What Is Real Estate Due Diligence And Why Is It So Important When Buying An Apartment Community
If you’re new to real estate investing, you might have heard the term ‘due diligence’ but not fully understand what it means. Real estate due diligence is the process where a buyer investigates all aspects of a property before finalizing the purchase.
Due diligence is the most important step in buying real estate because it helps you verify if a property is truly worth its asking price and reveals any potential issues that might make you reconsider the deal. Even if a property looks good on the surface, there could be hidden problems or reasons it should be bought for less.
Never rely solely on the seller’s information. Sellers might omit crucial details, risks, or legal issues that could prevent you from completing the purchase. Sometimes, this omission is intentional; other times, the seller may not be aware of these issues. Either way, thorough research is necessary to uncover any potential problems before buying.
Good due diligence helps you make a better investment decision. It can uncover costly repairs, unpaid taxes, or other debts that the seller hasn’t addressed. Knowing these issues beforehand allows you to adjust your investment plans to ensure you get a good return on your investment.
How the Real Estate Due Diligence Process Works
The due diligence period for an apartment syndication usually lasts from 2 to 4 weeks. It starts when you submit a Letter of Intent (LOI) and put the property under contract.
Due diligence involves several steps:
Digital Research: This includes checking online for property details, zoning regulations, utility information, and tax records. This can be done from your office by reviewing documents and websites provided by the seller.
Physical Inspection: This involves visiting the property in person. You’ll need to coordinate with the seller to access the property and inspect as many units as possible. This hands-on inspection helps you assess the property’s condition and provides valuable information for your final decision.
Real Estate Due Diligence Checklist
The goal of due diligence is to identify any legal, environmental, safety, or financial issues that could affect your ability to buy the property and achieve your investment goals. Finding significant issues allows you to renegotiate the deal or even walk away if necessary.
Here’s a typical checklist for real estate due diligence:
Current Rent Roll: Details on rent rates, security deposits, lease terms, unit types, start and end dates, and payment history. Also, note any ongoing evictions.
Last 12 Months of Expenses (T12)
Security Deposits Held
Ongoing Evictions
Copies of All Leases and Rental Applications
Utility Statements from the Past Year: Or authorization to contact utility companies for actual usage details.
Service Contracts: Details on contracts for pest control, trash removal, landscaping, janitorial services, parking lot sweeping, snow removal, security, and laundry equipment leases.
Profit and Loss Statements: For the last two years or a summary of expenses.
Electrical Expenses
Water Expenses
Operating Bank Statements: For the last two years.
Schedule E from Last Two Years' Tax Returns
List of Improvements/Repairs: Made in the last five years or at least the last 12 months.
Current Management Agreement: Or employment agreement with the property manager.
Insurance Policies: Copies and contact information for insurance companies.
Last Two Years’ Property Tax Bills
As-Built Surveys: Showing any property improvements.
Owner’s Title Insurance Files
Trust Deeds and Other Documents: Relating to title, liens, or debts.
Mortgage Documents: Or a letter from current lenders showing mortgage balances and terms.
Inventory of Furnishings and Personal Property: Identify what will not transfer to the new owner.
Warranties: For appliances, equipment, utilities, roof, paving, pool, etc.
Inspection Documents: From HUD, USDA, THDA, or other housing agencies over the last two years.
Recently Sold Comparables: Of neighboring properties.
Conclusion
Real estate due diligence is a thorough examination of a property before purchase. It involves gathering and verifying all relevant information to ensure the property meets your investment goals. Proper due diligence helps avoid legal, financial, or environmental issues and ensures your projected returns are accurate.
If you want to learn more about how our team handles real estate due diligence, schedule a call today or fill out our investor form. We’ll be happy to discuss your questions.
