So, you have found your first deal. At this point, you’ve spent a lot of time and money and you have finally found an owner who is willing to talk to you. You even found a price that you both agree upon. Suddenly it becomes real. It’s so exciting – you might actually be able to buy your first apartment building! Just slow down there, cowboy, your work isn’t over yet.
Now’s the time for the hardest part of the whole deal process. Your offer was based on a bunch of numbers provided by the owner. I’m under the belief that they rarely outright lie to you, but there is a gray area of what sellers say and what they fail to mention.
Remember the last time you sold a used item. Perhaps you traded in your car back to the dealer. You may have thought, “This is a car dealer, they should be savvy enough to find any defects in there.” And you may fail to mention how the car got in a fender bender and the airbag deployed, but you got it all fixed in Reno. You might justify this by saying that it is the dealer’s job to check out the car and if they fail to check the computer that’s their fault. In fact, you expect them to check that computer for a prior airbag deployment, and if they didn’t, that is on them. Why would you volunteer information that they should find out anyway? You expect them to do their Due Diligence.
Of course, your duty as a seller is to disclose all the defects that you know about. Sadly, it’s hard to prove later that the seller knew about the faulty sewer pipe in the basement, even if he actually did know about it an didn’t tell you. The seller should tell you these things, but sometimes the seller doesn’t. You better be savvy enough to find these defects yourself. With that, here are the things to do in your due diligence.
Due Diligence Checklist
- Verify income: Bank Statements
- Verify income: Leases
- Verify income: Rent Roll
- Verify income: Tax Returns
- Verify expenses: List of Vendors
- Verify expenses: Utility Statements
- Verify expenses: Property Tax Records
- Verify risk: List of All Agreements
- Verify risk: Insurance Claims
- Verify risk: Liens and Liabilities
- Inspection: Your Personal Inspection
- Inspection: Full Commercial Inspection
- Inspection: Site survey and title report
Every one of these things needs to be somewhere in the purchase agreement. The seller will be required to give you these documents. We will discuss later about how to put these in the purchase agreement. I’ll go into detail about each of these items in future posts. Start to familiarize yourself with each of these items now, so you know what to do when you make your offer.