DUE DILIGENCE

 

The common belief among unsophisticated purchasers is that due diligence simply involves verifying the property’s financial records, such as rent rolls, service contracts, operating expenses, building systems, etc. In my world, that’s just the beginning. It would help if you found out what’s going on with the property and the immediate area in which the property is located.

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Shyness can cost you money. Go out and talk to people in the neighborhood diner. Talk to building residents, building staff, neighbors, police officers, and others. It’s unbelievable how much you will learn by doing this.

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Read the local newspapers, watch the local news and look on the city or town’s website. Try to keep your ear to the pavement. Many times, the results I uncover will affect my purchasing decision.

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A real-life example of the importance of feeling the pulse of the neighborhood drives this message home. Some years back, my partner and I were on our way to an attorney’s office to sign a contract to purchase 20 acres of undeveloped land on Long Island. We arrived early and decided to take one last look at the property.

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While driving around the neighborhood, we observed a construction crew working on a new residential development site less than a mile away from the land we were purchasing. We pulled over and started a conversation with the men. I asked how many houses they were building and their purchase prices. When I asked why the prices were so high (in fact, they were much higher than the sales prices I projected), one man replied, “Because this is the last half-acre development site the town will approve since the recent up-zoning to one-acre lots.”

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Wow! The new zoning regulations for the land would only permit us to build 20 houses on the site — half the number of homes we were planning to build. The results would have been disastrous if we had signed the contract before learning this. We uncovered this information by driving through the neighborhood and asking questions.

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Obviously, we didn’t go through with the purchase. While the seller denied any knowledge of the recent re-zoning and refused to reduce the purchase price of the land, we later learned that both the seller and his attorney had seats on the town board.

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Generally for residential properties, a desirable community should offer tenants a safe and secure environment, convenience, responsible management, and functional building systems. Before making a purchase, you need to answer this vital question: Are tenants generally happy living at the property?

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Pursue answers to these questions to get a feel for the pulse of the neighborhood.

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1. Is the property well maintained?

Impressive curb appeal, such as a freshly painted property that’s well-landscaped and clean attracts more prospective tenants who will lease at the property.

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2. Are the various building systems in working order?

The building systems include boilers, storage tanks, pipes, HVAC and electrical systems, air handlers, condensers, master or individual meters, wiring, circuit breakers, smoke detectors, fire extinguishers, etc.

 

3. Is there adequate parking and nearby public transportation?

A lack of parking and/or nearby public transportation at your property will hurt your leasing efforts and lead to increased turnover. Imagine having to walk ten blocks to the train or bus stop in the cold. In addition, nobody wants to come home after a hard day’s work in the freezing winter and have to pray for a parking spot to open up.

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4. Good or bad management?

The kind of management you have at your property can make or break you. This applies to both third-party management and self-managed properties.

 

5. Does the property have a high amount of turnover? A major key to success is reducing the property’s turnover. Always remember that each time a tenant vacates a unit, you will need to incur costly turnover expenses. There are nominal costs when tenants renew their lease. Your mantra should be to do everything you can to keep the property as occupied as possible.

 

6. What’s the immediate area’s reputation? Is the area generally safe? Talk to the police. What’s the crime situation in the area? Are they often called upon for illegal activity, such as drug deals or drug usage, or for breaking up loitering by non-tenants?

 

7. Are there good schools nearby with available transportation? Good school systems with available transportation are tremendous draws to a community and lead to much less tenant turnover. Tenants are leery of taking their kids out of school and relocating elsewhere.

 

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Sam Liebman is the founder and CEO of WealthWay Equity Group LLC, a New York-based private equity and real estate development company. He has owned substantial interests in over 70 properties during the past 30 years, ranging from multifamily communities, office buildings and shopping centers, to the ground up construction of a luxury 21-story condominium development in Manhattan. He is also CEO of Rolling Cash Realty, Inc., a real estate management company, as well as a partner in Tepper & Co., a certified public accounting firm. His new book is Harvard Can’t Teach What You Learn from the Streets: The Street Success Guide to Building Wealth through MultiFamily Real Estate (Made for Success Publishing, Jan. 11, 2022). Learn more at samliebman.com.