Over the past few weeks our team has put two new assets under contract–a 350-unit value-add property in Austin, and a 106-unit we’re buying with a 1031 exchange partner. For both assets, just like all of our acquisitions, we completed a full due diligence on the property. Having just completed two of these over the last month, it’s a perfect time to review the importance of Due Diligence and dissect what our team at Wildhorn Capital is focused on during these inspection periods.
To make sure we’re all on the same page, I want to first define what Due Diligence means to us. This is the series of inspections and file audits you complete on an asset after you put it under contract. In residential real estate nomenclature, this would be your option period. For our large apartment complexes, this typically lasts 20-30 days and we conduct an exhaustive review of all the moving pieces related to this business and asset we are looking to buy.
This includes physical inspections of everything on site and electronic inspections of all paperwork, leases, contracts, etc. In the past, we’re written about the importance of your property management team in the acquisition process -this is where they are worth their weight in gold. They quarterback the whole process for us–bringing in managers from other properties to review files and maintenance staff to get inside units. We will typically spend 2-3 days on site completing the unit walks.
On site, we make sure to get inside 100% of all the units–to document the condition of the units, verify how many people appear to be living inside, take note of any pets and overall ensure the units are as advertised. For example, if the property is being marketing as having only 20% of the units being upgraded, we want to make sure that is the case.
While those teams are busy getting in all the units, we have another team executing a file audit. They start by reviewing all the leases, making sure the paper copies match up with what is listed online–checking to make sure the names match, rents are the same, end of lease is consistent. They will start to build a demographic profile–again referencing against what we’ve been told about the existing tenants, but also helping us refine our business plan as we understand who the current residents are, their interests, etc. They also review all the contracts in place and make recommendations on which contracts we’d want to keep, and which ones we’d be better off cancelling.
While all of that is happening, we have third party inspectors come on site to review all the major systems. Our preference, and general rule of thumb, is that if we can get it inspected we will. Its far better to spend several hundred or even thousands of dollars now than get surprised after closing with a big issue. We typically make sure we bring in the following outside inspectors: a roofing company to check/validate condition of the roof; an HVAC specialist to inspect a large sample size of A/C units to give us an overall condition report; plumbers, who put cameras down every main line at each building; foundation experts to review soil content and inspect any previous/potential building shifting; pool company to check on pool/equipment; and an IT audit to review all computer equipment onsite.
This all takes about 2 full weeks to get the complete report on. So what we, as Wildhorn doing during that time? We’re finalizing the business plan, tightening up our budget and assumptions and getting ready for takeover.
For us, that includes: meeting with General Contractors to start refining the intended scope of work–and getting bids on that work; work on the branding/naming if we intend to change the name at closing; working with our lender to finalize the loan application; reviewing insurance requirements and options, and the list goes on.
When we get to the end of our Due Diligence period, we want to have 90% certainty of our business plan, and 100% certainty about the asset we’re getting ready to buy and its overall condition. Of course, if you discover a major issue we need to address it with the seller before that period expires.
Executing a full Due Diligence is a tremendous amount of work, and absolutely a team sport (much like the rest of this real estate business). But when you’ve executed it correctly and move forward toward closing, you can rest easy you have a solid plan in place and you know exactly what you’re getting yourself into.