Due diligence is one the most complex task in the acquisition of a multifamily, especially when dealing with a large scale building or any type of building located in a hard to analyze submarket.Property Managers (PMs) are real estate professionals specialized in managing properties on behalf of the owner.
Regrettably, the consideration that investors often give to these professionals doesn’t go beyond the scope of managing their Assets. Therefore, during the acquisition process, PMs are often left on the sideline, perhaps voluntarily or by ignorance of what they can bring on the table, especially when probing a property for acquisition .Whether you’re a new or a seasoned commercial investor, it is highly recommended to have PMs as part of your team , even if you’re not ready to buy anything yet, because they’re one of the most valuable assets and contributors to your success in this business for, at least, two important reasons:
1/ Business insiders.
An insider is someone, in a group or in a community that holds valuable information unavailable to the others. In the commercial real Estate ecosystem, PMs are deemed to hold those type of information. Let’s consider leads for example. Because they manage Assets, they know who will be unloading its portfolio very soon , which loan of their portfolio is coming due, which of their properties is underperforming, which owner is going through some kind of financial hardship etc. So, if an investor has the right connection with PMs, these leads will be available to him/her before anyone else.
2/ Markets insiders
PMs have a wealth of skills and information that can be leveraged because they have boots on the ground. Their opinion matters, especially if you’re an out of State investor and relying on a third party to manage your property. A thorough Understanding of the local market can be a critical component of the underwriting process. As Paul Hugh Clitheroe, Australia's best-known financial adviser said: “Before you start trying to work out which direction the property market is headed, you should be aware that there are markets within markets.”
A quick Case Study:
I got up one morning when a fresh deal was waiting for me in my inbox, coming from one of my wholesalers with whom I’ve developed a good working relationship .It was a fully occupied six units apartment located in Maine, When I looked at the numbers, everything was just what I wanted. Right off the bat, I sealed the deal under contract subject to 15 days due diligence. I immediately started a simultaneous deal probing. Meaning that, I started doing Physical, financial, legal and local Market analysis all together in parallel. For the local market part, I called three PMs (local market insiders, as I like to call them) to have conversation and – more importantly as an incentive to cooperate- to offer them the management in case I close on the deal. Usually, when I do this, I ask them to tour the property with a checklist in hand.
After each of them visited the property on separate occasions, they all came back declining to take the job in case I’d have closed on the deal. When I asked why? Well, long story short, their answers came down to two issues:
1/The neighborhood was notorious for being part of the town where it’s hard to find and retain quality tenants.
2/The property was too old with many visible deferred maintenance issues.
Albeit I rusted their feedbacks, I decided to have one last opinion, by calling a local Realtor that deals with Property Management as a side job. He went to the property and came back with the same conclusion. This is what he told me: “Hey Charly, I’d have loved to take the job, but to be honest with you, this is going to be a headache.” This statement was the final bullet that killed the deal for good.
The point here is to shed a light on the power of PMs, by showing how helpful they can be in the decision making process while acquiring a multifamily property. Not only they saved everyone’s time, but also, they helped us to hold on to the inspection’s expenses. The question now is: Did I miss an opportunity or a deal? My answer: It is possible. But it must be reminded that if you’re running your business as it should be, you must have a guideline. Because we don’t mange any of our portfolio, we put a high value on PM’s opinion. In fact, we don’t pull a trigger on any acquisition unless we have found three or four PMs willing to take the management side of the project.
Questions:
1/ Have you (or your business partner) used PMs before in your due diligence? If yes, how was your experience?
2/ Do you think I’ve missed an opportunity in my quick case study? What would you have done differently?
Thank you for spending your precious time to read this article and to share your thoughts.
