Due diligence? You hear the word, but what does it really mean? Here is an easy description: “Investigation and verification of the details of a particular investment.” In property investment, you can begin this procedure before you make an offer, but you also normally have clauses in the offer that permit you to have analysis completed, and evaluations of the books and certain documents.
Due Diligence – What To Find
You’ll have to take a look at the files, to verify income. You are going to be locating rental agreements that are signed by the tenants, as well as rental histories that show if there are any problematic tenants or late payments. Review rental deposit documents also, to see amounts and where the deposits are kept.
Other documents you need to examine are service contracts and agreements. Take note of whether they transfer, or if you are free to search for better offers. These may include property management agreements, pool cleaning service, landscaping, snow plowing, and cooling system maintenance agreements.
Due diligence at all times involves a examine the books and files, of course. Usually, you’ll want to take a look at the last 24 months revenue and expense statements. scrutinize something odd, like charges that are too low or income that looks too high. In analyzing the rent roll, you’ll want to find out if the rents are above or under the market rates for the area. If there are employees, you need to examine the payroll records, and look for any surprises, like accrued vacation time you’ll have to pay.
You due diligence should take in an interior assessment. You intend to know about the place, the tenants, and any complications that you’ll have to fix in the next several years. Watch for pests, water or fire damage, obvious “problem tenants.” Observe if there are any vacant apartments that are listed as occupied. Bring in professional inspectors as needed for pest inspections, safety checkups, and such. A fire Marshall may do a free inspection for you to verify that the building meets existing codes.
For the exterior assessment, it would be best to first walk around and take notes. Be cautious about anything that seems strange or in need of repair. Then you can get professional inspections, if required. You want to verify that the electrical and plumbing systems are well run and meet current codes. You furthermore may desire to find an quote on how many years of use the roofing has left. You’ll check out driveways, landscaping, and exterior paint condition.
Check on compliance with government rules as well. Are there any authorization difficulties? Phone the local authorities to determine if there are any zoning or violation problems. Have there been any fire code violations, and were they repaired?
Get assistance in doing all your due diligence. An accountant might be better than you at analyzing the books and noticing any problems. A lawyer can study your offer and any documents – as well as state what other things you should be doing.
Take notes. List problems, and the costs to adjust them, to employ during succeeding negotiations. The majority of what investors come across when buying income properties is not unforeseeable. They can be prevented or resolved if you only act your due diligence – and employ a checklist.
Another great article by Applewood Heights Real Estate