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Due Diligence- Definition
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. 2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
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Due Diligence Who Originated this Statement? Ronald Regan Yogi Berra
Vladimir Lenin
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Types of Due Diligence Market Financial Physical Legal
Time Market Due Diligence Should Proceed all Other Due Diligence
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Market Due Diligence Economic Factors Demographic Analysis
Jobs Income Education Market Rental Analysis Market Vacancy Rate and Absorption Rate Crime Report You Can Fix the Property, But You Can’t Fix the Neighborhood
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Market Due Diligence- In What Phase of the RE Cycle is Your Market
Sell Here Expansion Phase Contraction Phase Above Long Term Average Occupancy Below Long Term Average Occupancy Recovery Phase Recession Phase Rents are Increasing Rents are Decreasing Buy Here
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Consider Employment Growth
November 2014: CA +2.2%, +344,100 ANNUAL PERCENT CHANGE Top 3 year over growers in the private service producing sectors. Source: SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division
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Consider Number of Employed
SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division
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Market Due Diligence -Demographics
Household income Estimated Population: 58,541 Population Growth (since 2000): -5% Population Density (ppl / mile): 14,640 Median Age: 33.28
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Market Due Diligence -Multifamily Purchases Increasing
Do Other Investors See the Market the Same as You?
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Market Data is Good-SubMarket is Better
Use These Data to Calculate Price Per Unit
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Market Due Diligence -Rents and Vacancies
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Financial Due Diligence-Valuation
Appraisal/Broker Opinion of Value Price Per Unit Price Per Square Foot Property Sales History These values should be compared to the Market/submarket norms
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Financial Due Diligence-Income
Income Statement Rents Other Income Rent Rolls (Past 3 years) Review All Leases Tenant Background Obtain Tenant Estoppel Certificates Tax Return Bank Statements
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Financial Due Diligence- Expenses
Expense Statement Tax Return Property Tax Assessment Insurance Policy Insurance Claims History Security Deposits Utility Deposits Existing Contracts (Property Managers, Maintenance, etc.) Loan Documents (if assuming loan) Utility Bills
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Legal Due Diligence Seller Listing Agreement Purchase Agreement (RIPA)
What’s Included in the Sale What are the conditions of the purchase Purchase Agreement (RIPA) What are you Offering Seller Disclosures Title Who Owns Property How is Title Held Deed Covenants, Conditions & Restrictions (CC&Rs) Ownership Rights Litigation History Liens Recorded Unrecorded
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Legal Due Diligence-Governing Bodies
Zoning Rent Ordinances Rent Control Number of Occupants Etc. Building Permits Easements Is this Property Suitable for it’s Intended Use?
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Physical Due Diligence
Location Class/Age A (0-15) B (15-30) C (30-45) Building Inspection Report Roofing Plumbing Electrical HVAC Mold Inspection Report
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Physical Due Diligence
Capital Improvement History Deferred Maintenance Report Environmental Reports Engineering Report Lead Paint
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Who Can Help and Where
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Reference General References Demographic Crime Data
diligence-factors Demographic Crime Data
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