When you find a property you like, either through a listing agent or through your own efforts, you’ll need to do some thorough due diligence. Carrying out due diligence on a commercial real estate transaction can be time consuming and expensive. But failing to carry out a proper due diligence investigation can ruin a deal.

Here is the checklist/steps you need to do:

1. Letter of Intent (LOI). This is a letter outlining what you are willing to do regarding price and terms.

2. Purchase agreement. You should ask your real estate attorney to make one for you. Set the due diligence schedule to 60 days: “in this agreement, all days referenced shall be construed as business days.” Having this gives you a good time frame to do your research. Try this, offer more than the asking price in exchange for the down payment. Split payment. Half at closing, the other half 30 days -12 months (the longer the better). Or ask for interest-only payments for the first 12 to 24 months. When negotiating a down payment, ask the seller to keep $200,000, but agree to keep only $100,000. Say, “If you have $150,000, I’ll pay 6% for the first three years, 7% for the next three years, and 8% during the term of the loan.When you are trying to put the minimum amount of money out of pocket to close a deal, try “cross-collateralization”, this is when the mortgagee allows you to transfer your mortgage from one property to another.You must have substantial equity on another property to make it possible or you can spread the mortgage over several properties.

3. Financing. Select lenders/mortgage professional. Submit the lender’s requirements (which will vary from lender to lender). Set closing date.

4. If you have private money partners helping finance the property, send them the details of the deal.

5. Get offsets from apartments sold in the area that are similar. Check what the median rent per unit is in the area. A property management company in the area should help (especially if you’ll be using them in the future).

6. Rental income. Get the latest “rental list.” A rent list is an inventory/documentation that shows what the rents are and what was collected per unit. Rents must match operating states. Obtain a letter from the seller with all tenants (verification) attached to the current lease. The letter should state that the attached lease is true, accurate, and no other agreements have been made between the tenant and landlord (someone can try to get one quick and have your cousin sign a lease by paying $100!) per month!). The letter must specify the lease and when the last payment was made.

7. Audit lease agreements, deposits, lease expiration dates, landlord disputes, compromises with other tenants (such as getting half the rent to clean up the property).

8. Pro-forma/projections of 5 years of ownership.

9. Vacancy. Historical and current.

10. Ancillary income, (money that enters other than rent). Analyze this income and see if it arrives consistently.

11. Laundry contracts. When do they expire? Who are they with? Last time renewed? What are the owner/seller divisions?

12. Cable/satellite television. When do they expire? Who are they with? Last time renewed? What are the owner/seller divisions?

13. Operating expenses. Get the list of vendors and copies of all service contracts. Review these contracts. Get copies of last year’s insurance claims, get vendor list of pending litigation (if any), environmental issues.

14. Review the advertising contracts of the owners, all advertising costs included in pro-forma. Price what it will be for having a leasing brochure (if you are going to self manage), resident retention programs.

15. Cost of payroll. # of staff (office and maintenance). Review salaries, bonuses, leasing incentives. One number you can have to help you manage the property is to have 1 person (office and maintenance) for every 50 units.

16. Administrative costs. Review: equipment lease, postage costs, phone and internet charges, snacks, supplies, legal business permits (evictions and “pay or quit”), and cleaning).

17. Property management expenses. Who is the company? Check your property records. It is the pro-forma rate. Are their differences? Pest control costs and any other miscellaneous costs.

18. Cost of landscape. Review contract. Take a look at what the property looks like with them doing the cleaning. Check the irrigation system. Get quotes for landscape improvements.

19. Property Tax Adjustment: Find out what the new tax amount will be before you buy. Go to the courthouse and talk to the tax assessor and ask what information they need to review the taxes on the building. If you can download it, ask, if you can make it retroactive?

20. Security costs. Investigate crime reports. Ask the police if any incidents have been reported at the apartment building. Include the cost of security in pro-forma. Try to get a gate and have security patrols (doing the rounds).

21. Cost of building turnover. Look at the turnover rate and the cost per unit. Look for unusual turnover expenses (refrigerators, stoves, etc.).

22. Maintenance costs of repairs. Please look at previous work orders. Review previous jobs.

23. Public services. Gas, water, electricity, garbage, others. See if the building could be “undermetered”. This is where tenants pay their own utility bill.

24. Property taxes. Get copies of two years’ worth of tax bills. Look at schedule “E”, this is where they report to the government what they have done with the property, compare this to what they want for the property.

25. Property insurance. Get an insurance offer along with floods, earthquakes.

26. Reserves review past capital expenditures. Identify frequent items of concern and budget with reserves per unit per year.

27. Questions of title. Select the title company. Obtain preliminary title. Analyze the title. Determine who pays for the title from you and the seller. Title fee must be included in financing. Learn about transfer taxes now and what they might be when you sell. Any documentation cost? What are the escrow fees? These costs must be in the contract/agreement. Is a survey needed for ALTA? Checked for zoning and parking compliance?

28. Inspections. Physical inspections of grounds and units, electrical wiring, plumbing, balconies, view as many units as possible, HVAC, stairs, elevators, roof, landscaping, asphalt condition, lighting, carport, exterior paint, pool, capital expenditures reviewed, copies of certificates of occupancy, pool operating permits, repair and maintenance records, recurring plumbing issues, list all deferred maintenance capital expenditures estimate, estimates should resemble third party reports, condition of garage , condition of the washer and dryer, fire sprinklers, determine if it complies with the American Disabilities Act. Try to videotape the property to show as evidence if necessary.

More about inspections

Report to the inspectors – make sure you understand everything they have reported. Ask about the consequences of any potential problems. Have each of them read the results of the others who also made a report. After they have read the other reports, ask them if there is anything they would like to re-inspect or anything in their report they need to change/modify or anything they think the other inspectors should re-inspect based on what they found. Remind them that they are a team.

when you find problems

o Recheck the scope of the problem

o Determine if there is a dollar amount to fix the problem

o Go over the issues with the seller: ask if they were aware of the problem, if they looked into how much it would cost to fix it, if any tenants complained about the problem, and if so, what did the landlord do with those complaints?

o Submit an addendum to the contract stating that the seller agrees to fix the problems, or reduce the down payment or price, or both.

29. Last task: make sure all the numbers are correct. Have CPA review. Have an exit strategy: refinance or sell and when.

30. Closing: Closing rental list received and reviewed. Have apportionment reviewed and agreed. The purchase price in the contract is correct. Seller credits are credit. Correct closing cost. Payment of points reviewed and approved. Approved legal cost.