Due Diligence
Updated: Apr 19
I want to share my knowledge to underwrite a real estate deal—especially for multifamily acquisitions.
The due diligence process is a comprehensive and systematic investigation and analysis to evaluate the property's financial, legal, physical, and environmental aspects before making a decision to purchase.
The process typically involves reviewing property documents, leases, financial statements, property condition reports, and environmental reports, as well as conducting site inspections, zoning reviews, and title searches. The goal of due diligence is to identify any potential risks or liabilities associated with the property, assess the accuracy of the seller's representations, and ultimately make an informed decision.
You might have a chance to get a flyer or offering memorandum from listing agents. Please don't get fooled by the seller's idea before doing homework.
There are four forces that drive property value: Economic, Social, Governmental, and Physical/Environmental
My method crosses over these forces and the analysis of the property itself.
Profitability Test
Market Research (Details will be posted soon)
Property Analysis
Profitability Study
Make sure the deal makes sense. Run a simple model including current operation and assumed debt terms. Assume as conservative as possible, and make sure cash-on-cash (CoC) stays positive.
If the CoC doesn't work, stop wasting time on it
2. Market Research (Details will be posted soon)
Demand
Location + Market Boundary
Leading Industry + Major Employer
Population Growth
Household Structure
Household Income Trend
Supply
New Construction Pipeline
Sales/Rent Comps
3. Property Analysis
Financial/Operational
Rent
Occupancy Rate
Operating Expenses
Utilities
Maintenance
Property Management Fee
Property Tax After Purchase
Expected Capital Expenditure
Debt Assumption
Physical
General Conditions
Deferred Maintenance
Exterior Wall
Roof: Installed/Replaced Year
Sewer Line: Scope it
Heating System: Manufactured/Repaired Year
Legal
Zoning
Rent Control/Eviction Moratorium