You’ve found a great multifamily property in which to invest.

You’ve made your offer, and the seller accepts it. You have it under contract.

Excellent!

What’s next?

Do you put your money down?

No. That part doesn’t come for another few weeks.

At this point, you will do your due diligence, making sure that everything you’ve understood up to the point of putting the property under contract is accurate.  You want to make sure the differences between what you think and what the seller thinks about the property and the deal are the same.  – Tweet  

As you may have guessed, I created a short tutorial on how to conduct due diligence, and here’s a link to that video now:

 

 

The due diligence steps you’ll take…

I use a helpful tool… the same one I use in my corporate job.

It’s a series of checklists and worksheets. This due diligence package has helped me figure out if a deal is worth closing or not. If you want me to share it with you, let me know. Contact me.

That said, here are top things to consider when moving through the due diligence process:

1.- Who are the different players involved?

For example, who will be the accountants, attorneys, brokers and other individuals who will be working on the property to get the deal done? Which escrow company will you use? Think about the transaction from start to finish. For me, it’s a little more complicated. I’m in Barcelona, which means I’ll have a legal team here and a legal team in the state where the property is located. I have an accountant; the seller may have an accountant, too. As for the broker, typically he/she will handle things for me, but if the seller has a broker or agent, guess what? That person is a part of the deal, too. You just have to know who the players are and what their roles are in the transaction.

2.- What are the consulting reports you will need?

This includes Phase I Report (report that tells you about the environmental report typically required by lenders in commercial deals), structural assessment and any inspections necessary. Depending on where the property is located and what type of property (i.e., apartment building, mobile home park, duplex, four-plex, etc.), there will be different inspections you should have done. If you don’t have inspections, you might be sorry in a very big way later. Do not just take the seller’s word about the condition of the property. Find out for yourself. Yes, inspections cost money, but it is well worth every penny to find out what needs to be repaired and in what time frame.

3.- What types of operational documents are in place?

For example, look at the existing leases the seller has in place right now and how those may need to be changed. Look at how many tenants are occupying the property and how much each tenant is paying. What about existing insurance that is in place? Is there any new insurance(s) that need to be added? You also need to look at service contracts that are in place, such as with landscapers, property managers, HVAC, pool maintenance, etc. You want to look at the utility costs past and present, too.

There may be ways to cut costs, but you won’t know until you look at all the operations expenses in depth. The seller should be able to provide you with a very accurate record. However, you may find with mom-and-pop operations where the seller hasn’t kept great records or has been filing taxes as a sole proprietor vs. business that there can be problems and a lot of missing information. The due diligence process is when all of this will come to light.

Speaking of the records kept by the seller, you also want to look at the financial documentation. For example, the taxes the seller has filed around the property. This is a critical step in the process. It can also be a negotiation chip for you, because if the seller hasn’t been keeping very good records yet wants to sell the property in a big way due to a variety of reasons, he/she may be more open to seller carry-back (seller financing) on all or part of the deal.

Be flexible and you can walk away with a BIG win.  – Tweet  

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Finally, make sure you do this…

From the very beginning, get the property management company you will be using to manage the property involved in your due diligence process. This will help them manage the property better when they take over.

Plus, they can provide you with tremendously helpful insight. After all, you want a company that has managed exactly the type of property you just put under contract, so it makes all the sense in the world to get them involved in the due diligence process.

Now that you understand the due diligence process a bit more, I have a question for you:

Which of these steps do you find the most helpful and why?

Let me know in the comments under my video or, better yet, contact me with your answer here:

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You can also check out my latest podcasts and collaborations here keeponcashflow.com/podcasts/