The best apartment buying due diligence checklist for multifamily investors

May 18, 2023 | Buyers

Explore our seven point due diligence checklist to safeguard your investment success

At some point, every single multifamily investor was a buyer, and the best in the business have a checklist they go through each and every time they purchase a property to make sure nothing is missed during their due diligence process.

Join us as we go through the ultimate apartment buying due diligence checklist from top to bottom that will turn you from a novice buyer to a seasoned investor.

#1: Physical Inspection

Physical property inspection is what the vast majority of people are familiar with in multifamily due diligence checklists since it’s the same as every other type of real estate. Whether it’s a single family home or a large office building, the physical inspection is an essential component because it allows you to go through all of the mechanicals and structural components of the property.

“Some of the things we recommend putting on your physical property inspection checklist is a four point inspection and roofing report for insurance,” says Joe LaFleur, co-founder and multifamily investment advisor at 100Units. “If the property does not have a brand new roof, which is 99% of the time, the best thing you can do is make sure you have a roofer who can go on the roof and give you a letter stating that the roof has greater than five years of life expectancy on it. Then, you can use that letter when communicating with your property insurance company to make sure you get the best rates possible.”

As part of the physical inspection, you should also take the time to walk through and do a one-by-one unit inspection. While doing the individual inspection, take a look up at the ceiling to check for patched drywall, mismatched texturing, and discoloration to give you further clues about the roof condition.

When you’re going through the physical audit, you also have to conduct an electrical inspection by checking for copper vs. aluminum wiring, 100 AMP service to each unit, and the breaker panels. 

Additionally, you have to check the plumbing systems. One of the best ways to do this is by putting a camera through the sewer line, which allows you to see the condition of the sewer line and find out how much of it has been replaced with PVC or CPVC and how much is still cast iron from the original sewer lines that were put in. 

“One of the things I’ve seen some people get confused on is they see the connection coming from the shutoff valve or from the water heater to the actual supply line that’s going through the wall. You want to make sure you’re looking at what is actually penetrating back into the wall and is hidden because that section is the real water supply lines,” explains Joe. 

Another part of the physical inspection is assessing the structure and foundation, which should only be done by a professional as part of a property condition report because it is not possible to tell that there are any issues if you are not a professional. 

“In Florida where we don’t have earthquakes the vast majority of buildings are not going to have any problems with structure or foundation,” details Joe. “On occasion, I have run into properties where there was a problem, but you can tell pretty quickly and then you can get a professional to give you an opinion on it.”

Air conditioning is a relatively easy part of physical inspection because you can see it from the exterior. You can definitely check out the exterior of the building with the ACs before you even put an offer on the building because they’re so visible. If you see a hodgepodge of everything from 20 year old condensers outside all the way to brand new ones, you know it’s going to be the exact same thing with the blower’s inside. 

Water intrusion is a tricky, but important part of the inspection as well. You can purchase a damp meter, put it right on the wall, and they’ll give you the dampness reading. There are also some devices that you can put right on your phone to do thermal imaging. It’ll tell right where the heat is, and if it’s damp it’ll be visibly cooler than the regular part of the wall. Termites are another thing you want to take a look at if you’re purchasing a wood frame building by putting out and checking bait stations. 

When you’re purchasing a building, we definitely recommend you physically walk every single unit of the property yourself. It can be a real quick look inside, but you definitely want to look inside every single one. You want to have the rent roll with you to make sure that the physical occupancy and the appearance of the unit matches up with the rent roll. If it says it’s rented from somebody who’s been there for five years, it should look like somebody lives there for five years. If it looks like somebody just moved in, it should look like somebody just moved in. You should also walk the exterior before making an offer to see the features that are highly visible like landscaping, lighting, and parking lots to determine the updates you’ll need to make.

#2: Property Audit

The second part of the due diligence checklist is the audit of the property, which includes:

  • Survey – either a new survey or an existing survey with the seller signing an affidavit of no change
  • Title search
  • Deed
  • FEMA flood map — readily available online to look at the address and see if the property is in a flood zone
  • Elevation certifications – typically takes about three weeks for a professional to complete
  • Copy of any bonds or warranties (i.e. roof, termite, etc.)
  • Environmental reports
  • Appraisals
  • Copies of permits and inspections
  • Copy of any known code issues – available through city and county records
  • Zoning – make sure that your property is properly zoned for its use and/or you have some assurances in regards to it being usable if it’s in a grandfathered state
  • Five years’ worth of loss runs from the insurance provider – if you have the loss run showing the situation of the current property from the current insurers, they do give you a discount and weight that toward your new insurance policy and it can be helpful

#3: Financial Audit

The next portion of the due diligence checklist is the financial audit. You want to check out the last 24 months of operating statements on a monthly basis, so you can see collections, month-by-month income expenses, and how the property operates.

“The ideal situation for a buyer in this profit and loss statement is when the gross income is rising over time and the net operating income is simultaneously rising over time,” shares Joe. “It’s also the ideal situation for a seller because they’re showing that their property is improving—lease rate, rent rates, collections, net operating income. It’s important to get 24 months worth because some properties, due to varying operations or situations, have seasonality to them and it’s important to be able to see that.”

Contracts are another essential part of the financial audit. “You would imagine that typically you don’t have to inherit contracts with a property, but that is not the case. There are a number of contracts that survive a closing and are in place before you purchase the property and are going to continue to be in place after you purchase it. Laundry, landscaping, and cable contracts are examples of ones that I’ve seen last for many years,” shares Joe.

You also need to assess readily available property tax bills to see the assessed value, current taxes are, and last 36 months of capital expenditure. From the existing seller, you also need to know what major items they have repaired in the last three years.

You also need to know the list of the employees with compensation on the property. “On that front, I would give advice to sellers and say that if you have property managers, have a conversation with them about the fact that you’re planning to sell the property, and how you want to work with them and have them work with you all the way through closing and how they’ll get a bonus at the end of closing,” advises Joe. “If you’re a buyer, you want to talk to them about how you’re going to work with them and keep them on and help them with the transition. The last thing you want them to do is to quit during the contract period and then you’re stuck with a very difficult situation dealing with tenants, rent collections, leasing units. It can be really tricky if that is the situation. Everyone wants to be on board with having the property manager there at least through a transitional period, pre- and post-closing.”

Utility bills are another interesting part of the financial audit. You can actually tell if there have been any leaks or if there is something going on where the utility spikes up or slows way down. 

Personal property inventory should be part of the contract and agreed to what is transitioning from the seller to the buyer as part of the property. It could include any number of items like lawnmowers or computers, but it just needs to be listed out and clear so everyone agrees to it and avoids conflict on the day of closing. 

#4: Lease Audit

A lease audit is another essential element of the due diligence checklist, and should include:

  • Copies of All Leases
  • Delinquency Reports – allows you to know who’s paying and how long
  • Rent Concessions that will Survive Closing
  • Ensure leases match Rent Roll
  • Ensure leases match Profit & Loss
  • Agreement with 3rd Parties: Sec 8, VA, VASH, HS, etc. – a number of entities provide rent assistance to residents and you want to read those agreements that are in place

“When asking for copies of all leases, be sure to push to get every single lease on every single page,” details Joe. “Even though it’s a pain, it’s important because every now and then you find that one of them has something that is not the same as all the others. You’re inheriting these leases, so you need to know exactly what your governing document is and your relationship with each resident.”

#5: Legal Audit

As for the legal audit, it includes many essential components to assess, including:

  • Copy of the title insurance policy
  • Title exceptions – it’s important that you have an attorney read review it so you know exactly what you’re agreeing to and purchasing
  • Recorded and unrecorded agreements affecting property – make sure the seller is fully disclosing to you any recorded or unrecorded agreements that are affecting the property that they know of
  • List of any potential or existing lawsuits
  • Copies of existing community rules
  • Copies of current application forms

“A number of times, we sold properties where there was litigation in effect or they had been on notice from it. As a buyer, you know what it is and the seller is signing a document saying that they’re holding you completely harmless since this incident happened before closing,” details Joe of the importance of getting a list of any potential or existing lawsuits. 

#6: Market Analysis

Market analysis is extremely helpful to incorporate in your buyer’s due diligence checklist.

You want to look around the entire property and check the median household income, crime statistics, and major employers in the area. “The best way to check each of those out is either you or one of your team members drive the neighborhood and go to the other apartments that are going to be rental comps and shop them to know how your property compares,” says Joe. “You can get a ton of really good inside information by going there, talking to the leasing agent, and getting a feel for how many units are vacant.”

Driving the sold comparables is also important because then you have an idea where your property sits comparison to the other properties that have sold in that market are being used to come to the valuation of your property and get a feeling for how they stand and what they look like, what did they look like at the time of sale, and how they are performing.

#7: Marketing Audit 

The marketing audit is where you’re going to be checking out how the current owner and the property managers are marketing the property. If they are doing an excellent job, there’s probably not a ton of room for you to do a seemingly better job, so it’s just a matter of putting out the same level of product.

“I’ve also seen plenty of owners purchase properties, not spend a ton of money on actually renovating the building, but they drive the gross income, the rent collections, and shrink the vacancy because their marketing and leasing efforts are significantly better than the previous owner,” says Joe. 

How we can help

At 100Units, we’re proud to offer our vast network of multifamily investors with access to our expert vendor list, including lenders, property appraisers, property managers, attorneys, contractors, and more. The list features the direct contact information of vendors that we’ve worked with in the past and trust to support our investors with guaranteed results.

If you’re interested in leveling up your knowledge as a multifamily investor, join us for our Monthly Virtual Summits to grow your knowledge base with insights from our very own Joe LaFleur on topics like buyer’s due diligence checklist and 1031 exchanges.

Upcoming topics include: 

  • Multifamily Financing  (June 22)
  • Q2 2023 Multifamily Market Update (July 20)
  • Selecting a Market (August 24)

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