Due Diligence for Income Producing Properties
Whether you are buying a single family house, multifamily buildings or commercial properties, the Due Diligence process is a necessary part of acquiring real estate. Whether you’re managing them yourself or having someone else do it for you, you must take the time to research the property thoroughly. When you do your due diligence, you must take into consideration all of the different aspects and requirements that come with this investment. Keep in mind that if you don’t complete these extra steps, no one is going to do it for you. Cavat Empeter (buyer beware).
It is essential to have your management team accompany you through the Due Diligence process. They should understand their target market regarding the quality of tenants, the renter’s lifestyles, competitor’s properties, the housing market conditions, and potential for increased value or income. As you go through the property with them, discuss what your goals are and make sure that you both have the same end game in mind.
Physical inspection should be completed by a professional home inspector, a licensed contractor, an engineer or an architect. Due Diligence is the time to find out anything that is structurally right or wrong with the property.
Go to your city building zoning department and make sure the building has proper building permits for the use stated in the purchase agreement as well as a certificate of occupancy or zoning compliance letters. Never assume a four unit building is approved for that use simply because it has four electric and four gas meters. Avoid illegal apartments. By investigating these avenues, it will give us a realistic perception of the buildings legal usage.
Be familiar with local laws regarding properties that are greater than two stories. This falls into what we call the multiple residence law (MRL). These laws govern buildings such as mixed use properties or multi family, where you might have commercial on the first floor and residential on the second and third floor. There are very comprehensive sets of rules put in place to protect fire safety and entrances and exits. Make sure that the units are in compliance with state and local laws.
Anytime there is oil, hazards or waste, a Phase One Environmental Inspection is always recommended. This procedure will allow for any issues regarding environmental matters to be addressed. These take a long time so you will want to make sure you give yourself enough time for the due diligence period.
Leases and Applications
Review all rent roles and records for all existing tenants. Verify that leases are signed by both the landlord and the tenant keeping the expiration of those leases in mind. Verify all security deposits with seller’s records. Make sure you get certified rent roles and estoppel certificates signed at closing as well.
All maintenance contracts such as lawn, snow, elevator, pest, trash, security, and any other maintenance contracts should be verified. Gas, electric, sewer, water, cable and any other utility bills should be verified as well.
During the Property Management and Cash Flow training we spend a lot of time going over due diligence. We do this to prevent people from losing thousands of dollars in lawsuits when deals fall apart right before the closing. Due diligence is the time to renegotiate any issues that might occur during the inspection period regarding your purchase. In closing, understand everyone’s roles and deliver consistently each and every time.
Rich Dad Education Elite Training Property Management Course Instructor