The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Multi-family apartment building due diligence is an involved process that should be done in two parts. On the first part, you’ll want to look at how that multi-family unit performs monetarily. You’ll take a look at a full lease audit, investigate the rent roll, verify security deposits, look into evictions and more. On the other hand, you’ll inspect the property physically, walking through each and every unit, talking to maintenance crews, having HVAC systems inspected and making sure the property itself is as you’ve expected it to be.
Richard Wilson: And what does a multi-family apartment building due diligence process look like on a high level? I’m sure you could do a full day workshop on this question, but at a high level what does that look like?
Brian Burke: Yeah, you’re right about that, Richard, you really could – this could be a full day. But on a high level we’re looking at – the main thing you’re trying to accomplish, you’re trying to make sure that the property is what you think it is, and that the income is what you think it is. So, let’s break that down into two easy components. On the income side, what you want to do is we’re going to do a full lease audit where we’re going to compare the signed leases and any lease amendments to the rent roll to make sure that there’s written documentation to show that the rent roll, where it shows $1000 a month for that unit really is contractually $1000 a month. We’re going to verify the security deposits that are on deposit to make sure they match their rent roll. We’re going to look at the delinquency rate to see if they’re hiding non-paying tenants on the balance sheet and not reporting that, and just look to see how many people are in eviction versus what’s being shown. So that’s verifying the income.
On the other side we’re verifying stuff about the property. So you’re going to do what we call a 100% unit interior walk, in other words you’re going to go inside each apartment unit to make sure what the condition is, that it’s habitable, rentable, what kind of renovations are needed and so on. You’re going to look at the major building systems and components, you’re going to get up on the roof, you’re going to have contractors look at the heating and air conditioning systems, and all of those things, and then you’re going to audit the maintenance tickets, you’re going to interview the maintenance man to ask about what their biggest problems are, and then you’re going to examine the title and survey to make sure that there’s no surprises there. Once you’ve done all that, you should have a pretty good handle both physically and on the income.
Richard: Right, great.