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Key Areas of Due Diligence | International Residential Real Estate Investors Association
Wednesday January 24th 2018

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Key Areas of Due Diligence

When thinking of due diligence, investors need to consider the main areas that determine a successful investment.  From our perspective this includes:

  1. The sales contract and legal issues,
  2. Market factors,
  3. Physical property factors,
  4. Resident base (current and planned),
  5. Local tenant rights,
  6. Local tax factors,
  7. Local and property crime factors,
  8. Local labor access and costs,
  9. Local supplier costs,
  10. Management plan and factors,
  11. Business plan
  12. Financing and structure of financing

Completing these areas effectively  can:

  • Save capital costs,
  • Increase immediate revenues,
  • Prevent poor investments,
  • Sharply reduce risks

The skills necessary to perform these take years to develop and are continually refined.

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2 Responses to “Key Areas of Due Diligence”

  1. Ask This CFO says:

    I completely agree with your assessment. . This largely overlooked, or at the very least underrated task is of utmost importance in the lifecycle of a deal. Before we go investing often-scarce resources on a venture, we must make sure that it can achieve a sustainable competitive advantage in the marketplace. Most entrepreneurs would like to get to market before the competition and so in their haste make a tactical mistake of sacrificing due diligence. It’s that run fast or die mentality again. The reality is that one must not only get to market as expeditiously as possible but also allocate sufficient time to researching the business issues. Otherwise failure is eminent. That having been said, the process of due diligence, which involves a great deal of probing

    Thanks Kandarp Vaishnav (www.askthiscfo.com)

  2. 062291va says:

    • Group: Multifamily – Apartment Investors Due Diligence Group
    • Subject: New comment (2) on “What do you consider to be the key elements for multifamily due diligence?”
    The answer to this depends on what you mean by key. If you mean important elements that should be part of any due diligence, all of the items in your list qualify, as well as many others, such as development pipeline, barriers to new construction, rent control, tenant profile, property image and position in the market, etc.

    If you mean which of these items are most important, the answer depends on the facts and circumstances of the particular deal. The most important item will be a function of the impact of the item on your cash flow projection and the degree of uncertainty you have about the item.

    To speak of a “most important” due diligence item, however, misses the essence of the due diligence process. When we buy a multifamily property, or any other type of income property, we are buying a stream of future cash flows. Since none of us has a crystal ball, or at least not an accurate one, this requires us to project what those cash flows will be. These projections involve making assumptions about all of the many factors that influence how the property will perform. Due diligence is our opportunity to test, in so far as possible, the validity of each of those assumptions. If you ignore a factor because you deem it unimportant or less important, that will likely be the factor that comes back to bite you down the road. So while there will always be some factors on a given deal that worry you more, or about which you have greater uncertainty, and which will therefore receive relatively more attention in due diligence, that doesn’t make those factors necessarily more important than other factors.

    The solution, then, is to have a due diligence procedure in place which covers as much as can reasonably be hoped for, and have a due diligence team in place who know to cover the entire procedure every time, but who also know what issues are of greater concern on this particular deal, and so will give extra attention to those items to be sure they got it right.
    Posted by Brian Rutter

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