Multifamily property due diligence is a critical task that involves much more than simply checking the condition of the property and comparing local rents. If completed correctly, the process will provide the information needed to make a prudent purchase decision, to mitigate post purchase risk, and increase post purchase cash flow and profits.

Useful due diligence should provide information about the market, submarket, the property, the current tenants, and local demographics (considering future tenant make up potential).

Market

For the broad market, due diligence should provide:

• Breakdown of employment including the major employers,
• Broad demographic averages of:

1. Race,
2. Sex,
3. Age, and
4. Income,

• Market growth over two decennials
• Infrastructure factors
• Entertainment
• Identify property management companies active in the market, their fees, and their actual operations delivery.

Submarket

• Major local employers;
• Crime;
• Schools (demographics, scores, news, condition of facilities);
• Surrounding neighborhoods (reviewed and various  times of day and weekday and weekend);
• Entertainment;
• Shopping;
• Restaurants;
• Competing properties:

1. Visit the competitors and collect their hours, rates, collateral, visit units, and identify amenities.
2. Coorelate property age, rents and revenues
3. Find out occupancies
4. Observe the closes competitors at various times of day on a Thursday, Friday, and Saturday (principally to identify demographics and to verify occupancy claims and to correct occupancy assumption if observations illustrate different conditions); and

• Infrastructure

Property

• Punchlist by unit, building, common area facilities, streets and parking, lighting, landscaping, and a walkover of the grounds for drainage, fence conditions, retaining wall conditions, etc.
• Plumbing review:

1. Type of plumbing
2. Waterheater conditions
3. Metering
4. Grounds leaks
5. Other leakage and water damage issues

• Electrical review

1. Per unit amps
2. Metering
3. Aluminum or copper

• Gas Review (if applicable) – Metering

• Office review

• Photos of all the above and photos that show:

1. Highlights of units,
2. Grounds highlights,
3. Property highlights,
4. Property “opportunities” (unused land or opportunity layouts)
5. Current office highlight,
6. Signage,
7. Property issues and repair requirements with clear association to notes

Tenants

• Review the rent roll and identify delinquent rent by unit.
• Review rent roll versus received revenue
• Past tenant issues
• Inspection of property conditions and tenant activity for all units on a Thursday, Friday, and Saturday including review of mid morning, mid afternoon, early  evening, and late evening (9pm or later).  Issues should be tied as closely to specific units as possible.
• A sex offenders search on the property and surrounding addresses
• Auto conditions in the parking lots
• Observations about ethnicity, age, race, and employment from inspections, the rent roll, and discussion with the property manager

Local Demographics (Property Zipcode)

• Age,
• Sex,
• Income, and
• Race

These items should be reduced to a report that identifies information in a format that:

• Identifies issues and mitigation suggestions for physical factors,
• Identifies revenue expectations as is and opportunities,
• Provides the information to provide a rent up plan based on the buyer’s intended operation and/or improvement of the property

With these items in hand, the new purchaser is positioned to operationally and financially minimize risk and to maximize their expected return.

Good luck and good buying.

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Related posts:

1. Price, Amenities, Property Condition, and Social Condition
2. What are the three legs of Apartment Leasing?
3. Deflation – Apartment Marketing and Operations
4. High Density Renting
5. Site Inspections

This entry was posted on Wednesday, September 9th, 2009 at 8:51 am and is filed under Apartment Acquisitions, Apartment Evaluation, Apartment Purchases, Due Diligence, Market Analysis, Property Inspection, Rent Roll Analysis, Rent Up Plans, Tenant Evaluation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.