’s better for you!
That being said, conducting due diligence is necessary in making sure you land a deal that’s favorable to you. A large part of it involves getting to know more about an apartment complex and using the information you have to make better price arrangements.
When it comes to getting the most value out of a multifamily investment property, it’s important to approach the due diligence stage with an eye for detail.
Here are the five due diligence items you MUST have in your checklist.
Seller’s Property Disclosure
The seller of an apartment complex should do their part of the due diligence by preparing and signing a property disclosure. This particular document lists down issues or flaws in the property. In any real estate deal, transparency is something you wouldn’t want to throw out the window, so a disclosure ensures that the transaction between you and the seller is made in good faith.
Although negligible to some, a disclosure statement is actually mandated by law in some states. Usually, sellers are required to make a disclosure within a 14-day period. During such time, buyers can opt to hire a third-party inspector to examine the property more closely. Make sure to inspect all the units in a property and not just samples of it. Inspect 100% of the units along with the drainage/sewer lines, foundation, roofs, and HVAC.
Has the property ever experienced delinquent renters? You need to know.
A renter delinquency report is important in that it helps you determine the monthly or quarterly income of an apartment complex. In effect, it provides you an idea on what the cash flow would look like once you have purchased the property. Moreover, it enables you to create an effective strategy for managing the property.
How many units does the property have? How many are occupied as of the conduct of due diligence?
A rent roll is typically a list of the units that are currently in use. It includes information about the tenants themselves along with their status and the rates they payout on a regular basis.
But why do you need to know anyway? Just like a rent delinquency report, a rent roll is crucial to managing a property. It helps you determine the right approaches in keeping tenants happy and ensuring that they pay rent on time.
The property might have hired contractors for making improvements to the property. Other contracted services such as pest extermination and housekeeping should also be presented by the seller.
The information you get from these disclosed contracts can help you in determining the final price for the property.
How much does the property make from rent and value-adding components?
By looking at the income statement of the property, you obtain an informative view of the cash flow you will be getting. In fact, in determining metrics such as the cap rate and, later, the NOI of the property, you will need to know how much income it can generate and how much of the revenue goes to operating expenses.