• Developing investors,
• Investor communications,
• Reducing operating costs,
• Increasing revenue, and
• Much more

We believe you will find this book a must have element if you follow the housing industry, if you are considering investing, if you are manager, or if you are a principal!

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A Letter of Intent is a great tool because the basic business terms can be captured with minimum involvement from expensive  attorneys.  Additionally, when the attorneys become involved the cost is muted because of a clearly  articulated set of terms to translate to contract.

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A Letter of Intent (LOI) makes sense to use prior to going to contract.  The LOI gives you the opportunity to agree to terms prior to handing the document to your lawyer.  This can save you significant cash because your attorney and the sellers attorney can simply convert to a legal document without a lot of discussion.   As you complete more deals, you will become more versed tightening up the letter of intent to lower legal costs of going to contract and closing.

Additionally, in many cases  the Letter of Intent can  stand through the due diligence period.  In this way, if the deal does not pass scrutiny you never have to involve the lawyers in the process except for areas where their expertise is required.

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To complete an investment, there are some distinct steps to wade through.  Unfortunately, this is not a path that always lends itself to meeting each item a single time and moving onward.

Also, the Association’s objective is to make investing easier, less mysterious, and more straight forward when the requirements are often obscure, hard to understand, and tough to assemble.  Given that occupies the entire topic, no page can answer all questions.

So, this page will cover the high level details of each area to help you organize your research, preparation and coordination as you work with sellers, complete due diligence, prepare debt support, and work out investors.

The areas the page includes are:

1) Principal Information (that’s you if you are the organizer),

2) Partner Information (owning more than 10%),

3) Other investor information,

4) Where and how to identify opportunities,

5) Qualifying opportunities,

6) Negotiating and contracting with the seller,

7) Completing due diligence and developing your business plan,

Developing lenders,

9) Arranging Management,

10) Managing receipt of investor funds,

11) Organizational and business set up,

12) Closing the purchase,

13) Post purchase management,

14) Accounting, finance, and tax,

15) Preparing to market the property,

16) Selling the property, and

17) Winding up the entities

The page will go into more detail under each of these items.  However, each area may be covered specifically in one or more items provided by the association now or in the future.  Further, each item may require adjustment for each project.  The prudent investor will verify the adequacy of each step for each given project.

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Often buyers take the sales contact for granted assuming that all parties are acting in good faith.  This can be an extremely costly choice.  Instead, investor security requires viewing and acting on the negotiation, development, acceptance, and execution of the sales closing as a critical financial decision.

What does this imply?

First, while negotiating the contractor there are many critical warranties and representations that the  buyer should insist be included.  A list of my favorite are:

• That the current residents meet the seller’s quality requirements including:
  • Rent as a % of income,
  • Credit scores,
  • Criminal background check, or
  • Community policy standards;
  • That all leases and applications signed between the beginning of due diligence and closing meet normal resident qualifications for credit, background, employment references, and rental reference;
  • That the seller provides an inventory of all items conveying with the sale of the property and all items not conveying with the property;
  • The seller’s  inventory should include a statement of the condition, make, and model of each item above $50 each;
  • That the seller warrants that the property will be maintained in the condition existing at the completion of due diligence with such repairs being made as required under the contract;
  • That the seller will maintain the property at consistent rents and occupancy without losing more than 5% until closing;
  • That the buyer will maintain retain all financing contingencies through due diligence, until:
    • lending is approved,
    • until property condition reports are complete,
    • until environmental phase I and if required environmental phase II are complete,
    • until survey’s are complete,
    • until the buyer verifies deposit account amounts,
    • until the buyer verifies rent and other income deposits,
    • until the buyer verifies expense and other cost checks,
    • until the  title search is complete, until liabilities and liens are established as not existing, and
    • until the appraisal is complete with any  deposits held in escrow until that point in time;
    • That the seller shall warrant that the income  and expenses for the property are true and  complete and that no  other properties or businesses owned by the seller have absorbed the costs falsely  altering the revenue, expense, or capital costs of the property;

A number of other items should be included in the sales contract.  Further, the buyer must specifically verify each of these items during the leasing process.  Verification includes checking and documenting the results of that verification.

In general, the buyer can expect that issues are likely to crop up during the period between due diligence and closing.  The buyer should seek recompense of some sort for all material amounts either prior to or at closing viewing each instance as an opportunity  to potentially materially improve the deal.

Blake Ratcliff

The  Residential Real Estate Guy

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This article does not seek to provide all the necessary steps to effective due dilingence. The point of this article is to highlight in as a great of detail as possible what each of the due diligence areas are and the importance or purpose of the particular area.

Due diligence can be divided into some key general areas:

1. Sales contract negotiation and details,
2. Financial needs including the appraisal, debt & equity structure, budgeting, and distribution & exit plans,
3. Operational expense needs,
4. Physical infrastructure needs and inspection including associated reports,
5. Legal and title requirements,
6. Market factors,
7. Management and staffing,
8. Operating agreement / investors contract,
9. Resident issues and analysis

Each of these areas is multifaceted bringing information demands, investment opportunity, and risk management requirements. We will explore each of these in limited detail below as a foundational comprehensive look at the due diligence discipline required evaluating multifamily projects for investment or acquisition.

The sales contract is not normally considered a due diligence item by most investors. Nevertheless, we recommend reviewing the contract specifically focusing on:

1. Items to be provided during due diligence,
2. Requirements to maintain occupancy, revenue, and quality of residents in place and being added,
3. Requirements to allow ongoing inspection by the purchaser,
4. Requirements to correct day-to-day maintenance,
5. Processes should an insurance company repair occur during the contract period as well as guidelines for value adjustments should units be lost to acts of God or other insurance addressing repairs,
6. Requirements regarding background and credit check of the existing residents and new residents added while under contract, and
7. Pre existing liabilities

The sales contract should have specific financial considerations protecting the integrity of the investment post closing.

Financial requirements will include past utilities costs, recent property improvements, dates of roof replacement, dates of paving and sealing, a review of the appraisal, project budget, historical income and expense statements, and project pro forma financials. Additionally, the investment should be supported by a fixed investment management, exit, lending, and banking service plan.

Operationally and physically, the keys inspection areas are type of electrical wiring, HVAC, roofs, termite inspection, metering, trash, age of appliances, acreage, unit by unit inspection, building inspection, grounds inspection, paving and sidewalks inspection, amenities facility inspections and punch list development, development of and review of environmental and property condition reports. This should include photos showing the best of the property for marketing, investor development, and lender support purposes. Also, photos should capture and record major structural and physical issues.

The operating agreement should be reviewed for budgeting, capital expenditure management, sales and acquisition rules, status with state and local authorities, occupancy certificates if applicable, status of tax payments, survey encroachments, survey parcels, and other legal guiding documents and forms.

The market and submarket studies are critical elements for due diligence. The study should result in a detailed marketing plan that flows down to a set of actions designed to:

• Improve customer satisfaction,
• Improve retention,
• Drive traffic,
• Close leases,
• Increase revenue

Developing the marketing plan and market information includes collecting the following:

1. Economic trends,
2. Major employers,
3. Economic demographics including per capita income, industrial employment breakdowns, etc,
4. Lists of local businesses, shopping and restaurants of interest to residents,
5. Lists of local churches and religious groups of interest to residents,
6. Lists of clubs, schools, government facilities, colleges, universities, points of interests,
7. Ethnic, racial, education, and age demographics,
8. Comparable rents and amenities,
9. Comparable sales,
10. Housing inventory, price, and rental information

Additionally, the marketing information should include photos of nearby shopping, schools, points of interests, signage, comparable properties, etc. These photos combined with the other information will be a part of the larger plan for the investment, part of property websites, ILS website info, etc.

Today marketing should include a clear and detailed management plan for online marketing plans.

The Company should have an articulated proven plan for screening and managing resident issues from initial contact, to day-to-day operations, and finally to eviction or moveout.

The management company must demonstrate proven accounting, reporting, leasing, property maintenance, improvement management, resident screening, resident management, expense management, and investor reporting capability. Also, the management company should a clear concrete resume of skills, education, and experience relevant to delivering all of the above items. Further, the management company should have articulated plans for acquiring and maintaining management skills needed to support the investment.

Finally, the investor should spend enough time with the principals to assure comfort and trust regarding communication and management capacity to assure the success of the investment.

In summary, the above article provides a general outline of the major due diligence issues. While in no way, conclusive and totally comprehensive this article can serve as a good starting point for an effective due diligence process.

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