What does your due diligence check list include? As an investor, checking off receipts of the standard items falls far short of what a successful property must deliver. The usual items are:
- Principal’s personal financials,
- Property condition reports,
- Phase I environmental reports,
- Zoning and historical site info,
- Pro forma financials, and
Unfortunately, ticking off these items leaves a great deal of risk on the table for the investor unnecessarily.
An effective checklist will provide:
- Financial, experience, and background of the principals,
- Financial position of the key (largest investors),
- Physical condition of the property,
- Submarket and market situation,
- Sales and Marketing plan,
- Resident factors,
- Improvement plans,
- Management and maintenance plan and resume,
- Staff assumptions for the purchase,
- Organizational and legal documents and considerations enhanced due diligence services including operating agreements, licenses, securities filings, etc.
Under each of these areas, investors should be seeking significant detail. In the following paragraphs, I provide a high level view of each of these items to support investors.
Financial, experience, and background of the principals
The investor should have a financial statement on each of the principals and the investing entity. Additionally, the investor should have a resume of experience, references, and a current background and credit check.
Financial position of the key (largest investors)
The investor should have a sense of the networth and intended contribution of the largest investors. Key factors include liquidity, networth, amount of multifamily investment, and planned or formal involvement in oversight of the investment.
Physical condition of the property
This consists of the information from the property condition report (PCR), environmental study (ESA), and investors unit by unit, building by building, system by system, and grounds punch list of issues. This should include survey information, parking density, encroachments, available land, and much more.
Submarket and market situation
Perhaps this is the most complex portion of due diligence. In this area investors need to know sales and rent comparables on the basis of square footage, amenities, age, and bedrooms. All sorts of demographic information is needed. Local infrastructure and economic facts are required. Shopping, restaurants, entertainment, and other community facts are important. All of this information needs to be correlated to distance from the property.
Sales and Marketing plan
This plan should include items like local traffic counts, cost and availability of signage, and other advertising information. This information should be articulated as a cohesive well thought out executable marketing plan for the property.
If the market is new, tenant rights must be understood. The current leases need to be examined. A detailed plan determining the specific plans relative to the disposition of the current residents, evicting problem residents, and replacing with new residents must be developed.
The property condition, condition of the submarket, the sales and marketing plan, and resident situation will all be used to develop a comprehensive capital improvement plan for the property.