8 unit under contract! Due Diligence advice?

[Scott Hensley]

Hey BP!

I now have an 8 unit property under contract in North Carolina. This is my first commercial purchase and first multi-family.

I would like to hear from the community any advice, tips, or lessons learned for the due diligence process that will help make this process successful.

As always, thank you so much for your support!

[David Monroe]

Some of the comment above are really good, especially on hiring Experts to look at the mechanicals, electrical and roof.

Here's what I do for every property I invest or broker:

• Hire the experts for the mechanicals, electrical, roof and foundation.
• get 3 years of P&L, since this is a small property the owner probably doesn't have a P&L, ask for his schedule C tax returns, the bank is going to want to see them anyway.
• Current rent roll. If things copacetic, that should be enough, otherwise ask for the last 12 months of rent rolls. Again, small property owner may not have a rent roll...
• ...In which case create one yourself from the leases, and last 12 months of rent receipts. Make sure you look at the move-in date, lease expiration, and tenant deposits. Create a balance of rent owed from the rental receipts.
• DO NOT INTERVIEW THE TENANTS! If you want to piss of the owner, go ahead. This works in your benefit as well. If the tenants think the property is for sale, they will move out for fear of rising rents. The numbers will tell the story on who's naughty and who's nice.
• Interview the fire inspector and chief building inspector to ensure the property has no outstanding violations. If possible get a meeting with planning commission to find out what the master plan is for the immediate area.
• Get a survey, phase I and possibly II environmental, and if the lender requires a third party condition assessment, for God's sake DO NOT hire a local property inspector, no cares if the linoleum in the kitchen of unit C2 is pealing in the corner. Hire a firm that will do property condition assessment, PCA, and the phase I and II environmental inspection. They will only walk 10% of the units. so you will need to walk the rest with your team of professionals.
• Walk EVERY unit. For occupied units, apologize and thank the tenant for allowing to inspect their apartment, be very kind and DO NOT dig under sinks or open closets. Be respectful for their time. You will get an idea of the condition from the vacant units.
• Get a copy of any insurance loss reports from the last 3 years. This will be required by your insurer and give you an idea if there was a fire, flood, wind damage, etc.
• Find the rent and sold comps for the property and WALK THEM! Act as if you're looking for an apartment. See what the condition of the units are in compared to the subject and see if you have room for updates and rent increases based on the comps.
• Get your personal financial statement together for all the managing members of the LLC, and all the financials and tax returns from the property, to include your proforma and summary of operations, because the lender is going to require them for their underwriting.
• Look at the local demographics and make sure the tenants in the market can afford any rent bumps you have planned. This can be done by pulling a per capita income report for the immediate area. As a property manager you want the tenant to have at least 3 times the monthly income of your proposed rent. Per capita income will tell you the average annual income for the trade area per employee. This is an advanced strategy not many people use, and it has bit them when they couldn't get their rent bumps they projected.
• Pull a flood plain report and make sure the property isn't in a flood zone. It's OK if it is but you will need an elevation certification before you can get it insured.
• Look at all the vendor contracts, especially laundry. You want to look for areas you can save money and any contracts that may be hard to get out of. You will hear that it's impossible to get out of a laundry contract. It's not true. The owner of the property, or LLC, is the holder of the contract, not the property. When you take title, unless you assume the owners LLC, the contact is no longer valid for the property. Disclaimer - Consult with an attorney in your state to verify this statement.
• If you aren't going to manage the property start interviewing management companies. The lender is going to want to know who is going to operate the property.
• If you're going to rehab the property, start getting contractors in and getting quoted on the repairs so you can properly budget for the rehab and be  more accurate on your proforma, especially if you have investors.
• If you're seeking private investors, and it's more than just a couple of friend or colleagues, you need to hire a SEC attorney to draw up the disclosures, PPM and operating agreement for the property.
• Stet up and register your LLC. You will need to have it done before closing so you can take title in the name of the LLC, if that's the route your going. If your taking title in your name, disregard.

OK, that's enough for now. If you have any questions, please don't hesitate to ask.