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Investor Due Diligence Requires Detailed Understanding of Improvement Plans | International Residential Real Estate Investors Association
Friday July 21st 2017

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Investor Due Diligence Requires Detailed Understanding of Improvement Plans

As an investor, improvement plans require close examination.  Without examing actual contractors bids, resumes, human resource requirements, and costs, this can be disasterous.

Here are some thoughts of mine from a recent ezine article I prepared:

An important investment consideration is the construction and improvement plan. This plan must be reviewed on several levels including:

  • Human resources quantity and skills,
  • Cost of materials,
  • Cost of labors, and
  • Schedule.

The Company should have project schedules per property.

Additionally, for an established multifamily operation considerable savings are likely to be possible using and expanding existing staff during key periods of the improvement plan.

The initial startup of an improvement plan represents a period of considerable risk. Part of the plan should include improvement high value items that can be addressed by the internal staff or expansion of that staff. For example, in a recent project approximately 100 units required basic make ready work. By weighting the plan to complete these items, the Company has the opportunity to keep the plan on schedule as the more complex improvements ramp up to producing ready units.

Additionally, simultaneously completing high value external work can often run simultaneously for several items. For example, roofing, landscaping, and building wraps may be executed simultaneously.

Next, the Company has to consider choke point skills such as electricians and plumbing to consider how this will pressure the deliver schedule.

After considering these points, realistic rental schedules for multiple projects can cause the improvement plan to run in stage between several properties resulting in staggered availability of units designed to more closely match the ability to rent up.

Additionally, the marketing plan requires review also as the cumulative effect of marketing. Beginning advertising does not instantly produce prospects. Because of this, the plan will consider and plan delivery of units to attempt to match this ramp to ready unit delivery.

If all of these are correctly correlated, the Company will have the opportunity to achieve the greatest NOI on the lowest cash flow requirement.

While the above items are important, the Company must next consider cost of materials and cost of labor. Cost has to be considered from multiple contractor bids and then balanced against capacity and cost from internal delivery. For an apartment manager, the key considerations are likely to revolve around the major day-to-day activities. Normally, these are painting, basic carpentry, appliance, and flooring services. The chances are very good that the cost efficiency of the business exceeds a General Contractor’s delivery ability. Secondarily, a major cost consideration will include items that can be completed “free”. Items falling in this category will include items that can be accomplished in the course of completing make readies. Some items that stand out are:

  • Medicine cabinet installation,
  • Mirror installation,
  • Towel bar installation,
  • Some doors,
  • Some locks, and
  • Similar items

In addition, to the items described so far, due diligence should require providing local pricing by material, appliance, labor class hired or contracted, etc.

Next, all improvements should be tied to several key areas:

  • How much revenue can be generated from an improvement,
  • What deferred maintenance items must be addressed immediately,
  • What deferred maintenance items are anticipated in the short run,
  • How much cost can be avoided based on given improvements,
  • What improvements are required to support increased valuations

Finally, the improvement plan should be supported by a review of the resumes of the managers, project managers, internal maintenance staff, and temporary support staff verifying the skills and experience is adequate to protect the budget and complete the activities required.

Having completed all of the above steps, the investor should have in their possession:

  • Detailed project plans and schedule,
  • By month project budgets,
  • Detailed enumeration of the project material costs,
  • Resumes of resources (contractors and staff) that will be completing the improvement plan.

If work will require new buildings or major changes, the investor should receive drawings and formal bid responses.

If the work will require permits, permits must be completed before actual work is funded.

The investor should require that during the project that the improvement plan processes will include:

  • Photos of the project improvement areas prior to the work,
  • Photos of the project post completion,
  • Detailed receipts for all work completed.

A sound way to manage these projects is to:

  • Provide a reasonable initial draw, and
  • Allow subsequent draws up completing work of the past stage (with documents as described earlier).

With these items in place, the risk of failure is sharply curtailed and the likely success is significantly enhanced.

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