Building Your Due Diligence Team
by Omar Ruiz
Building your due diligence team is necessary, when purchasing an apartment investment. The due diligence process involves several aspects (financial, local market, building, etc.). This article focuses on building your due diligence team that will help with checking out the property/buildings and the various mechanical systems involved.
There’s companies that handle the due diligence process for a charge. If you plan to spearhead the due diligence process, then you need to find the right contractors to build your due diligence team.
Your due diligence team will be comprised of the following contractors, but may involve others. Those involved will depend on the property or any issues discovered that may require other professional opinions.
- Property Manager
- Building Inspector
- General Contractor
- Roof Contractor
- Pest Control Contractor
- Plumbing Contractor/Drain scope
- Structural Engineer
- HVAC contractor
- Asphalt Contractor
Each contractor on your due diligence team will handle a specific task. Depending on their area of expertise and focused activities, they may alert you of unknown issues outside of their scope of expertise. In these instances they will advise that another professional get involved with inspecting that specific issue or mechanical system to provide their professional opinion.
What follows is each contractors general tasks during the due diligence process.
Get to Work – Who Does What
The Property Manager:
You may or may not have your designated property manager during the due diligence period. On smaller properties you may not have a property manager and manage yourself. If this is the case than property management will not be part of your due diligence team.
If you do have your designated property manager and signed a management agreement, they will be very useful in building your due diligence team. Property management companies typically have a roster of contractors they have working relationships with. They can plug in these venders to build your due diligence team and coordinate the scheduling of inspections with the broker. The can also help with other aspects of due diligence, such as auditing leases, utility receipts, reviewing financials, etc. The property manager can assist with taking care of many due diligence tasks and free up your time for other due diligence activities.
When building your due diligence team the building inspector is your first line of defense in due diligence and may suggest that other licensed professionals (electrician, roofer, etc.) get involved when something out of their scope of expertise is discovered. Your building inspector will be tasked with doing the general building inspections and provide a report of their findings.
They’ll inspect the interiors and exteriors and point out problems. Their inspections are generally of a visual nature and limited in scope. In our experience, building inspectors usually notice something about the roofs and suggest a roof contractor perform an inspection. This happens so many times, it’s become our standard practice to get a roofer involved from the beginning. On a recent purchase of a large 100 unit apartment complex, the inspector noticed some exterior cracks. They advised that a structural engineer inspect for possible foundation issues. We hired a structural engineer that provided a certification clearing the issue and since he was already onsite, we asked him to check the whole property for anything else.
A general contractor may or may not be involved in your due diligence team. They typically are needed if you plan to do renovations or rehab. In these cases they will inspect and provide suggestions and cost estimates. They may also get involved if the building inspector advised that an item outside their scope of work be inspected.
The general contractor is also useful to provide references of other specialized sub-contractors, such as electricians, plumbers, roofers, etc.
Listen to the Podcast on Mastering Apartment Due Diligence
We recommend always including a roofer when building your due diligence team. The roof contractor will advise on
the roof(s) condition and if they require replacement. They can also give an estimate of the expected life of the existing roof. Replacing a roof will be costly. Old or damaged roofs needing replacement are generally good leverage for renegotiating with a seller.
An experience we had with inspection of a large apartment complex, spread out over several locations, the roofer discovered mismatched shingles (indications of repairs) and educated us about the use of the wrong roof cement on bad repairs on a flat roof section that was not visible. With a well-documented report and pictures, the seller was willing to credit us for these repairs.
Pest Control Contractor:
Your pest control contractor will inspect the property for termites and other pest issues. If they find any issues they will provide a report and estimates to fix the problem.
On recent apartment acquisitions, the building inspector was able to include the pest inspection with their inspection. They sub-contract that part of the inspection to a pest control company they have a business relationship with. This adds extra value to their inspection work and provides possible work for the pest control company if they find any issues.
The main thing you want a plumbing contractor to do as part of your due diligence team, is to video scope the drain lines. Not all plumbers have the right equipment for this, so you may have to call around to find someone that has this gear. There’s companies that specialize in this type of work and can detect hard to find leaks. Repairing a collapsed drain pipes can be a costly endeavor. It may even require the evacuation of a building. We absolutely advise that every property have the drain lines scoped.
On a deal we were under contract, we hired a company to video scope the drains. They discovered a main drain with excessive tree roots accumulation that prevented the camera from penetrating past a certain point. This would cause a clog in the near future. Using radio sonar equipment they pinpointed to location in the middle of the entry access road. Directly next to the road was a large tree located outside the property fence and along a ravine slope that would make it difficult and extremely costly to bring in equipment to remove it. Without the ability to remove the tree, this would be a regular maintenance activity requiring jetting the drain to remove roots on a regular schedule (and possibly get worst over time). In the end due to other issues, the contract was cancelled.
Video of Camera Scope Operator Finding Location of Root Clog
Notice the Massive Tree Directly Behind the Location of Root Clog
A structural engineer is usually not involved in the beginning or at all depending on the property. They will typically get involved when triggered by a finding by an inspection activity from the buyer or other contracted inspector. They typically get hired when a building’s integrity is in question (foundation, compromised structure, etc.). It’s the structural engineer’s responsibility to certify whether a building is structurally sound or deficient.
The first time we had to hire a structural engineer, it was on a large apartment complex and triggered by the lenders inspector. The inspector noticed cracks in between the brick exterior on a portion of a building. They suggested a structural engineer certify it as sound. The structural engineer inspected it and classified it as “step cracking” which is common on brick building, but not a major foundation problem. We were able to close the deal after getting the engineers certification and agreeing to fix the issue shortly after closing.
Your HVAC contractor will check your air conditioning condenser units and furnaces. On older properties with window units, an HVAC contractor is not useful as window air conditioners are not as expensive as HVAC systems. If you’re buying a large apartment complex, it may be costly to have them check all units. You can request maintenance records to identify the oldest units or visually identify older systems and focus inspections on those units.
The main purpose of having an HVAC contractor is to identify non-operating units or units approaching their useful end of life and provide a documented report. With this knowledge you’re able to approach the seller and negotiate repair credits as these are costly machines to replace.
Having an asphalt contractor as part of your due diligence team, will typically happen if there are obvious signs of deteriorating asphalt requiring repair or replacement. Their involvement may be triggered by the recommendation of the building inspector or your lenders inspector. The asphalt contractor will notify of problem areas; make recommendations if total demo and replacement is necessary or maybe just an overcoat. They’ll provide pricing and can also include striping of parking slots, speed bumps and other asphalt enhancements.
Major asphalt repairs can cost a lot of money. The reapplication of new asphalt requiring demolition of old compromised asphalt on larger apartments can run in the hundreds of thousands of dollars. The cost can increase by fluctuations in the price of oil.
Get Your Due Diligence Team to Get It Done…
Building your due diligence team will help you purchase an apartment complex for a successful investment. Your due diligence team will give the confidence to proceed with a good purchase, or give you the necessary documentation and backup to renegotiate with the seller and come to a satisfactory transaction. This list is meant to be comprehensive but it’s not all encompassing. Other contractors may be necessary depending on your specific property situation or lenders recommendations.
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