Blog 4. Due Diligence and Rejection
I’ll be tagging this series of blogs about my next acquisitions with “first time investor”
Due diligence is probably an extensive series of posts on its own, but it essentially is about doing your homework on the property
Inspection. Hiring a 3rd party inspector is the best way to find out what you can use to negotiate for credits on your purchase. This is why it is important for an inspection contingency if you're not confident about what you're doing yet.
Title. Check with the city documentation and make sure no one has other claims on the property. It might be annoying if the former homeowner has a lien because they decided not to pay a contractor or etc.
Extra inspections. If your building is older than the 80s, do a sewer scope. You'll save yourself more money in the long run.
Big ticket capital expenditures to watch out for, as everything else is normally pretty cheap to fix. This is stuff you can't lipstick over. I've probably glossed over some other expensive cap-ex, but this is my shortlist when I do walks.
Windows. Leaks and etc will mess you up
Roof. Most generic asphalt roofing has a 15-30 year life span depending on trees/weather. Any home older than the 90s will presumably need a new one unless stated that there was a recent replacement.
Water damage. Always keep an eye on each ceiling for water leakage during walkthroughs
Crawl space/basement/foundation. You want this dry and the walls not to be caving in. If your concrete foundation is starting to lean/etc, I'd probably avoid the property or hire a structural engineer to give a second opinion
Boiler/furnace/HVAC. These usually have a 10-15 year life span, usually age won't be known.
Electrical. Aluminum wiring will burn your house down. Circuit breakers with at least 100amps per unit, make sure they aren't using bulbs.
Utilities separately metered in multifamily, ideally all your circuit boxes and etc are split up already.
For the current acquisition, we weren't allowed to see one of the building's interiors before getting into contract and a following walkthrough with an architect (who we paid a consulting fee to show up, don't expect contractors to do it for free for you when you're looking to purchase) showed us that there were substantially more code violations that we think the seller, a corrupt former politician, was able to sweep under the rug from the city. All the extra fixes were going to cost an extra 500k.
We then ran into an issue with the city of Chicago. In order to up-zone our property to allow for smaller square feet per unit, we had to include 10% of them as affordable housing units. I understand their intentions, but it essentially reduced the after repair value by another 550k.
Therefore, in order to make this property viable, we ended up needing a 1.05M discount on top of our original 650k discount from the listing price. Obviously we don't expect them to accept our negotiation credits, but this is just another remind of how important it is to do the research and include contingencies that allow you to back out when it comes to risky deals.
The location is still amazing despite the condition of the property, so we've mentioned that they should take our findings to their other offers and that we'd be waiting in case they don't bite. Either way, on to next property for now.