If you have been in the industry for a while, you’ve heard at least a few due diligence horror stories. From discovering extensive mold (or as some call it "organic growth") in units to uncovering community-wide termite damage, it’s pretty easy to see the value in conducting a thorough due diligence. It helps ensure you’re maximizing your investment and adequately prepared for the takeover.
While the ideal due diligence fully assesses property conditions, compares all active leases, identifies necessary renovations, and analyzes expenditures, these things can often be overlooked due to lack of time, human error, and paper-based processes. That’s why you’ll want to streamline your due diligence with this easy-to-use checklist.
With it, you can make sure that you not only keep your inspection schedule on track, but also have an upper hand in negotiating the terms of the transaction.
- Inspect the property on your iPad or tablet in 75% less time.
Conducting your inspection on traditional pen and paper is manual and time consuming. Leverage technology to get ahead and streamline the process. Apps, like InfoTycoon, enable your team to take photos, document conditions, and flag items, all in an intuitive and user-friendly platform. Carol Winfrey, Director of Due Diligence at Lincoln Property Company, says InfoTycoon has transformed the way her team conducts due diligence inspections.
“I've been utilizing InfoTycoon for the past year and my work life has been completely transformed from being bogged down in creating reports and entering numbers from interior walks into Excel spreadsheets to enjoying real time reporting, instant results, shorter due diligence time, and a more professional due diligence report for our clients,” she said. "Using InfoTycoon is one of the best decisions Lincoln Property Company has ever made.”
- Identify millions in variances as part of a Lease File Audit.
Long gone are the days of tedious, manual Lease File Audits. Firms like Alliance Residential are leveraging software to automate the process and immediately identify gain/loss to lease, rent and deposit variances, concessions, relevant resident demographics, and more. In fact, Alliance Residential identified $1.4 million in uncollected rental income and saved over 3,000 hours by leveraging technology to expedite the process. Other firms have also raved about the quantifiable results they’ve seen.
“InfoTycoon’s Lease File Audit is life changing,” said Kandy Chicarell Green, Vice President at CAPREIT. “I am thrilled with how the solution has streamlined the process for us. I cannot imagine conducting another audit without it.”
- Review property contracts with your legal team.
In addition to reviewing leases, you’ll want to review the existing contracts the property has in place. Knowing what the property is legally obligated to should be disclosed by the seller, but can often be inaccurate or glossed over. Now is the time to review all contracts with maintenance providers and the terms associated with each (length, cancellation policy, etc).
Reviewing maintenance contracts will reveal how existing vendors service HVAC, elevators, plumbing, pest control, and more. Be on the look out for additional fees they might charge when ownership transitions and what kind of service interruption might happen during the acquisition. Determining what financial obligations the property has will influence operating expenditures in both the short and long term.
- Pull all accounting and expenses related to the property.
In addition to your file audit, gather an accounting record of all income and expenses associated with the property. This includes security deposits, tax bills, collection reports, and more over the last three years. To better understand how the property’s financials compares to others, you want to use NAA’s Income and Expenses Study. The benchmarking study, updated annually, compares data in over 100 multifamily markets and allows you to see how your property compares to other industry operators. See the full study on NAA’s website to get benchmarks which will help evaluate the financial health of the asset.
- Look for patterns in no-entry apartments.
If you’re not able to enter several units at the time of the inspection, look for a potential pattern. One InfoTycoon client discovered that the inaccessible units were all in one section of the building and decided further investigation was necessary. After entering the units, the team discovered they had undocumented water damage. That kind of damage and reporting can easily be captured and recorded in InfoTycoon’s platform, saving you hundreds of thousands of dollars when it comes time for negotiation.
- Inventory and photograph all assets associated with the property.
Take photos of the good, bad, and ugly. By doing this, you’ll verify that everything in your inspection is backed by documentation in your reports. Finding any damage that wasn’t disclosed by the seller will put you in a better position when it comes to re-trade negotiations. Be sure to record the good items as well.
One client shared the importance of inventorying their assets when leveraging InfoTycoon. Their due diligence team took photos of golf carts in good condition at the newly-acquired property. After the acquisition, the management team found just the opposite. The golf carts were now in poor condition with extensive wear, clearly switched prior to the ownership change. Because of the photographic documentation, the new owner was able to correct the situation.
- Calculate the cost of necessary rehab and renovations.
If you plan to do significant rehab and command higher rents, you’ll want to determine the projected ROI. In order to calculate costs quickly, take advantage of your inspection results in InfoTycoon’s platform. InfoTycoon automatically calculates the biggest costs for both your exterior and interior items. Whether you need to repair entry gates, replace the carpets, or restore perimeter fencing, InfoTycoon will identify those costs and plug them into your summary report.
The Bainbridge Companies recently leveraged InfoTycoon for their due diligence and loved the results.
“The ability to take all of the information from our inspections and bring it to one location for analysis allows us to instantly identify issues/concerns and make better decisions on how to proceed,” said Scott Skokan, Vice President of Capital Projects and Maintenance.
Additionally, if you plan to renovate the property’s amenities, we recommend you reference the NMHC / Kingsley Renter Preferences Survey. The national report aggregated over a quarter of a million renter responses and will help you determine what amenities residents really want and includes market-based reporting.
- Analyze permits, compliance, and insurance paperwork.
If you decide to move forward with the acquisition, you’ll want to make sure that the property is compliant with the Fair Housing Act, government zoning laws, and building codes. Additionally, make sure the title (and other associated documents) are in order. While reviewing the title, it helps to employ a third-party service to review it thoroughly. Having a neutral party examine the paperwork will give a clearer picture of stipulations and remove bias.
During this time, you’ll want to see a historical record of insurance claims over the last five years, as well as closely examine the existing policies. Make sure to request this information in full, as well as any other liability disclosures the seller should provide.
- Get to know the neighborhood and comps.
Take a close look at the neighborhood the property’s in. If it’s near an undesirable area, like a sewer facility or crowded interstate, that can impact marketability. You’ll also want to compare data from similar market transactions. To complete this step, use your internal team to research policies, compare rent rates, and review the local market. Alternatively, you can also turn to a research firm to complete the analysis.
The checklist above is a helpful starting point for your due diligence process. To optimize your acquisition further, you’ll want to check out InfoTycoon’s Transactions Module, which offers due diligence inspections, capital expenditure planning, pre-disposition inspections, lease file audits, and more. InfoTycoon’s powerful platform empowers you to speed up your acquisition process up to 75% and keep a historical record of the property, accessible anywhere, at any time.