A Guide to Performing Due Diligence on an Apartment Building
Buying an apartment building is a great way to make money. However, this remains true only if you don’t do it wrong when buying it. You can easily lose money if you fail to follow the right process. Due diligence is the nitty-gritty part of apartment building investment that is often ignored by investors. Apartments and other large properties require thorough due diligence because more investment money is at stake. It is one way to confirm all material facts regarding a sale and determine whether you’re satisfied with the state of the property. Performing your due diligence prior to the end of the inspection period is important because it gives you the opportunity to renegotiate or back out the deal.
Below are the key things to consider during the due diligence process for your apartment building.
Inspect Every Unit in The Apartment Building.
You need to be strategic for you to get a nice investment property. The rule of the thumb is; “do not make payment for an apartment building you have not seen”. You can have the property inspected by a licensed property inspector to have a professional recommendation. This is a report prepared by the property management company detailing the condition and characteristics of every unit. Check for issues that will require extra money to fix. Renovating an apartment building can be a huge expense. You, therefore, need to know the estimate for renovating the property before going on with the purchase process.
Market Survey
The pricing of an apartment building is greatly dependent on the state of the market. A market survey is basically a comprehensive rental comparison analysis. The prices of houses tend to rise if there’s high demand for real estate property but the supply of good quality property does not meet the demand. When there’s less demand for property with much supply, the prices of houses consequently go down. However, when there’s a high supply of property that is in high demand, the pricing will be higher because some buyers will be willing to go an extra mile to get the property. When you identify what the market offers, you will avoid paying more than you should.
Appraise and Valuate the Apartment building
An appraisal is the estimate of the as-is value of the apartment building. An appraiser will inspect the property and establish its market value. On the other hand, a valuation is only done to determine how much a real estate property is worth. If you need to have a successful real estate purchase, never neglect property appraisal and valuation. A valuation report should have detailed information about the property including the location, value, land use, legal description, improvements and comparative sales information. With this information, you can determine if the property is a good investment or not.
Check Transaction Documents
As the buyer, you need to establish that the seller is the owner of the property. For the apartment building to exist, there have to be legal public records proving that the seller is legally the owner. You obviously don’t want to issues with other people with interest in the property after you’ve already paid for it. Doing a title search and working with an attorney is the best way to avoid such issues. Moreover, you should also analyze the operating statement and review every single lease to ensure it matches the rent roll given.
Site Survey
A site survey shows the property boundaries, easement, utility and any zoning issues. It is a great way to check for issues that could impact your property. The bank may not give you a loan on the property if it has issues in the site survey report. Check for zoning issues such as floods and renovation plans that could impact the neighborhood.