evaluating MF

9 Replies

What is you process when evaluating a multi famialy property? Whats your step by step process?

My steps pre-contract:

1. Get the financial data for at least one year, two years is better. Analyze gross income, operating expenses, and edit accordingly (many sellers don't include property management fees or other expenses - just because they self manage does not mean I will or that I will work for free!). After adjustments, I come to the new NOI.

2. Step two is occupancy - I get the rent roll and add it all up making sure it matches the gross income. 

3. Photos - I look through all the supplied photos of the property to identify deferred maintenance. I also ask seller to supply a list of known defects which help in evaluating this number.

4. Location - I verify that the location is good, check previously sold units in the area to comp the cap rate on the asking price, I check the crime report for the specific property as well as the immediate area, and also check the sex offender list to make sure no known sex offenders are living within the building or the neighboring buildings

5. I gather all the items requested by me from seller and analyze all the info. Here is my list I ask for typically, sometimes it has more, sometimes a few items are taken out in the request.

  1. Last two (2) years year-end financial statements and tax returns (Schedule E only for the property, not personal).
  2. Current or previous inspection reports (if any)
  3. Current appraisals or previous (if any)
  4. Tenant Ledgers (Rent payment history - last 6 month schedule).
  5. Rent Roll (24 months)
  6. Last two years P&L financial statements
  7. Litigation (existing and pending if any)
  8. Floor plans
  9. Interior and Exterior photos
  10. Ages of roof, windows, heating systems and cooling systems
  11. Age of appliances
  12. Name, address, and telephone number of property manager and all vendors
  13. Last 12-months utility bills
  14. All service contracts
  15. Insurance policies and loss runs for last 5 years (if any)
  16. List of all personal property utilized by Seller in the operation of the Property that is currently located on the property
  17. Current and last 2 years property tax bills
  18. Lease agreements
  19. Known Zoning ordinances affecting the property
  20. Known Environmental issues affecting the property
  21. List of improvements and/or repairs done during ownership
  22. Seller’s list of any expenses not listed before.

@Will Barnard   Thank you for the great info. But then what do you do after the pre-contract phase?

So, once I go under contract, I then immediately schedule my inspections which include roof inspection, plumber (check sewer lines and fresh water lines), HVAC (check AC condensers, heating units, boilers and chillers - if applicable), and if anything looks suspect, a foundation expert. These inspections cover all the main large ticket items. Next is the appraisal which will give you all kinds of info on comps, financials, condition report, etc.

Next step is the lease audit to ensure that the current tenants listed are their and paying what was represented and a walkthrough of all the interior units is performed. If you have an on site property manager/leasing agent, you will want to perform this part with him or her. It is at this time that you also interview and dig into as much info as you can with this person including asking  for the most common tenant issues, info on any on or off site maintenance personnel, and previous raids or issues they are aware of. Surprisingly enough, you can often get more detailed info from this party than what the seller will give you as they are essentially interviewing to keep their job!

If anything is uncovered that was not previously known or disclosed, a renegotiation ensues for a credit or price reduction. (I prefer the credit over the reduction in most cases).

Depending on the circumstances, you also may need to get an environmental report.

Apartment building purchases are mostly about the numbers so all this due diligence is to uncover the truth and ensure your numbers meet your expectations without any major surprises.

I suggest that you invest in some books on the topic.  I have not read any lately so don't have any recommendations.  You will find entire chapters dedicated to the topics that you want to learn.

It is amazing that someone will take all the time to write this information for you when you have not even done any basic research yourself.

Originally posted by @Steve Olafson :

I suggest that you invest in some books on the topic.  I have not read any lately so don't have any recommendations.  You will find entire chapters dedicated to the topics that you want to learn.

It is amazing that someone will take all the time to write this information for you when you have not even done any basic research yourself.

 I'm just an amazing guy Steve! :)

In all seriousness though, this is the power and benefit of BP Nation. Don't want to research but get a quick answer, just ask on BP and someone is willing to put in the time to answer. Now if I could only find a way to get paid for all of this, I would not have to work so hard!

Originally posted by @Will Barnard :

In all seriousness though, this is the power and benefit of BP Nation. Don't want to research but get a quick answer, just ask on BP and someone is willing to put in the time to answer. Now if I could only find a way to get paid for all of this, I would not have to work so hard!

 Agreed!  But it would be difficult for someone to ask a few basic questions on a forum and then go out and start buying.  I read multiple books before starting to buy.  It is nice to have the resources from this forum that are available to anyone that has a question but this type of information is much easier to understand with a little bit of education under your belt.

@Will Barnard  thangout for taking the time out of your day to answer my question. 

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