Multifamily assets are one of the hottest and most demanding commercial real estate assets in the U.S. With so much liquidity in the hunt for multifamily deals, it can be tough to negotiate long due diligence periods when competing with other aggressive offers. As a result multifamily investors need a good strategy for effective due diligence. Here are 6 keys to performing stellar multifamily due diligence:
1) Start Due Diligence When All Documents Are Received - When buying large multi-million dollar assets, the margin for error becomes thinner and more catastrophic. In a competitive market, sellers typically want the highest offer price, with a quick close, and may try to push back against a buyer requesting their due diligence period to start when all of the requested documents are received. This should be a non-starter if you want to maximize your opportunity to fully vet the investment and decide whether to move forward or back out. Don’t skimp on your due diligence process. This can come back to hurt you later.
2) Delegate your due diligence tasks - Delegation and planning is one of the best strategies you can do to ensure due diligence success as it makes everyone accountable and focused on their part of the process. Having to do too many tasks in a short time can lead to costly mistakes and overlooking important aspects that add to your decision making.
3) Consolidate your property visits - It is much easier and more efficient if all of your due diligence team members, inspectors and lenders are able to access the property at the same time. Multiple visits may be too intrusive to residents and they may be reluctant to cooperate.
4) Use Technology - We live in a time where technology has allowed us to be more efficient in our processes and procedures. Using workspace apps like Trello allows you to take notes and pictures on-site rather than utilizing pens and paper. Organization and structure is key. Find ways to systematize your due diligence so you can focus more on paying attention to detail at the property.
5) Be in sync with your lender requirements - Obtaining financing often makes your lender the biggest partner of your deal. So it’s important that you understand their requirements on what inspections and reports they need to perform under a short timeline. Some lenders may be flexible on what they’re willing to waive, while others may be strict to protect themselves from any downside in the deal. If you’re pursuing energy efficient financing from agency lenders (Fannie or Freddie), there are specific reports that are needed, so ensure you’re aware of what needs to be done. Not understanding their requirements and procedures may lead to the deal blowing up early.
6) Allow for extra time - Getting a head start on due diligence is one of the best strategies to ensure investment success. Things don’t happen as planned all the time. A short turnaround may require you to get things done and scheduled with a sense of urgency. Be sure not to wait until the last minute or you may be stuck with having to make speculative decisions.
In short, never skimp your due diligence process. Protect your investment capital by ensuring the financial feasibility and viability of realizing your investment thesis and proforma. Stay disciplined!
Photo by: Andriy Blokhin
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