Due Diligence Team - Apartments

You've done it! You got a property under contract and you are ready to do your physical due diligence (DD). There is an art and science to conducting a complete and thorough physical due diligence so that no surprises come up after you actually own the property and now any problems are YOURS. Here we break down what our due diligence team looked like at our most recent Growth VUE Properties DD trip.

But first, I must point out that your due diligence is only as good as the property management (PM) team that you hire to manage your day-to-day operations. This is critical! We only use third-party PMs that have been in business at least 10 years and have at least 10,000 doors under management, preferably all 10,000 doors in the local area, and preferably a large chunk of their management is in the asset grade that your asset is in; meaning you don't want an A-grade PM managing the C-grade project you are trying to renovate to B-grade. We review if they are under any current lawsuits, or have previous egregious litigations brought upon them outside of normal eviction court. The PMs will be the ones executing your business plan, so it is CRITICAL to have the right PM for your job.

Our Property Management team has over 120,000 doors and over 800 employees. They are PROs in every sense. After getting the contract signed we connected with the management president and requested a due diligence team that can handle a C-grade project that we want to move to a B+ project. Here is the Team we brought together for several days of due diligence:

Property Management President - oversees all regional PMs, and sets the tone for the property management firm. We ask for him to be available, and good presidents value their customers that want to grow in an area and will show up to introduce the team. Really good PM presidents will walk the asset with you. 15+ years of local experience.

Regional Property Manager - The manager that will oversee your day-to-day on-site PM. 10+ years experience in the local area, and will likely have been a local on-site PM. If you are lucky they might have managed your asset previously. They have a wealth of knowledge on the regional dynamics and what rent prices to expect. They will help get quotes for repaving/restriping, signage, landscaping, and amenity & service contractors like washer-dryer, internet, cable, trash, tree trimming, and landscaping.

2 + local on-site managers. Depending on the size of your asset your team will have to break up into smaller teams to efficiently walk ALL of the units on the property. Yes, EVERY SINGLE UNIT. These professionals will have cameras and take pictures of all the rooms and all the appliances in the unit. They will have detailed corporate knowledge and detailed area-specific knowledge on what problems might be seen, what you should look for, and what value-add improvements for the demographically-specific area your asset is in. They will highlight any tenant problems for future evictions and will look for any glaring internal capital expenditure issues. They will also inform the construction team on what items will be needed for future renovations. 5+ years of experience in the local area.

2+ back office leasing agents. These agents will review EVERY SINGLE LEASE. They will make sure that the lease names match the Rent Roll. They will ensure the leases are signed, and audit the termination dates to help determine the best timeline and method to enact a value-add business plan based on tenant turnover. 5+ years of experience.

Roofing inspector. Critical on value-add assets. This could possibly be one of the largest capital expenditures. If you have an asset with multiple buildings you want the roofing inspector to walk each roof and provide an estimate of when each roof will need to be replaced that you can model out in your business plan. 5+ years of experience in the local area.

Plumbing inspector. Another critical survey to have done. They will look for any aging problems, major leaks, or major backups. Ensure that they have state-of-the-art equipment that can conduct a video of the pipes to look for any leaks or problems. If there is a sub-basement or crawl space they should also fully inspect each of those to look for standing water or piping problems. If any of your units are below the ground, the plumber should walk each of those units to look for water issues, drainage issues, or other water-related issues.

Renovation Supply Agent. The regional area Home Depot or Lowes (or another hardware store) will have an agent that works on large commercial assets that can price out interior and exterior improvement in accordance with your business plan, and with input from your local area PMs. His quotes will go directly into your model to further refine your business plan. 5+ years of local area experience.

HVAC. Another possible large capital expenditure item. Depending on the style of your asset you may have several large rooftop HVAC systems, individual ground systems, through-wall systems, or even boiler systems in older assets. For individual systems, the HVAC agent should look at each individual unit and give you a proposed timeline of replacement that you can add to your model.

Broker. Your broker should coordinate the entire due diligence with the current owner/management and should be on-site to help negotiate any problems that might arise. They are there to ensure that the due diligence is moving along and that the deal gets closed. If there are any GLARING issues they will be the ones to push that back to the seller and insist on concessions or fixing the problem prior to closing.

Current Onsite PM + 1. Depending on your asset size you should have at least 1 current PM for every 100 units. The current PM should have a plan to efficiently, thoroughly, and quickly view EVERY SINGLE UNIT. They should also have all the leasing jackets in order and ready for review at the beginning of DD. If your potential asset does not have master locks, then ensure that the keys are organized and a plan is in place several days ahead of time to notify the residents that an "inspection" is occurring. A good PM will notify all the tenants well ahead of time so there are no surprises prior to the DD visit. A good PM will notify you of any glaring problems ahead of time. Do not be surprised if the current PM is brand new and may not have a good grasp on the tenant base or any glaring issues in the units. The current owners could also act as the PM and may or may not have a thorough understanding of the asset. They are there to let you in, and let you see EVERYTHING! Make sure to check all storage lockers, community-use spaces, leasing offices, and any other locked rooms.

Current Maintenance Manager. This manager should highlight any frequently reoccurring problem on the property, and should also alert you to any major capital expenditure issues. They should have a complete record of maintenance tickets for the previous 12 months to verify the reoccurring problems. They should provide you with any exterior landscaping or exterior infrastructure problems.

Your Due Diligence Team: Our best practice is to have at least three members from the ownership team: one to review all the leases and front office items, while the other two walk EVERY SINGLE UNIT. It is critical you have eyes on to see each potential problem, and to look at each potential benefit. There might be units that have immediate concerns: drugs, illegal activity, health department issues, or even child abuse. Any glaring issues found will be noted by the current property management for immediate action. If there are any bad tenants then an eviction plan can be created by the new PMs and the ownership.

Other possible team members: Environmental assessment agent, surveys, appraisals, etc depending on the age and type of asset you buy. For older assets, we encourage that you spend the money upfront to know as many of the problems as possible before buying the asset and they suddenly become YOUR problems.

This isn't an all-encompassing list, each asset will have its own set of issues and benefits, but this team gets us through 90% of the DD walk-throughs we complete on value-add assets. However, I can not stress enough how critical it is to have the right Property Management team working on your behalf. As with most things, their value will be indicative of their price, and I would not skimp out on having the best management team you can afford!

If you are an accredited investor and you are interested in investing in multifamily apartments please feel free to contact me on linked in, or at [email protected] to find out more. Please visit our website at www.thegrowthvue.com to fill out an investor form and we will be in contact asap to find out if you are a good fit for our team of savvy investors!

Brad Penley?is a Founder and Principal at Growth VUE Properties, a commercial multifamily investment firm that sources deals from across the United States in stable or emerging markets. Growth VUE Properties teams up with institutional partners as well as individual accredited investors to acquire and manage multimillion-dollar commercial real estate deals.

Brad began his investing career in residential multifamily investments accruing millions of dollars in personally owned apartment assets. He now teams up with other savvy investors to pool their money to buy large apartment buildings that provide efficiencies of scale, providing freedom of time and freedom of money to his clients.

He has advanced degrees in Financial Analysis from the Naval Postgraduate School in Monterey, CA and holds a bachelor of science degree from the US Naval Academy.

You can find out more about Brad Penley at?www.thegrowthvue.com