Important Things You Need to Know About the Due Diligence Phase in Multifamily RE

Posted on Mar 23 2016 - 10:59pm by Lance Edwards
Lance Edwards. President, First Cornerstone Group, LLC.

Lance Edwards, President, First Cornerstone Group, LLC.

During the due diligence period of the contract on a multifamily property, you are doing a financial inspection and a physical inspection. Some lenders require an environmental inspection as well. During this important phase of the contract, you will need to request and inspect the rent roll of the property, copies of all current leases and the inventory of personal property. There are some important items to keep in mind during the due diligence phase.

The due diligence period is also known as the feasibility period. In this section of the contract, you state the length of time that you need for due diligence. You may have a statement such as the following, “buyer may terminate this contract for any reason within 45 days after the effective date by providing seller written notice to terminate”. You can ask for anything but 45 days is typical. If you have a dilapidated property, you can ask for more time.

It is very important that you have a coach or an attorney when completing your contract and going through each of the due diligence items. You also want to hire an inspector to inspect the property and flag any items that need attention as a part of the physical inspection.

You may stipulate in the contract that the seller has 10 days to provide you with rent roll, leases and inventory. These items are necessary for the financial inspection of the property. You want to check out the financial statements as well.

You’ll look at whatever financials they send to you in the context of how you can improve the situation. So you play “what if”. If the occupancy went from 72% to 85% how would I increase my cap rate? If it went to 95% how would it increase my cap rate? How would I run this property today to make it a real winner? You’re doing that by wearing your asset manager goggles.

Brokers will typically have this information ready for you. There may be things they don’t have but you want to ask for everything because this is where you make sure that you understand what you are getting into.

It is becoming more and more common for lenders to require the environmental inspection. Basically, this is where ground samples are taken from around the property. It actually is beneficial because it can protect you in case there are any underlying problems discovered.

The due diligence phase of a contract really allows you to examine every aspect of your multifamily deal. Do not try to take shortcuts and neglect any aspect of the due diligence phase. Your ability to analyze the information from the physical inspection and the financial inspection can greatly assist you in making money on your multifamily deal.