Jared Husmann / August 14, 2020
Missed Due Diligence Items During Your Due Diligence Inspection
8 Common Due Diligence Mistakes for Multifamily Properties
Investing in multifamily real estate is exciting, and multifamily rentals have the potential to deliver huge returns. However, if you’re new to commercial real estate investments, you may benefit from some assistance during the purchasing and due diligence process — especially during property assessments.
Inspecting a multifamily asset can be time-consuming, and there are a number of potential dangers and risks that many buyers and agents miss. Working with an experienced due diligence consultant when purchasing your next property can help you avoid due diligence mistakes and protect you from costly updates and repairs.
Whether you’re working with a professional due diligence coordinator or navigating property inspections on your own, be on the lookout for these common items missing during due diligence reviews.
What Does Due Diligence Include?
Due diligence audits protect you, the new property owner, from making an investment that could cost you more than you’d profit. Before investing in commercial real estate, buyers should look at financial statements, do a market analysis, check tenant reliability and study turnover rates.
One of the most important things to do when buying a multifamily property is a thorough property inspection with professionals who know what they’re looking for. We’ll focus on a few common due diligence mistakes new multifamily investors make during their property walk-through.
8 Red Flags & Common Items Missing During Due Diligence
Pay attention to the following items during your due diligence inspection. Catching these issues before finalizing your purchase could save you thousands of dollars!
1. Faulty Electrical Outlets
Many older apartment buildings have aging wiring and electrical outlets that do not meet state and local electrical code requirements. Electrical codes are put in place to provide a regionally recognized standard for the safe installation of electrical wiring. When wiring does not comply with codes, it could pose a significant safety risk to building residents.
Lenders and insurance agents will require updates for any electrical elements that are not up to code. This can often mean rewiring the entire building, an expensive project that, while necessary to avoid potential fire risk, could negatively impact your bottom line.
Closely inspect all electrical outlets in the entire building to make sure everything is up to code. Look for things like GFCI outlets in bathrooms and kitchens, and hire a professional to investigate further. An electrician will provide specific recommendations tailored to the needs of the property and will be able to give you an estimate on the total cost of a major electrical overhaul. With this information, you’ll be better equipped to decide if the property is a wise investment.
2. Outdated Breaker Boxes
Some older apartment buildings also utilize Federal Pacific Electric (FPE) breaker panels. These breaker panels have a high potential risk for unexpected failure and are universally understood to be defective and unsafe. FPE panels are no longer used due to faulty manufacturing and risk of electrical fires.
If you see Federal Pacific Electric panels in a building, you can expect your lender or insurance agent to require you to replace each FPE electrical panel. Failure to replace FPE breaker boxes will likely lead to higher insurance premiums on the building.
Hire a professional if you’re looking at buying a building that has FPE breaker panels. An electrician can give expert guidance about replacing FPE breaker boxes, along with cost estimates. Modernizing breaker panels may be a significant investment, but it’s an important one to keep residents safe and protect the longevity of the property.
3. Cast Iron Pipes & Orangeburg Sewer Lines
Cast iron and Orangeburg pipes are two types of plumbing to look for in older buildings. Cast iron was a common material for plumbing pipes prior to 1970, and Orangeburg pipes were used in many properties built from 1945 to 1972. Both of these materials are substandard when compared with modern PVC sewer pipe structures.
Cast iron pipelines are known to rust, causing breakages or deterioration. Aging cast iron pipes can lead to sewer seepage around the property and cause massive damage and inconveniences. Orangeburg pipes are essentially made from hot tar and wood pulp, and they often deform and collapse. Hire a plumber to inspect the pipes with and find out as much as you can about the plumbing inside and around a rental property before you commit to a purchase.
4. No Water Cut-Offs
Older apartment complexes are often missing water cut-offs throughout the plumbing system. These water cut-offs are simply valves that allow water to flow from the source to the faucet, toilet, etc. These knobs allow you to easily cut off the flow of water in the case of a leak.
If a property does not have water cut-offs, you will have to turn the entire building’s water supply off in the event of a leak or a burst pipe! This is inconvenient for property managers, maintenance staff and tenants. Look for water cut-off knobs next to toilets and under sinks, and be aware of the cost associated with updating an older plumbing system.
5. Unsafe Decks, Balconies & Porches
Balconies and porches are nice amenities for residents, but they’re often not built to comply with current building code requirements. In order to protect tenants, have all balconies and porches inspected by a professional.
Common balcony and porch issues include over-spaced spindles that could possibly allow children to fall through or become stuck, unsecured or misplaced footings and more. Familiarize yourself with local building codes for decks, balconies and porches, or hire a qualified contractor to inspect these areas.
6. Check Your HVAC Inventory
Walk through each unit and inspect each HVAC system. If possible, hire a qualified HVAC contractor to walk the property with you. Getting an accurate assessment of the heating and cooling systems is essential because repairing and replacing HVAC equipment is extremely expensive. You’ll want to have a good record of which systems are in good repair and how many will need to be replaced in the coming years.
7. Sufficient Exterior Lighting
Tenants want to live at a place that is safe and well lit. New, bright lighting can also improve the property’s overall curb appeal. Drive by the property at night to look at exterior lighting and ensure the entire parking lot and common areas are lit appropriately. If possible, walk the hallways of the apartment/building to look for defective lighting.
8. Confirm Property Has Secured Access
Lighting makes tenants feel safer, but secured entrances are an essential part of building safety. Without secured entry points, anyone could enter the property, even individuals who could harm residents or vandalize property.
Providing secured access protects residents and prevents vandalism. Always check for secured access points to the building to ensure residents’ safety and quality of life, and be prepared to invest in security improvements if property entrances aren’t up to par. From keyed entrances to doors with keypads or smart locks, research what you feel is appropriate for your property.
Don’t Fall Victim to Common Items Missing During Due Diligence Reviews
Before buying your next multifamily investment, have a professional help you with a due diligence audit to make sure you’re not making any due diligence mistakes. The Katalyst Team has years of experience and has seen plenty of checks that save buyers money and common errors that have cost new buyers. Reach out to us!
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