Performing Due Diligence Checklist

Another 4 Items on Our Due Diligence Checklist

In our previous article, we analyzed these four items on our due diligence checklist: payroll ledger, current budget, 2 years of seller tax returns and vendor contracts. In this article, we are going to delve into utility bills, insurance documents, outstanding work orders and loan documents. Let’s get started!

Utility bills:

You need to request a copy of all utility letters from local companies letting you know that service is currently available to the property. These companies include:

1. Sewer

1. Water

1. Telephone

1. Electric

1. Gas

1. Cable

At the time of closing, make sure that all the meters are read and that service is put into your name so that there is no disruption of service to the property. Find out if there are any additional cable or phone providers to see who will give you the best deal. In our market, we only have one cable provider and were able to secure only free internet for our apartment. If you are in a market with more than one provider, check to see if they will give you a bonus if you sign an exclusive agreement with their company.

Once you receive the bills, check to see if there is any value play with these expenses. For instance, most properties still utilize costly phone land lines and call centers. We cancel the land line and issue prepaid cell phones to our employees, resulting in big savings. We also check to see if the market is implementing Ratio Utility Billing Systems (RUBS), another terrific value play. If the answer is yes, then the property is a serious contender for creating value. Your goal is to have the tenants pay their portion of the utility expense, thus lowering your burden and raising your Net Operating Income.

Loan Documents:

You need to gather information about the loan that you will be securing to purchase the property. Here is the information you need to know about the loan:

1. Down Payment (loan to value)

1. Interest rate

1. Rate fixed or variable

1. Amortization schedule

1. Prepayment penalty

1. Recourse or Non-Recourse

1. Closing Costs

1. Is it Assumable

Financing is the Third leg of our Framework, and with subpar financing, the deal will crumble. Check out our website www.JakeandGino.com for more articles on financing

Finally, check to see if the loan on the property is assumable. If it is, then you may save yourself thousands on closing costs and may secure a lower interest rate. The bank will still have to qualify you for the property, but it may be in your best interest to assume the existing loan if it is allowed.

Insurance Documents:

Check to see the existing coverage on the property, and look to see if the property is located in a flood zone. We want to make sure the property has adequate coverage with the policy that is currently in place. We shop the quote to our brokers to see if we can save anything on the premium and if there is any other coverage that has to be put into place, such as business interruption or workman’s compensation. Some sellers try to skimp on insurance, so be sure to get a quote from your team member.

Outstanding Work Orders:

Does the property have any outstanding maintenance calls that need to be addressed? You can either force the sellers to complete these open orders, or ask for a credit to finish them yourselves. On one of our properties that we purchased, the sellers had no system of detailing and logging in maintenance requests. We soon found out that tenants were irate that maintenance was not being performed, and we quickly rectified the issue. We set up a maintenance log and got to work. If there is substantial work that needs to be accomplished before you take over, then ask the seller for a price concession or repair allowance to finish the work.

We are half way through our checklist. In the next article, we will explore the next four items. Please leave us any comments below and we hope you become part of our community.