5 Critical Diligence Items for the Purchaser of Multi-Family Real Estate

A client engaged me this week to assist with the purchase of a multi-family apartment complex in Atlanta, Georgia, which gave me a chance to dust off my multi-family due diligence and closing checklist.  Purchases of operating real estate assets (whether multi-family, office, industrial, or retail) come with many of the same issues.  All types of commercial real estate require similar purchase contract documents and diligence materials.  However, multi-family deals include a few additional items that wouldn’t normally be seen in other types of properties.  After reviewing my checklist, these are the 5 most important distinctions regarding multi-family purchases that stuck out to me:

  1. Purchasers should always review police reports for the last 2 years related to the property (particularly if the property is in a low-income area).  A purchaser may not necessarily want to purchase an asset that was the scene of a double-homicide last week or known for drug activity;
  2. It’s often revealing to review a schedule of insurance claims made on the property during the ownership period of the Seller.  Was there a flood, tornado, or other natural disaster recently that may affect value?
  3. Review the tenant correspondence file or a schedule of lawsuits against past or current tenants.  This would apply to any asset with tenants (whether multi-family or not), but I think takes particular significance in the multi-family context.  Are there problem tenants?  What percentage of the total?  Has the past landlord been too lenient with past due rents, etc.?
  4. A broker opinion regarding market rents can give the prospective purchaser an idea of whether value can be created by raising rents.
  5. Section 8 evaluation.  Is the property currently enrolled?  Can additional value be created by including Section 8 tenants?  What percentage of tenants are section 8?  Is this hurting value?