By Judy Dolan, Senior Vice President
Over the years I have seen many examples of investors purchasing properties where they had not reviewed key points of the sale. These investors assumed that because the marketing package made sense to them, the actual property information would follow suit. This is not always the case, however, many issues that occur shortly after closing could be avoided or resolved prior to the closing. There may be items which are revealed after closing, but if you do your due diligence, hopefully you will uncover the issues during the time you have to cancel the contract.
As a purchaser of an investment property, there are many items that you should review which could affect how your investment will perform in the future. These items should be reviewed during the inspection period so that you can cancel or renegotiate the contract according to the terms of the contract should you determine that these items would adversely affect the deal. Hiring a professional should help you discover any issues, but it doesn’t necessarily guarantee that all issues will be uncovered. I’ve compiled a list of 21 items that I believe are important to review. This list isn’t all encompassing. There are other items that should be reviewed, but these are the ones that I have seen that can cause issues after closing. I’ve split the 21 items into three parts. Here are the first seven in no particular order:
1. Condition of the Property: When purchasing an investment property, it is advisable to conduct a property inspection or a property condition survey. This type of report should outline all the major systems in the building, their condition, age, if known, and in some cases, repairs or capital improvements needed. Take note in these reports if the information about the property is independently verified or if it is just representations from the seller or the seller’s broker. If the report indicates that the roof is new or under warranty, get a copy of the report or the latest permits for the roof work.
2. Parking: Ensure that there is adequate parking for the property. Actually count the number of parking spaces at the property. Cities have parking requirements based on the type of use. For instance, most cities have a requirement that an office building should have 4 parking spaces for every 1,000 square feet of rentable space. That means that if you are purchasing a 20,000 square foot office building, there should be at least 80 parking spaces for the building. Verify the parking ratio requirement with the municipality. Take a look at the parking lot various times of the day. Are there parking spaces available? Do people have a difficult time parking at the building? Are there vacant spaces in the building that need to be leased but no parking spaces available in the lot? These are all red flags and lead to tenant discord and vacancies in the building. Also make sure you check the leases to see what parking spaces have been allocated to the tenants. Do the parking spaces allocated add up to the available parking spaces at the property or have the parking spaces been over allocated.
3. Condition of the Roof: When purchasing an investment property, have a roof inspector prepare a roof condition report. Research the age of the roof. Is there a roof warranty? If so, you need to get a copy of it, review it, and make sure it transfers to a new owner. Is the roof water-tight? Are there leaks? What is the remaining useful life of the roof? Will the building need a new roof soon or are you able to maintain the roof for many years? The roof is an expensive item if it needs replacement. You should always have a roof inspection during your due diligence period.
4. Zoning: Is the zoning compatible with the current uses of the tenants? Has the zoning been changed or modified? Are there tenants that don’t conform to the zoning and their use will be prohibited if the tenant vacates? For instance, there was a new ordinance in a particular retail zoning category that prohibited a convenience store within 1,500 feet of any other convenience store. A landlord had been negotiating with a prospective tenant for a deli that also sold chips, sodas, cigarettes, and other various items. When the prospective tenant went to the city for a business license, the city denied the use because there was a convenience store operating within 1,500 feet of the subject location. Zoning information is generally available from the municipality’s zoning office.
5. Tenant Leases: When purchasing an investment property, you should carefully review the leases for the property. You should abstract the leases so you have all of the key items in a short summary form. The abstract form should list all of the same information for each tenant at the property. Pay careful attention to rent charges, additional rent charges, if any, insurance requirements, rights of first refusal or first option, renewal options, parking.
6. Rent Roll: A rent roll should have the following information – Tenant name, unit/suite number, monthly rent, monthly additional rent, if any, lease commencement date, lease expiration date, and space size. If you have been supplied with a rent roll, verify the information on the rent roll with the actual leases. If things don’t match, find out why.
7. Tenant Estoppels: Make sure your contract provides that the tenants have to complete a Tenant Estoppel Certificate. This is a document that verifies the lease terms to the purchaser and, in some instances, to the purchaser’s lender. The document should require the tenant to certify the lease term, any option provisions in the lease, any renewal terms, the security deposit currently held, the current rent payment, the current additional rent payment, the tenant’s past due payment status, and anything that the current landlord may owe the tenant (repairs, credits, etc). When you receive the Tenant Estoppel, compare it to your lease and the lease abstract. If the Tenant Estoppel does not match the lease terms, that should be a red flag.