What is Due Diligence?
Due Diligence (DD) is the careful, thorough evaluation of a potential investment. It helps the new buyer gain a complete picture of the apartment community’s repair needs as well as its potential for financial performance. It includes the evaluation of the physical asset as well as its financials. However, in this article we will be focusing on the physical property walk throughs.
Similar to your home inspection, the due diligence walk through typically occurs after a Purchase and Sale Contract (PSA) is signed between the buyer and seller.
What are we looking for?
When it comes to the physical due diligence, we want to look at every nook and cranny of the property and come out with a detailed list of the repairs/rehab needed. Next, we take that list to create a full capital budget to compare against our initial underwriting, look for any unexpected issues we didn’t initially account for, and we make sure the rehab plan is approved by the lender.
The Due Diligence (DD) process includes:
Unit Walks: The team takes 40+ pictures per unit including flooring, countertops, fixtures, etc. They also take a picture of the service tags on appliances to obtain serial numbers and make/model information, which can come in handy for property management down the road.
We want to see every unit during Due Diligence as you never know what you may find behind closed doors.
Major Systems: Inspection of all major systems include scoping plumbing lines, inspecting building foundations, notating HVAC systems, etc.
The team also uses drones to get footage of the area and inspect roofs.
Deferred Maintenance: The team checks structural integrity of railings, staircases and balconies. They look for wood rot, cracked sidewalks, fence conditions, and more. They’ll also notate every item across the property to determine if the condition is good, functional, or needs replacement immediately.
What new tools are used?
In addition to using drones to fly the property, there are a number of cool new technology items that make the process streamlined.
The DD team carries Matterport cameras to be able to capture virtual walk throughs of units and get 3D dimensional floor plans. Many class B and C apartment buildings typically do not have this option to view floor plans, which can be very helpful when it comes to leasing units.
Additionally, 3D models can be created for the building exteriors, which can be used to do mockups for outside capital improvements, like new exterior paint colors or roofing.
The teams also use phones and tablets to upload pictures in real time to the cloud as they check in and out of units. This allows any of the buyer and his/her partners to watch inspections in real time and access the report virtually. This feature is invaluable for times when not all the partners can be present during the unit walks, particularly if there are travel restrictions during the current pandemic.
What changes or new precautions are being made given current Covid-19 concerns?
Obviously, the safety of the due diligence team members, residents, and staff is priority #1.
The DD team takes extra precautions which includes wearing masks and avoiding touching anything inside of units as much as possible. Gloves are used in instances where it is needed, such as opening electrical panels, peeking into HVAC closets, etc.
The team also tries to minimize the number of people and time spent in each unit…the typical time in a unit is less than 5 mins. Get in and out!
Making the Purchase of the Property
While physical due diligence is only one part of the decision making process, whether we move forward with the purchase of an apartment community, it is also extremely important to ensure our assumptions of the business plan and underwriting are accurate.
If you’d like to learn more about the process or have your own multifamily due diligence needs, our preferred vendor Heritage Construction and Consulting Services performs this function nationwide and does a more detailed job than any we’ve seen in the industry.
You can reach them at:
Tell them Think Multifamily sent you!