MF Acquistion-What are the most important items on your due diligence list?

Question

While discussing multifamily investing, the question was asked what are the most important issues when doing due diligence.  When we analyze potential deals we look at:
*Last 3 yrs financial statements, occupancy, concessions.  
*We do market surveys(actual visits as a "potential renter")  on competing complexes to see what the potential market rents and occupancy we could achieve.  
*Make the contract subject to an acceptable property condition report.  Determine what deferred maintenance and improvements are necessary to achieve our targeted market rents.
*Create our projections based on the above information to determine loan amount and sales price.

What am I missing?

Rich Weese · Answer

Tod- I want to know about the rents. i want to see the rent rolls, discrepancies in rents on comparable units in same complex. I also don't want to be surprised with longer than normal leases so as to not be handcuffed on increases. I also need to know if tenants are on any sort of locked in subsidized rents. That also limits your increases.

I also want to really check out the mgmt. If they've been lousy in tenant relationships and rent collections, I have a problem going forth. Also, I want to hear from the tenants about repairs and attention to problems by mgmt.
    Those are 2 areas that can cost you a lot in your future proforma. Good luck. Rich.

Tod R. · Answer

I definitely agree to use current market rents in your due dil, not projected market, when determining value.  You should look back,however, for clues to potential problems in operating expenses as well as rents/occupancy.  It's eaiser to hide deferred maintenance, utilities issues, for just one year compared to a three year time period.  Historical occupancy and rates vs. market also provide clues to potential mismanagement or any desirablity issues of this property vs competition (amenities, deferred maintenance, outdated units, etc).

Dion DePaoli · Answer

I think you may be think of the initial set of information, regarding why a seller will not provided information.  When a deal hits the market initially there is no real standard to data provided, unfortunately.  I would always ask to see as much information as possible without having to get serious about the deal, however sometimes sellers and their agents want that serious engagement before releasing some data.

If a seller can not issue rent rolls, which is a standard document, then I would run as they are clearly playing games or simply are not the owner of the property.

Regarding property targets.  I think there is good potential in B and C class stuff in most markets.  Most of the A grade stuff goes into institutional guys and really is not much of an upside as they drive the price up.  I personally have not seen too much D class stuff that I thought was really worth pursuit once everything was taken into consideration.

I agree with the above statement to use the current numbers when evaluating the deal.  The property is only worth what it is worth today, why would you speculate into the future and give your upside to the seller?  I see banks do this like clock work.  They try to push a future value based on some stabilized occupancy and rental stream.  I see the same in some of the appraisals folks get on these distressed projects too, where the appraiser used a proforma to come up with a value based on cash flow.

Be strong in your skin and know that the value is the current value today based on the current numbers today.

Iman Yusef-Yahya · Answer

I agree with Rich. I'd to add that I want to review the leases and see which months have the greatest exposure.

Michael Stuart · Answer

[/i]*Create our projections based on the above information to determine loan amount and sales price.[i]

IMO: If you base your offer on your projections, you'll likely be overpaying.  Current owners see the current numbers, negotiate with those.  If you find foreseeable increases in revenue streams, obviously keep that information to yourself.  Otherwise, they might not be as motivated to sell.

Tod R. · Answer

One thing we have seen on a few deals is that the seller sets up "corporate" leases that is related to him in order to boost rental income and occupancy.  I would be a little cautious on multiple leases to tenants other than individuals.

Mehran K. · Answer

Just wanted to say thanks for everyone's input on this thread. I'm studying and doing research on how to do my due diligence one my first residential MFH acquisition this year and this thread is awesome!

Michael D. · Answer

Make sure that you review all the leases carefully (even on 50-units).

Take a note of anything that the landlord is paying for tenants, and then get statements of those costs going back at least 3-6 months.

I learned the hard way recently that the water I would be paying for tenants came to $600/mo, rather than the $200-300 per month I was told be the seller.

Just Don · Answer

i guess I am nuts and bolts type guy.  I would 'look' at the heat/furnace efficency,water heaters type size and location,,gas supply,,electrical (very closely).

Generally older units have dated equipment,,,generally replaceable at a cost,,,but cost is cost.  And some cant be changed. Do they have ac?appliances and their condition.

Doors and windows a standard sizes where replacement isnt major rehab.  Roof walls and foundation secure.

YOU can change rent rolls more easily than replacing electric systems,,,say knob and tube,,,or even ungrounded,,,not an easy task in say masonry construction.

BIGGEST issue,,does it meet all building regs,,,if there is a minor fire even, a small incident and they red tag the building its a bad deal.  Had a building condemned once because tenant called city and asked how to get rid of a garder snake on sidewalk,,,I kid you not.

Al Williamson · Answer

Nice thread!

MF Acquistion-What are the most important items on your due diligence list?

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