It typically involves the following steps:
1.Seller Deliverables. Request a detailed list of documents and information from the seller, including financials, leases, contracts, capital expenditures, surveys, environmental reports, open permits, and the Certificate of Operations.
2.Physical Property Due Diligence. Conduct a comprehensive inspection of the property to identify any significant issues or deferred maintenance. Obtain estimates for planned renovations and confirm if the allocated budget is sufficient. Engage professionals to inspect major components such as the roof, plumbing (including sewer lines), foundation, drainage, electrical systems, HVAC, chillers, boilers, termites, exterior walls, balconies, stairs, rails, and concrete. Inspect each unit and document existing conditions.
3. Lease and Contract Audit Due Diligence. Review all leases and match them with the rent roll and ledger. Ensure proper documentation and usage of addendums. Record lease data using software or spreadsheets, correcting any errors or discrepancies. Analyze resident qualification criteria. Gather demographic information, including employment details and income. Scrutinize contracts related to services like laundry, internet, cable, and phone.
4. Execution of Due Diligence. Choose to conduct due diligence in-house, hire a third-party company, or utilize the property management company. Request and review sample reports to ensure the collected data is useful and well-presented. Consider engaging a construction company for physical property inspections, utilizing software for comprehensive reporting. Hire a specialized company for lease and contract analysis to obtain more detailed information.
5. Assessment and Negotiation. Update your assumptions based on the findings from due diligence and evaluate if the deal still meets your target returns. If major issues or concerns are discovered, provide detailed information to the seller and either negotiate a discounted price or consider walking away from the deal.
Due diligence is the backbone of successful real estate transactions. It's the phase where you dig deep into the property, conduct inspections, and address any uncertainties. Rushing through this stage is a recipe for disaster. I learned this lesson the hard way during those early days.
Don't wait until the last minute to complete due diligence tasks; prioritize them for early completion. That way, you'll have plenty of time to tackle any problems head-on. You get to make smart decisions and avoid costly blunders.
Confidence matters here. You must be confident in your decision to proceed with the deal before investing significant time and money. Cutting corners during due diligence can have severe consequences.
Take due diligence seriously. It's all about paying attention to the tiniest details and sticking to a plan. Prioritize it, do thorough inspections, and trust your gut. Don't cut corners, and you'll be well on your way to successful real estate investments.
