Before you make the decision to purchase a multifamily property for sale, you will need to do some research first. In the multifamily property industry, this is known as due diligence and consists of hiring a third-party service provider to inspect or/and provide reports on various property parts to know its viability as an investment.
If you are planning on financing your commercial property with a loan, due diligence will be required by your property lender and will need to meet their requirements if you need a loan. However, if you want to finance the property, you will still want to do your due diligence to ensure you are getting a good deal.
A basic due diligence checklist
The major requirements for both the lender and borrower due diligence include a market report, financial audit report, lease audit, property condition assessment, unit walk, appraisal, environmental site assessment and site survey. In addition, some more reports may be required, depending on the individual situation of the borrower: seismic report, green report.
Financial audit report
Borrowers will look at a property’s expense and income statements, including T-12 and the last three-year profit and loss statement. They’ll then make projections about how the commercial property will operate in the future. However, the projections alone are not enough to make a solid decision about the future profitability of the property, instead, borrowers will want to hire a consultant to examine the historical financial statements of the property. This can help reveal inconsistencies and concerns as well as make sure the projections of the borrower are accurate.
Market report
Before purchasing a property from a commercial property buy-sell platform, a market report is required. A market report analyzes the subject market of the property and the submarket to determine the estimated occupancy level of the property, absorption time, market value and other data.
The study will additionally examine market need, supply and demand, local multifamily rents, and other market conditions which could affect the long-term profitability of the property. It is crucial to note that, for some types of loans, a borrower may need to use an approved consultant.
Property condition assessment
This is sometimes referred to as a CNA or a capital needs assessment. It is a third-party report that examines the condition of the property and how much it will cost the new owner to maintain the property. It can also be used to help calculate the replacement reserves.
Lease audit
This is a third-party property report that comprehensively examines the leases for a commercial property. It can be done by the management company that is currently managing the property, but if you think they may be biased then you may want to use a different company. This process involves looking at the rent roll of the multifamily property for sale. A lease audit will involve looking at each aspect of every property lease, including unpaid or late rental payments, tenant billing schedules, and discount leases or leases that are being given freely to a manager.
