Performing Due Diligence before Purchasing a Multi-family Unit
Commercial real estate transactions involve many different issues during the process of getting to closing, including negotiating the terms of the deal, putting together the financing package, and drafting all of the required documents. However, a prospective buyer should be certain that he is getting the right property and that there are no hidden surprises. In order to accomplish this, there are certain items that must be considered before an initial offer ever is made. The critical items include:
- Obtain a broker’s analysis of current rental rates – As the past few years have shown, real estate values fluctuate wildly as market conditions change. It is important to understand whether the rental rates that are set at the time of acquisition of the property are realistic moving forward.
- Does the unit have Section 8 housing requirements – Knowing whether the property must provide a certain number of affordable housing units as part of an agreement with the local municipality or town is imperative. It is possible that the value of the property may be increased through the inclusion of more Section 8 housing units. However, having to offer a certain number of Section 8 units may decrease the anticipated rental income.
- Get a current rent roll from the seller – When the property is being sold as a going concern, it is critical to have the seller verify the current rent roll at closing in order for the purchaser to have a clear understanding of what leasehold rights are included in the deal. When the multi-family property has a limited number of tenants, it is likely that the purchaser will review individual leases, but when the number of individual units is significant, a review of individual lease terms is not practical, which is when the rent roll becomes critical.
- Identify any rental units that require work before being rented – In most large multi-family properties, there are a number of open units that cannot be rented out until significant work can be done to fix up the property. It is important that the purchase price of the property reflect these un-rentable units. More open units should result in a reduction of the sale price.
- Review local police and crime reports – Understanding the neighborhood in which the multi-family property is located enables the purchaser to anticipate problems with keeping the rental units occupied. It is important to go back a few years in order to get a clear picture of the challenges that may exist. Is there a growing drug problem? Have there been homicides in or around the property? These serious issues will prevent a purchaser from realizing the anticipated profits from the property. However, if there is a recent police initiative to clean up and revitalize an area, a purchaser may be able to acquire a property with great potential at a reduced price.
When investing in commercial real estate, it is critical to have done due diligence before opening up the negotiations in order to avoid surprises. While an analysis of zoning issues, easements, and other property restrictions should always be reviewed, there are many other factors that impact the long-term value of the property. Obtaining a comprehensive analysis from experienced real estate attorneys can ensure the long-term success of a real estate investment.
At the Law Offices of Georgette Miller & Associates, P.C., our attorneys are skilled in all aspects of real estate transactions, from evaluating the potential of a property to effectuating a successful closing. Our clients can be certain that we will handle negotiations, drafting, and compiling the required closing documents with skill and efficiency. To discuss your real estate needs, please call us at 1-866-964-6529 ((866) 964-6529).