Buying an Occupied Quad: Due Diligence Checklist?

Question

Hi all, I'm hoping to buy my first rental soon, maybe the new year, and currently have zillow notifications on for MultiFamily properties around me. One that just popped up in my price range is a four-unit (2/2s) and all are occupied. I would love to dig in and feel this one out.

Is there a list of things I should ask the Selling Agent for? (rent roll, leases... etc.)?

Drew Sygit · Answer

Purchase Agreement Clauses for Buying Tenant-Occupied Rental

If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to

the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.

Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately,

there’s always the potential that one, or several, of the documents may be fraudulent.

So, let’s go over each document and why it’s important:

1. Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent,

when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and

much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.

2. Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their

history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees

etc.

3. Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.

4. Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you

have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is

also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.

5. Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).

6. Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during

the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or

property damages.

7. Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent

and/or property damages. Usually collected as part of the application process.

Fraud: let’s not pretend it doesn’t happen. Desperate sellers do desperate things. We’ve seen fake leases and rent ledgers, even fake

tenants - who were placed by the seller to backup the fake lease and ledger. So. it’s not uncommon to request proof of rent deposits

via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they

collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.

So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to

review it.

Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least

X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications

& supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal

actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank

statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and

expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent

ledgers.

Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?

As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.

Bo Buser · Answer

Thanks @Riaz Gillani, I appreciate all that. All very helpful. Just wanted to see if there were any documents I hadn't thought of. Luckily, I've purchased two houses for myself in my life which has given me a good idea... plus purchasing a business. That probably gave me a WAY better idea of how diligent my Due Diligence should be.

Sounds like they've got multiple offers already and I'm not quite organized enough yet to go forward. I'll keep grinding.

James Hamling · Answer

Yeah, a really good REI agent who can help you as a buyer. Preferably one who twist's him up like a pretzel and he fear's in negotiating against.

Bo Buser · Answer

@Drew Sygit My Man!

Riaz Gillani · Answer

Hey Bo,

If this is your first property, you may want to take a step back before reaching out to the selling agent. You could have this already taken care of...and if so...skip past this first part. But, what's your exit strategy? Is this a buy and hold or are you looking to flip? You'll then want to consider how you plan on financing your purchase. Are you paying in cash? Will you go the conventional route (mortgages bought by Fannie Mae / Freddie Mac) or are you instead looking for a private mortgage?

If a hold, will you be self-managing the property? If you're an OOS investor, have you familiarized yourself with the costs of property management in your target market? What about the tax assessors and insurance providers in the area? This is especially important given in-place tenants. Something could go wrong Day 1...

A quick list of docs you'll want is the rent roll + Income and Expense Sheet / T12 (this may not be available for a 4-Unit- standard with 8+). But, pay less attention to the bottom line numbers and instead plug in their line items to calculate the NOI by yourself...

Unfortunately, very few people calculate NOI the same. But you can across your different leads and compare from thereon.

Still, you are correct in that you'll want to approach a turn-key investment differently. As being occupied, find out what the current lease amounts are. Are they in line with the property type. Are there comparables to potentially raise those rents? What's the term on the in place lease agreements? You may want to perform some RENO...

Then there's the property itself! Has it been inspected for environmental hazard? Is it being used in accordance with zoning? What's the life remaining on the structure, roof, etc....

Unfortunately there isn't a one size fits all checklist. Soon, you'll have your own that works for your strategy and underwriting process.

Hope that helps!

Bo Buser · Answer

Shoulda been more specific. I've got a pretty good understanding of the basics from reading the blogs, the BP books and listening to the podcasts. I was more hoping there might be a specific post dealing with Due Diligence on occupied properties or that someone might have a Due Diligence list of their own.

Buying an Occupied Quad: Due Diligence Checklist?

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