How To Break Through All The Fake News About A Property
What is DD and why is it important?
So, for those out of you who have never heard of DD or Due diligence it is pretty much fact checking. This is a process every owner of anything should do before they put any capital on the table.
Whether it be stocks, a business, a relationship, a flip, or an apartment building. Doing your homework will pay you in infinite returns if done correctly.
So, what is your objective during this fact checking process? Well I like to think of it as searching for what is going to hurt the business plan. This is the “oh shit” things that may not come to mind but must be checked for before moving forward.
In other words, red flags.
So how do you think of everything that can hurt you or your plan in a deal?
As it pertains to apartments, we break this down into a few chunks:
· Exterior: We want to check the entire outside of the buildings for issues with structure, the roof, the sidewalks, and any safety hazards that could result in a lawsuit. Exterior is really the sturdiness of the building and how it will last in the weather.
· Interiors: This is where we check all the units for problems. Water leaks from the tubs, toilets, sinks, units from above. Any electrical issues(are they up to code), are they the design that the seller or broker said they are?(walk every unit) Check for safety concerns again; this could be faulty stairs, flooring that is a tripping hazard, or a door that swings open to fast that could endanger other residents in a common area.
· Financial: Dive into the documents, make sure the tax returns and bank deposits reflect the income they are describing. Check all rents and leases, make sure it’s clear who pays for what. What the actual other income is such as utility bill backs, pet rent and storage. See all bills from all expenses, understand why they are what they are. The goal is to completely match their T-12 to actual money received, and all expense line items.
· Environmental: Now this is normally done by a 3rd party to make sure the building isn’t harming the ground it’s on. And isn’t let’s say built over top an old gas station which could have harming effects.
· Legal: This again is done by your lawyer, it’s important to understand that the title is clear, and the sale can move forward. If there are any unpaid items such as a mechanics lien or an unpaid water bill you want to know this moving forward. Now to my knowledge you cannot sell with either of these issues but if they have issues paying for things, I can bet there will be more deferred maintenance that we will uncover or things that they tried to cover up.
· Systems: One of the biggest things is understanding what shape the things that run the building are in. One of the biggest things is underground plumbing, you should scope all lines. The last thing you want is to take over a building and have a major underground plumbing issue. I’ve heard it costing operators upwards of 100k to fix these issues!
All in all, the objective is to uncover unknowns that can impact your bottom line. As you walk more you will see and pick up new things to watch out for, but I think this list can be a good thing to be weary of when starting the process of closing on a deal.
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