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Due Diligence- Definition

Due Diligence- Definition. 1 . An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

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Due Diligence- Definition

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  1. Due Diligence- Definition 1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. 2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

  2. Due Diligence Who Originated this Statement? Ronald Regan Yogi Berra Vladimir Lenin

  3. Types of Due Diligence • Market • Financial • Physical • Legal Time Market Due Diligence Should Proceed all Other Due Diligence

  4. Market Due Diligence • Economic Factors • Demographic Analysis • Jobs • Income • Education • Market Rental Analysis • Market Vacancy Rate and Absorption Rate • Crime Report You Can Fix the Property, But You Can’t Fix the Neighborhood

  5. Market Due Diligence- In What Phase of the RE Cycle is Your Market Sell Here Contraction Phase Expansion Phase Above Long Term Average Occupancy Below Long Term Average Occupancy Recovery Phase Recession Phase Rents are Increasing Rents are Decreasing Buy Here

  6. Consider Employment Growth November 2014: CA +2.2%, +344,100 ANNUAL PERCENT CHANGE SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division

  7. Consider Number of Employed SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division

  8. Market Due Diligence -Demographics Household income Estimated Population: 58,541 Population Growth (since 2000): -5% Population Density (ppl / mile): 14,640 Median Age: 33.28

  9. Market Due Diligence -Multifamily Purchases Increasing Do Other Investors See the Market the Same as You?

  10. Market Data is Good-SubMarketis Better Use These Data to Calculate Price Per Unit

  11. Market Due Diligence -Rents and Vacancies

  12. Financial Due Diligence-Valuation • Appraisal/Broker Opinion of Value • Price Per Unit • Price Per Square Foot • Property Sales History These values should be compared to the Market/submarket norms

  13. Financial Due Diligence-Income • Income Statement • Rents • Other Income • Rent Rolls (Past 3 years) • Review All Leases • Tenant Background • Obtain Tenant Estoppel Certificates • Tax Return • Bank Statements

  14. Financial Due Diligence- Expenses • Expense Statement • Tax Return • Property Tax Assessment • Insurance Policy • Insurance Claims History • Security Deposits • Utility Deposits • Existing Contracts (Property Managers, Maintenance, etc.) • Loan Documents (if assuming loan) • Utility Bills

  15. Legal Due Diligence • Seller Listing Agreement • What’s Included in the Sale • What are the conditions of the purchase • Purchase Agreement (RIPA) • What are you Offering • What are the conditions of the purchase • Seller Disclosures • Title • Who Owns Property • How is Title Held • Deed • Covenants, Conditions & Restrictions (CC&Rs) • Ownership Rights • Litigation History • Liens • Recorded • Unrecorded

  16. Legal Due Diligence-Governing Bodies • Zoning • Rent Ordinances • Rent Control • Number of Occupants • Etc. • Building Permits • Easements Is this Property Suitable for it’s Intended Use?

  17. Physical Due Diligence • Location • Class/Age • A (0-15) • B (15-30) • C (30-45) • Building Inspection Report • Roofing • Plumbing • Electrical • HVAC • Mold Inspection Report

  18. Physical Due Diligence • Capital Improvement History • Deferred Maintenance Report • Environmental Reports • Engineering Report • Lead Paint

  19. Who Can Help and Where

  20. Reference • General References • https://www.biggerpockets.com/articles/2506-multifamily-investment-due-diligence-factors • http://nesteggrx.com/multifamily-real-estate-due-diligence-2/ • Demographic • http://www.city-data.com/ • Crime Data • http://www.neighborhoodscout.com/

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