14 Steps to Multifamily Acquisition - Step #9 Due Diligence
Introduction
As multifamily syndication experts, our firm, Groundswell Assets, has developed a rigorous and thorough due diligence process to ensure that our investors' money is protected and that our business plan can be successfully executed.
In this piece, I'll discuss the process of due diligence. We've gone over analysis and writing offers. Due diligence is simply the process of digging into the deal to make sure we have a thorough understanding of whether or not our assumptions can be executed accurately. The process starts before we've made an offer. It starts with our analysis and runs through closing on the deal.
Primarily, when we talk about due diligence, physical inspections are what come to mind. During this process, there are multiple things we will do to make sure the property is an asset we want to add to our portfolio and that it will meet our criteria to make favorable returns for our investment partners. Ultimately, this is the process that we begin to protect our partners’ capital before they invest in our deal.
In Step #2 “Build Your Team” We discussed all the members you will need to get this inspection done. Make sure you have them all lined up and ready to go!
Step 1: Financials
The first step in due diligence is to review the property's financial statements, including the trailing 12 months of income and expenses, copies of leases, current rent roll, and capital expenditures in the last 24-36 months. This will give us a better understanding of the property's cash flow and help us identify any potential issues with the leases or expenses.
We also perform a financial analysis to determine the property's potential for income growth and expense reduction. This analysis includes a review of market rents and a comparison of the property's performance to similar properties in the area. We also analyze the property's historical vacancy rates and occupancy rates to identify any potential issues.
Step 2: Lease Audit
Our property management team conducts a full lease audit to verify the accuracy of lease information provided, validate rent rolls, confirm occupancy, and identify any discrepancies. This ensures that the leases are accurately represented in the financial statements and that the property is generating the expected rental income.
Step 3: Neighborhood Analysis
We conduct a thorough analysis of the neighborhood surrounding the property. This includes looking at crime rates, the proximity of businesses, and other multifamily properties in the area. We also secret shop other apartments in the area to compare finishes and amenities. This analysis helps us determine the property's competitive position in the market and identify any potential issues that may affect its performance.
Step 4: Physical Inspections
We conduct a comprehensive physical inspection of the property, including the roof, HVAC and other mechanical systems, pool, foundation, plumbing, lighting, and any other potential hazards. We also walk through every unit, looking for signs of building damage, mold, or any other issues. This helps us identify any potential maintenance or repair issues that may affect the property's performance.
Step 5: Photos
We take photos of every aspect of the property to document any issues and to have a reference point for future inspections. These photos are also shared with our investors to keep them informed of the property's condition.
Step 6: Utilities
We review utility bills for the last 12 months to ensure that they are accurate and to identify any potential issues. This analysis helps us identify any inefficiencies in the property's systems and determine if there are any opportunities to reduce expenses.
Step 7: Grounds and Parking Lot
We inspect the grounds and parking lot, looking for any issues with landscaping, maintenance, or security. This helps us ensure that the property is well-maintained and that residents are satisfied with the living environment.
Step 8: Lead Paint or Other Hazards
We check for any lead paint or other potential hazards that may pose a risk to residents. This analysis helps us ensure that the property is safe for residents and that there are no potential or glaringly obvious health risks.
Step 9: Stress Test
We perform stress tests on our underwriting assumptions to see how the deal would perform under different scenarios, such as a vacancy or rent decrease. This analysis helps us determine the property's resilience and identify any potential risks that may affect its performance.
Step 10: Legal and Regulatory Compliance
We review any legal and regulatory compliance issues related to the property, including zoning laws, building codes, and any pending litigation. This analysis helps us ensure that the property is in compliance with all relevant laws and regulations and that there are no potential liabilities that may affect its performance.
Step 11: Negotiation and Closing
After completing the due diligence process, negotiating the final terms and closing on the deal are the next crucial steps in the multifamily acquisition process.
Negotiation is an important aspect of the process, as it involves finalizing the terms of the purchase agreement, including the purchase price, closing date, and any contingencies. Contingencies can include items such as the seller providing clear title to the property, resolving any issues identified during the due diligence process, or meeting certain financing conditions.
During the negotiation phase, the buyer and seller may go back and forth, negotiating the terms until they come to an agreement that satisfies both parties. As you read last week about Negotiating the Contract, the final purchase agreement will be drafted and signed by both parties, outlining the terms of the sale.
Closing typically involves a series of steps, including the transfer of funds and the transfer of ownership of the property. The closing process can take several weeks, and the exact steps will vary depending on the jurisdiction and the specifics of the transaction.
The buyer will need to arrange financing and insurance for the property, and the seller will need to prepare all the necessary documentation to transfer ownership. A title company or an attorney will typically handle the closing process, ensuring that all the necessary legal and financial requirements are met.
At closing, the buyer will typically bring a cashier's check or wire transfer to cover the purchase price and any closing costs. The seller will transfer ownership of the property to the buyer, and the buyer will take possession of the property.
Closing on a multifamily acquisition can be a complex process, involving a variety of legal and financial considerations. It is important to work with experienced professionals, such as real estate attorneys, title companies, and lenders, to ensure that the process goes smoothly and that all parties are protected. By carefully negotiating the terms of the purchase agreement and completing a thorough due diligence process, investors can ensure that they are making a sound investment in a multifamily property that will provide them with a steady stream of income for years to come.
Conclusion
Ultimately, due diligence is the point in the show that we are deciding to move forward or withdraw and protect our investors money. It is our thorough risk assessment process to make sure our business plan can be achieved successfully.
Join Us
At Groundswell Assets, our team is passionate about supporting our partners in achieving their financial goals through multifamily real estate investing. We recognize the significance of making informed decisions and identifying investment opportunities that provide exceptional returns. This is why we are dedicated to delivering unparalleled investment opportunities and expert guidance to our partners.
We strongly believe that multifamily real estate investing is an influential tool for those seeking to expand their wealth and establish financial stability for their future. With our access to exceptional deals, extensive industry expertise, and unwavering commitment to producing results, we are confident that we can help you accomplish your investment objectives.
If you're ready to take control of your financial future and join the ranks of savvy investors, drop us a line. We are standing by, ready to help you make the most of this exciting investment opportunity. Don't wait - secure your financial future by investing along with us now.
