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Due Diligence Purpose | International Residential Real Estate Investors Association
Friday July 21st 2017

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Due Diligence Purpose

How often do we examine due diligence from the perspective of purpose.  When multifamily investors are completing due diligence, the purpose is risk mitigation.  Those risks are:

  • Revenue risk – will the property reliably produce the revenue needed for a successful business plan?
  • Expense risk – are the expenses maintainable and are there factors that could drive expenses beyond the expectations of the business plan?
  • Capital cost risk – are the capital cost clear and well defined, could those costs escalate unexpectedly and why, and finally can the business plan support those costs reliably?
  • Debt risk – what amount of leverage can this property endure and can the debt be acquired under terms acceptable to the investor.  That is can the expense be maintained, will new debt be available within the anticipated term, is the debt at risk for debt service coverage or loan to value requirements?
  • Legal risk – Is there significant legal risk associated with the property, how can this risk be mitigated, and what magnitude of cost could it represent?  How does legal risk potentially impact the business plan?
  • Equity risk – what amount of  equity is required to assure a fully funded business plan that offers the right cash mitigation to the earlier stated risks?

Viewing due diligence through this lense increases the quality of risk mitigation the investor is completing.

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