When it comes to investing in multi family complexes, otherwise known as commercial real estate or apartment complexes. Common mistakes are often made that could otherwise be avoided if extra caution were to be taken. Due diligence is key when it comes to any real estate deal, especially commercial real estate. Mostly because you are dealing with far more volume than you otherwise would be with just a single-family house. For instance, when it comes to multifamily complexes you are dealing with much more volume. Which could translate into a lot more problems, if you are not careful. In this article, we will outline the 10 most common mistakes that investors will make when purchasing a multifamily or commercial complex.
Mistake #1: Putting an incorrect value on the property
When you are first valuing a commercial complex, it is wise to be far more conservative than liberal in your underwriting of a deal. You need to do your homework. Meaning, you should check for sales comps and other available properties on the market. Reach out to active commercial brokers in the same area and inquire about local property values and compare sale prices. By doing your due diligence you can then correctly value this type of property.
Mistake #2: Not understanding your lender’s underwriting requirements
One thing that is vital to beginning phases of purchasing a new multifamily complex is making sure you’ve had a preliminary discussion with the lenders about the amount of the loan they would consider putting on the property. Lenders these days are very conservative and look at several aspects of the property including physical condition, sale and lease comparables, leases in place, intended use, environmental issues, etc. You need to have numbers in place before you go to far down the road and spend a lot of time, money, and energy conducting your due diligence.
Mistake #3: Failing to check if the complex complies with all current municipal building codes
One of the worst things you can do is purchase commercial complex that your building is not up to code. So, make sure that before you purchase the building that a contractor or architect comes out to inspect the property to make sure that everything is up to municipal standards. After all, you don’t want any costly surprises arising after the closing.
Mistake #4: Making the assumption that there are no issues within current tenant leases
As you know, lease agreements can be complicated and have many “tripwires” attached to the lease. Such as cancellation provisions, contraction provisions, pass-through expenses, and fixed option rents. You want to be aware of these provisions because if the tenant exercises them; it could put you in a bind and devalue the property. Make sure you have a competent real estate attorney look over the leases, if you are not familiar with commercial real estate leasing.
Mistake #5: Making the assumption that lenders will accept all third-party reports
Check with the lenders for an approved third-party vendor list in order to see who can conduct an inspection and prepare a report. Otherwise, you’re just wasting time and money and may have to pay multiple vendors for the exact same report.
Mistake #6: Relying on the seller to disclose all issues
While it would be nice if a seller would be completely upfront and honest, most times this will not be the case. Therefore, you need to be a bit of a detective and perform your own investigation and due diligence on properties you are looking to purchase. This can take some time and effort. After all, there hasn’t been any multifamily leasing technology invented yet they can give you an instant read on the property. So, ask hard questions and make sure that you have everything in writing in case you would need to bring it to court one day.
Mistake #7: Assuming the closing statement will not include discrepancies
Before signing any document, finalizing the approval of a closing statement, make sure you have scrutinized all items listed, as well as those omitted. Some common overlooked items are letters of credit, certificates of deposit, leasing commissions owed to brokers on leases that have recently been signed, tenant improvement allowances owed to tenants, and vendor billings that need to be prorated or paid in full prior to new ownership taking over.
Mistake #8: Failing to check out your competitors
It is crucial to check out your competition, especially if you’re not familiar with the area. It is important to be aware of rent specials or other concessions and why they exist. Reason being, it might affect your underwriting and valuation of the deal. Once again, there is no multifamily leasing technology that will be able to help you with this. So, go the extra mile and do your due diligence.
Mistake #9: Failing to spend time at the property
Knowing is half the battle. So make sure you are aware of what goes on at different times during the day, and different days during the week at your complex. Also, give yourself a chance to talk with tenants, because you never know if they will change your mind about the property.
Mistake #10: Not inspecting each and every unit
This is a vital. Don’t let the current seller try to talk you out of looking into each and every one of the units. You don’t know what they’re going to be hiding. Nor do you know what you could possibly find, such as fire issues or mold.
Purchasing commercial real estate is already complicated as it stands. So, make it easier on yourself and do your due diligence. If you do, it can help you make a much wiser investment decision.