Inside the Multifamily Due Diligence Process: The Essentials That Protect Your Investment

Over the last few years, we’ve heard from friends and colleagues who were desperate to buy a house but faced the ever-growing competition of the housing market, and either contemplated or moved forward with an offer on the house, site-unseen, or once under contract, bypassed the inspection process to close the deal quickly. The desire to have THAT house was stronger than the risk of buying a home that may have significant structural issues or major appliances that would need repair. This is not inherently a terrible idea, if you have the right mindset going into the home and can plan for costly repairs that may come up.

As syndicators in the multifamily real estate market, we consider the benefits and risks of purchasing a property in a much different way. We want to know every potential issue, all the strong qualities of the property, and how we can build our business plan around both of those criteria. Enter the Due Diligence Process of an investment. As a potential investor in a multifamily property, you should be confident that the GP Team has thoroughly examined the property physically as well as financially and has a plan to address all potential problems through the life of the deal. Let’s break down a few of the top things we investigate once in the Due Diligence window, before we bring a deal to you for consideration:

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Physical

-          Observe Each Unit: An extensive part of the due diligence process is observing every unit and generating a condition report to address all observable issues.

-          Observe Property Grounds: A similar condition assessment is created for the exterior of the property.  Observing or inspecting conditions like Roofing, Decks, Stairways, Landscaping, Fencing, Ancillary Structures, Outdoor Amenities (grills, firepits, pools, etc) and more are imperative for assuring accuracy of the business plan.

-          Equipment and Maintenance: Knowing how the HVAC, plumbing (water, sewer, etc.), and electrical systems are functioning is essential, as well as conservatively anticipating repairs or replacement of these systems within the business plan.

-          Audit Maintenance History: Additionally, reviewing the maintenance requests that have been submitted by tenants, as well as how they were completed will illuminate issues to dig into further and have a detailed understanding of. Does a roof in one unit continue to leak despite repairs? Is there high turnover in one unit but the current owners do not disclose why? Physical issues with that unit may be the reason!

-          Renovations and permits: As we investigate each unit, we will develop a plan for renovations within our plan. We engage with the city/local code requirements and laws to ensure any renovations are properly permitted and completed to those standards. We will also anticipate how renovations will impact lease turnover and vacancies, so our investors understand anticipated returns with conservative expectations.

-          Property and Estate Audit: Each of the following details of the property are also imperative to review and often times track down: Zoning Status, Existing Survey, Title Search, Deed, Elevation Certificate, FEMA Floor Map Assessment, relevant Bonds/Warranties, Appraisals, prior existing Permits/Inspections, City/County Code Issues, and Five Years Insurance archive of Loss Runs.

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Financial

-          Rent Rolls and Lease Agreements: We go through the entire rent roll as well as every lease agreement to understand current state, as well as plan for future vacancies and how we will complete renovations without disrupting tenants.

-          Legal Analysis: It is critical that we know any previous or ongoing lawsuits the management company or current owners are involved in, as well as any insurance claims that have been filed.

-          Debt and Loan details: We partner with legal resources to understand the debt terms, interest rates, and penalties for prepayment. We build all these factors into our business plan to ensure success in the investment.

-          Cash Flow and Income Statements: Depending on the current owners and management company (or lack thereof), the income and expenses may not add up. It is our job to understand why and determine if the investment will net positive results or if there is a glaring risk.

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During the Due Diligence window of time, we, alongside our GP team are on site with the inspectors working through all the above, and much more! When we present an investment opportunity to you, this summary will help you understand the extents of quality assurance we exercise on each deal.  Through proper planning, strategic and proactive due diligence, and risk assessment our goal is to always deliver value for your portfolio!

Don’t forget to reach out with any questions and schedule an appointment with our team to join our exclusive investment partners. 

God bless!