06 Apr Do Your Due Diligence: Your Guide to Inspections
So, you found a great listing at a great price – congratulations! This just may be the start of a great rental property. But before you go too crazy, don’t forget about your due diligence. That’s right – before you seal the deal, be sure to carefully review the sellers’ disclosures and make any necessary building inspections.
See, inspections are a must in order to reduce the risk of acquiring any major liabilities with the new asset. Above anything, compliance is pivotal – and remember, housing laws change over time. Just because a property seems to be in compliance with state and federal regulations, doesn’t mean it is – there are plenty of sneaky ways properties can try to cheat the system. Not to mention, just because a property is in compliance one year doesn’t mean it will be the next.
It may not seem like a big deal in the excitement of acquisition – but the minute you get slapped with a lawsuit or the IRS knocks on your door, you’ll be wishing you’d done due diligence. Here are some tips on performing due diligence inspections to ensure your property is in tip-top shape.
The On-Site Inspection
A physical inspection is the largest attribute of due diligence – from confirming the property value is reflective of the building to checking off the compliance measures, it’s a step you don’t want to miss. Ensuring the building has been taken care of over the years and received routine maintenance is a major indicator of whether the building is in lasting condition, or whether you may be acquiring some major liabilities. If you skip out on inspection and find out post-closing that the building has a major flooding problem, you’ll be wishing you’d taken advantage of due diligence.
The Compliance Checklist
Remember, non-compliance is an expensive slap on the wrist that you’ll want to avoid at all costs. When inspecting a property, there are two major measures to lookout for on the compliance end: accessibility and staffing.
In performing a physical inspection, keep accessibility at the forefront of your mind – a building must have adequate accessibility for the disabled in order to be in compliance. A first-time violation of the Americans with Disabilities Act will rack up a whopping $75,000 in fines, so be sure the building’s accessibility is in compliance. This applies not only to the building entrance, but to parking, elevators, and access to the unit itself.
Compliance laws change often, so be sure to stay on top of the latest updates to accessibility regulations. Although a building may have been built in-compliance for the year it was constructed, times change – and the property can easily fall out of compliance as it ages. Laws can also vary depending on the building’s local and state mandates, so be sure you’ve studied the books on the area’s regulations.
Secondly, onsite staff is a major key to inspections and determining whether a building is in compliance. The people enlisted to look after a property are the most knowledgeable about the building because they’ve been the ones responsible for it. If a building manager has allowed deferred maintenance to pile up, moved in unreliable residents or enlisted poor site staff, this is sure to be a problem that carries over with the building’s ownership. What’s more, knowing the staff quality prior to sale will indicate whether you can expect to bring the current staff on with your business, or if you’ll be searching to make new hires.
While some measures are easy to fix, knowing the building’s state of compliance allows you to make a knowledgeable decision prior to buying. When it comes to operating a building of your own, staff should be up-to-date on the building’s compliance measures, like maximum rent and utility allowances. This will make a world of difference in only a year’s time, as regulations change constantly. So, once you evaluate the building compliance measures and settle on a price – move forward with intentions to have high-quality staff that keep the building in good shape from year to year.
Due diligence isn’t meant to scare or discourage – it’s simply an important tool that allows you to make the right decision when it comes to buying. Having all of the knowledge about a building upfront will be beneficial whether it’s good or bad news – and when it comes to addressing noncompliance issues, you’ll only regret not having known sooner. Get in the habit of having a close eye on a building’s compliance before you buy – and if you’re lucky enough to settle on a sale, carry those diligence practices into your own business.
