Seeking advice on performing financial due diligance on my first multi-family purchase

I recently put my first multi-family commercial property under contract for what I believe to be a good price. Now I have 30 days to perform due diligence on the physical property and financials.
- What tips do other investors have for a first timer who is trying to vet income numbers?
- What Documents should I request and look at?
- What if the seller is disorganized and has not kept any formal records?
- How do I make 100% certain that the property is bringing in what the owner claims?
- How do I make sure that ALL expenses are disclaimed?
Thanks everyone.
In Buying Property - Asked by Jacob C. - Nov 21, 2008
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Answer(s)

Karim A.
Broker/Agent
San Diego, CA

You should request the seller's Schedule E. Even disorganized owners must file a Schedule E with their tax return to report income/expenses associated with their rental businesses.
Regarding expenses, the first thing to is ensure that you have a complete list of expenses including property taxes, insurance, property mgt, utilities (gas/electric, trash, water), payroll, accounting/legal, advertising, cleaning, gardening, pest control, & repair and maintenance. Next is to check that the amounts for each of these items is reasonable - this is typically measured as a % of the gross operating income. Check for particularly low repairs/maintenance - some sellers misclassify (not intentionally) these expenses as capital improvements as opposed maintenance making the net operating income appear larger than it should. Also call the utility companies and verify the amounts that are being reported by the seller. Make sure there is a budget for property mgt (even if the building is/was self-managed); someone managed the property and there is an opportunity cost associated with their time. Self managers sometimes do not show a property mgt. cost resulting in an artificial inflation of the net operating income, on which the value of the property is largely based.
Regarding the physical due diligence, be sure to hire certified building inspectors that will walk each unit and inspect the plumbing, electrical, roof, sewer lines, etc. Do not call your due diligence over until you have done this.
If you need help, I offer consulting services for due diligence on behalf of my clients. I have also done extensive due diligence on my own multifamily buildings as well - you can reach me at: karim@epifanyproperties.com

Nov 21, 2008
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Jason L.
Steger, IL

Jack,
I am not sure what state you are in, but generally you can get a good handle on what numbers to vet by asking for the current owners tax return, I believe Schedule E. This is where he will list the income for the property plus all expenses he is claiming. I would imagine it best to use those numbers as true expenses regardless of the excuse that they only represent taxable expenses, blah, blah blah. Many expenses can be verified through public means such as average yearly utility expenses, property tax records form the previous three years to observe any trends. You can also request "certified" rent rolls for the previous two years (assuming he has owned it that long). These are forwarded typically every quarter to the lender, as part of there servicing due diligence. Finally, I am sure you have done this already, but have a commercial building inspector conduct an inspection of the property randomly selecting 20% of the total units for viewing. It sounds like you have already submitted a contract, but I would make the disclosure of any document you wish to review or any other inspections a condition of the sale, this way you have an out if something doesn't seem right. I don’t invest in properties; rather my company inspects them for varying lenders and investment groups. Many of the things I mention here are part of our daily inspection procedure. Feel free to call or e-mail me if you have any other questions. I hope I was helpful.

Nov 21, 2008
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Wayne P.
Broker/Agent
San Francisco, CA

Request 2 to 5 years income and expense history. Make sure that the net operating income is at least 1.5 times you the debt service before you place an offer. Example: Monthly mortgage is $1,000.00 per month, your monthly NET operating income or your income after maintenance and expenses and property taxes should be no less than $1,500.00. This will minimize your risk and ensure you get a return.

Nov 21, 2008
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Eric W.
Owner/Investor
Billings, MT

My company provides phase one site assessments nationwide as wells as environmental insurace for your transactions. We'd love to work with you and your investors to speed the closing process. We get our phase ones completed quickly...not 3-4 weeks. Please contact me at your convenience.
Eric Wells
Point Consulting Group Inc
406-697-2486
www.pointconsultinggroupinc.com

Nov 22, 2008
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Eric W.
Owner/Investor
Billings, MT

My company provides phase one site assessments nationwide as wells as environmental insurace for your transactions. We'd love to work with you and your investors to speed the closing process. We get our phase ones completed quickly...not 3-4 weeks. I am a commercial lender by trade and 30 days is not enough time to accomplish the property due diligence such as; financial analysis, appraisal, structural inspections, phase one environmentals...ect.
Please contact me at your convenience.
Eric Wells
Point Consulting Group Inc
406-697-2486
www.pointconsultinggroupinc.com

Nov 22, 2008
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

good questions. First and foremost, proceed with caution if the property owner cannot provide good financial records. Check to see what is individually metered and what is paid for by the owner. If I were evaluating the property, I would physically look at the meters and ensure it was clear which meter belonged to which unit. Ask for copies of utility statements as well. One other tip, even if the property is 100% leased and also managed by the owner, a vacancy factor must be included in the valuation dependendent on the market. Good luck with the transaction. Below I put a link to how we (hard money lenders) evaluate property.

Nov 24, 2008
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Carlos V.
Owner/Investor
Dallas, TX

Jack, go to www.themultifamilymentor.com and you will get a free report, also visit www.themultifamilymentor.com/blog to get more information. I am always putting videos and answering questions from there. To your success,

Nov 26, 2008
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