When you scale up to hundreds of units, the increase in potential risk points is such that you’ll need additional reports before deciding whether or not to move forward with the deal. In fact, during the process of due diligence for apartment real estate, you’ll want to obtain and analyze the results of these 10 reports:
- Financial Audit Report
- Internal Property Condition Assessment
- Market Condition Report
- Lease Audit
- Unit Walk Report
- Site Survey
- Property Condition Assessment
- Environmental Site Assessment
- Appraisal
- Green Report
1 – Financial Audit Report
The financial audit report is the detailed results of an inspection conducted by a commercial real estate consulting company. They will analyze the asset’s operating history and provide a breakdown of the individual components of the operating income and expenses.
When you underwrote the deal, you likely used the income and expense figures provided in the pro-forma, and then made assumptions for what those figures would be after you took over the property. The results of this report will confirm the actual income and expenses, as well as allow you to make adjustments to your assumptions if necessary.
2 – Internal Property Condition (PCA) Assessment
The internal property condition assessment is an inspection report that provides you with the overall condition of the property. This portion of the real estate due diligence process is conducted by a licensed contractor of your choosing.
This assessment will differ depending on the contractor. However, you will most likely be provided with a list and images of problem areas observed by the contractors, recommendations for repairs, opinions on costs to address deferred maintenance, and whether or not further inspections are required.
These results will help you confirm or make adjustments to your repair and rehab assumptions and screen out deals that have maintenance issues outside your investment criteria.
3 – Market Condition Report
The market survey and condition report is a comprehensive comparison analysis of the sub-market. The subject property is analyzed and compared using multiple variables, including rents, unit type, occupancy, unit size, new construction, historical statistics, amenities offered, and more.
This portion of your due diligence for real estate deals is created by your property management company, so the thoroughness of the report will depend on who you select.
The results of this report can be used to confirm your underwriting assumptions including for occupancy and rental rates.
4 – Lease Audit
The lease audit is a systematic examination of the leases, including the stated income and expense figures, billing methodology, and lease language. Typically, this audit will be conducted by your property management company.
The purpose of this section of the real estate due diligence process is to verify that charges billed are accurate and in compliance with the lease terms. The most important piece of information I receive from this audit is to understand the difference between economic and physical vacancy.
5 – Unit Walk Report
A question my clients ask a lot is “when I am performing due diligence, do I need to walk every single unit?” The answer is a resounding yes! And that is the purpose of the unit walk report. It is a detailed inspection of every single unit, assessing the condition and characteristics of the entire unit.
This report is also prepared by the property management company. However, if you so desire, you can print out a spreadsheet and perform the inspection yourself.
6 – Site Survey
A site survey shows the boundaries of the property, indicating the lot size, and is a key component of your due diligence for real estate. It also includes a written description of the property. The report resembles a map.
There are a lot of third party services that can conduct a site survey. A quick Google search of “site survey + (city name) will do the trick.
7 – Property Condition Assessment
The property condition assessment is the same as the internal property condition assessment, except this one is created by a third party selected by the lender. So, you’ll have two PCAs from two different contractors, which should cover all your bases.
8 – Environmental Site Survey
The environmental site survey is an assessment that identifies potential or existing environmental contamination liabilities. This report is required and is conducted by a third-party provider selected by the lender.
The analysis typically addresses both the underlying land and the physical improvements on the property.
9 – Appraisal
When completing due diligence for real estate, the appraisal is a report that determines the value of the property based on market capitalization rate and net operating income. This report will also be created by a third-party provider selected by the lender. Hopefully, the appraisal value comes back equal to or, even better, exceeding the contract price.
10 – Green Report
The green report is an energy audit that evaluates an apartment for potential energy and water conservation opportunities and calculates the estimated cost savings that would result from addressing these identified opportunities.
The audit is performed by an energy efficiency provider. Once completed, you are sent a report with the results and recommended next steps.
Conclusion
The 10 reports needed when performing the real estate due diligence process on apartment buildings are:
- Financial Audit Report
- Internal Property Condition Assessment
- Market Condition Report
- Lease Audit
- Unit Walk Report
- Site Survey
- Property Condition Assessment
- Environmental Site Assessment
- Appraisal
- Green Report
Failing to do so can, and most likely will, result in unexpected and unplanned for expenses later on down the road. Make your investment successful, and check out my book to learn more about apartment syndication.