• 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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The answers to this are infinite.  Also, investors should consider their investment as a work in progress that can offer growing opportunity over the course of time.

With this in mind, the process is generally  straight forward and requires:

1. Take  the correct first steps.  Take all the information from closing and pre-closing and set up an accurate initial balance sheet and income statement.  Ensure your accounting system and support are ready to go.  Collect all the files from the seller and ensure all closing documents, resident records, and resident leases are complete, accurate and as represented and warranted.  If not, protect your legal position by filing these documents formally through your attorney with the seller.  Assure all services, utilities, etc. are transferred to your name.  Assure all payments and especially taxes are paid per the closing statement (probably a HUD1).  Ensure all bank accounts are established, initial balances deposited, and deposit accounts are fully funded.
2. Protect you asset.  Focus on cash flow, debt pay down, and strong reserves.  Assure that the bank has no incentive to consider taking the property by managing the default conditions and the position of the property versus the default conditions.  If you can move to a shorter term and lower rate you may pay slightly greater monthly payments, but you protect your asset against unfavorable banking conditions.  As we have all recently learned during the recession, this is a valuable consideration.
3. Keep an eye on your assets’ loan due dates.  Develop and close financing far in advance (I recommend seek closing new financing at least 12 months prior to term) of the loan term always keeping an eye on preventing foreclosure loss.  This vigilance would have prevented many losses during the recession and  subsequent commercial property losses during the ongoing commercial property crisis.
4. Identify your costs and continually re bid service providers, and seek alternatives to reduce material costs.  Assuming you add to your portfolio this is a combination of comparing servicing internally with your own labor or servicing with  outside sources.  Also, over the course of time, you can often find independent sources that will work for much less than larger contract sources.  Process can be a significant factor as you may determine methods that dramatically  reduce your cost.  For example, we recently  switched to a carpet type that absorbs odor and offers a 7 year life.  The reduction in long term maintenance was hundreds of dollars per year for a 1,000 square foot apartment.  Another means to reduce cost is to seek residents that will remain in place for a longer term.  This can reduce costs $1,000 or more per year in some markets.  Often elderly residents fit this category.  Finally, preventive maintenance can avoid needless expense and increase cash flow very effectively.  Build and expand your approach to preventive maintenance over time and you will net an ongoing reduction to your cost of operations.
5. Look at options to increase revenue such as offering new services to your residents.  You have a captive audience and as your portfolio grows the audience grows.  Look at offering furnished units or alternative amenities like including cable and Internet or other services.  Some good options I’ve seen in the past include selling renters insurance and offering storage.  Accomplishing this end requires consistently checking your competition and considering ways you can broaden your attraction in the market.  For example, a property  in the correct location may be worth dramatically more cash flow annually  as a short term rental.
6. Don’t allow residents to get behind on their rent and include strong enough deposits to get them out as early as possible should they fail to pay.  Also, spend time requalifying your residents periodically.
7. Alternative uses are important to consider as well.  The opportunity  may  exist to add new revenue generating services if the property has excess land and if you are willing to rezone.  Or if the property has high traffic you may be able to add signage to gain new rental value.  Or, the property may offer the opportunity to convert part of the property to a separate apartment.  Could the property rent at a higher rate if fitted for roommate rentals with  individual leases?
8. Make certain that you stay abreast of market value.  While relatively straight forward, you have to also consider alternative rentals as you may  find yourself incorrectly assessing your true competition.  For one property I held, the previous owners had failed to increase rents for many  years and had not noticed that they were $300 per month below their competition on closer analysis.
9. Be conscious of all the aspects of your asset including separate buildings, separate plaths, available acreage.  In one case, we had determined keeping the separate plaths. When the county moved to install water we were able to charge for the loss of a develop-able lot vs. the .2 of an acre they had valued at $1,500 and gained $17,500 instead.
10. Maintain the  right insurance and re bid the insurance regularly.  Avoid too low of a deductible and in general if possible make repairs without relying on insurance as this drives cost up.  Insurance is a major cost and methods to reduce cost can save significant cost.
11. Do not simply accept tax value increases.  Follow the market and look for comparable properties to support and always appeal the tax value results that government officials attempt to apply.  This implies following recent sales, knowing per square foot sales values, and other details you can use to your advantage on appraisal.
12. Hire good accounting, legal and tax support.  A good book keeper dramatically reduces tax preparation cost.  A good accountant and tax lawyer will likely save you significant cost over the project.  Specifically, include the accountant in all year end activity.  Include your attorneys in all transactional activity including refinancing, restructuring the operating contracts, or sales.

A project may seem quite limited in the beginning and overtime with careful review offer a wide range of possibilities.  Attention to the asset can go far to protect the asset and increase cash flow and value over the course of time.  Remember, investing is a team sport.  If you fail to play with the team, the results can be painful and even disastrous.

These tips can add 10s of thousands of value to the final position of the property, practically prevent project loss risk, and can increase month over month results.  Additionally, the steps you take with each project will improve your ability and efficiency with new investments in the future.  Can you afford not to exercise this diligence?

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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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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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