Bob Nelson – Cursory Due Diligence

Thanks so much for checking out the Real Estate Today Podcast. Right now we’re going to talk about cursory due diligence.

Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker

Marcia Edwards: I think one of the most important things is understanding what due diligence is before you get to a property. A lot of the due diligence on investment property is not on site, it’s actually a conversation about the financials and the story.

Bob Nelson: There are certain things that you want to check out. You want to know exactly how much the tenants are paying for rent, how long they’ve been there, most recent increase, when did that occur, how stable are the tenants, because what you’re effectively buying is a piece of property that generates rental income. Well, how well does it generate rental income is a function of the tenancy.

Marcia Edwards: Now, usually when you have an investment purchase, Bob, isn’t it a case that you’ll be presented with what the seller shows as the financials or the cash flow and the benefits financially on the property?

Bob Nelson: Yes. And what the seller of course, or the broker who represents the seller, what they’re going to do is give you information that would allow you to lead your conclusion to the asking price of the property.

Marcia Edwards: Okay. So you’re looking at that part of the picture and you don’t always get a realistic … I mean, they may be under-rented and this may be just six months of rent history. It may not have all the operating costs, or it may have operating costs that include capital improvements during that one year.

Bob Nelson: Property analysis deals with recurring operating expenses, those expenses that will occur year in and year out. Now, if you happen to re-roof the property in a particular year, is that an operating expense? Well, it’s classified as a capital expenditure, a capex, as it’s referred to in the business. And certainly you’re not going to re-roof the thing every year, so I would exclude that from the typical analysis.

Bob Nelson: Now, sooner or later there will be a year when you replace the roof, but that’s not part of the operating income and operating expense that you’re looking at initially when forming an opinion of investment value to you.

Marcia Edwards: When you’re looking at multifamily, I recognize that you’re going to walk through possibly just one unit, not all the units. On the inspections, do you actually have an inspector go through all the units?

Bob Nelson: Yes, absolutely, every unit. Not only will I walk through every unit, I’m going to have my inspector walk through every unit also. I’m going to have him walk through the attic and crawl underneath the property, etc. I want to see everything.

Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30 on KPNW for the “Real Estate Today” radio show.