“Learning is not attained by chance, it must be sought for with ardor and diligence.”  -- Abigail Adams

Due diligence is a comprehensive, complex, and critical stage in any commercial real estate acquisition. You don’t want to leave any stone uncovered, and you want the most time available to review all documents and look for any and all possible red flags with the property, title, tenant relationships, and numerous other considerations. 

That’s why we’ve created the checklist below, which outlines many of the key documents, records, and financial information needed for a full and complete due diligence on a prospective property acquisition. 

In most transactions, we usually  incorporate this checklist into our purchase and sale contract and require that the specified due diligence period will not commence until the date that the seller produces the last of each of these deliverables. 

Simply put, when you’re the potential buyer of a property, you deserve to have all the necessary documentation in your hands before you start the intensive due diligence process.

Whether you’re a growing business looking for your first real estate investment, or a developer with an experienced deal team conducting diligence on multiple acquisitions simultaneously, we hope this checklist will serve as a helpful guide for the items you’ll need to make the most informed decision possible on your next real estate acquisition. 

The (non-exhaustive) Checklist of Due Diligence Reports

1. The most recent title policy or title commitment on the property in the possession or control of the seller together with all related documents.

2. A recent ALTA survey and topographic study for the property and a copy of the construction blueprints, engineering plans and as-built drawings in the possession or control of the seller.

3. Legal description of the property.

4. Zoning Compliance Certificate for the property and all zoning approvals (including variances and any pending applications).

5. Declaration of covenants, conditions, restrictions, reservations and easements for the property.

6. Seller’s third-party engineering, environmental reports (including but not limited to Phase I and Phase II reports, NFR letters, mold abatement reports and underground storage tank  testing and closure reports), appraisals, soil tests, boring reports, foundation reports (logs of pilings), termite or radon studies.

7. A true, correct and complete copy of each written lease and each guaranty (together with any amendments), and a certification that there are no oral leases or oral understandings, if any.

8. An accounting of all rent and other income, common area maintenance if applicable, security deposits and real estate tax contributions paid by any tenant at the property, including, without limitation, a certified rent roll, showing current rent, previous rent if applicable, delinquencies, security deposits, years of occupancy, lease commencement date and lease termination date. 

9. All security deposits and any other amounts to which any tenant, vendor, or any other party may be entitled.

10. A copy of the last three years’ real estate tax bills, including special assessments or incentives, copies of all tax protests, related correspondence and protest results for the property and copies of the prior two years’ utility bills for the property.

11. A true, correct and complete copy of each written service contract (together with amendments thereto, if any) and a true, correct and complete written summary of each oral service contract, together with copies of any and all other contracts and agreements relating to the operation, maintenance and repair of the property.

12. An accounting of all income and expenses related to the property, including collection reports and tax statements for the last three years.

13. A list of all personal property, if any, owned by the seller, located at the property, and used or useful in connection with its operation and maintenance.

14. A list of all permits, partial certificates of occupancy, certificates of occupancy, warranties, government notices, special assessments, code violations and unexpired guaranties and copies of same in seller’s possession or control.

15. A copy of existing insurance policies and certificates and any pending claims against the property.

16. A schedule of pending litigation, if any, affecting the property or seller’s ability to convey the property.

17. Any and all other matters as purchaser may deem reasonably necessary to satisfy itself, in its sole discretion, concerning the property and the status of the property’s title.

Bottom Line

This list may seem way too long, I know.  But to be honest there are other reports that could be added to the list.  

Don’t let the steps overwhelm you.  They are 100% worth it – I promise.  Think of it this way, “It’s to be safe than sorry.”

Additionally, our philosophy in due diligence is to trust, but verify.  When we’re entrusted with the preceding requested documentation, it is our responsibility to verify its relation to reality. 

With that said, there are a number of “musts” to follow:

First, we must conduct on site interviews with the staff, with tenants, with the community. 

Then…

We must conduct a full lease file audit.  We must physically inspect all components of the property. We must conduct a comprehensive forensic investigation of all components of the asset to uncover hidden risks or opportunities. 

As we do so, we gain a clear perspective of the asset we’re acquiring, and we make any business plan adjustments as we project our way forward upon closing the acquisition. 

We invite you to do your own due diligence, whether you’re an active or passive investor. For our passive investor community, we are fully transparent in the findings we uncover during due diligence, and you are entitled to reviewing that information and making the most informed decision as a prospective partner of our deals. 

“Time is really the only capital that any human has, and the only thing that he can’t afford to lose.” - Albert Einstein

No matter how much work we put into productivity, somehow it always feels like there is so much to do and never enough time in the day to do it.  But why?  Is it because there is really so much to do? Or are we not managing time effectively enough?  The rule of 168 reminds us that we all have 168 hours each week.  Some of it’s spent sleeping, keeping up with personal hygiene, spending time with family, and some of it’s spent for professional endeavors.  The question is, how are you maximizing your 168 hours each week?

In this discussion, we dive into how to manage our time, because time management is life management.  The more we take control of our time, the more we are taking control of our lives.  Further, the more we’re managing our time appropriately as real estate investors, the more optimal our results will be.

But before we get to the particulars of it, let’s discuss why time management is important.

Time Management & Stress Reduction

When we take control of our time, we are sending a signal to ourselves and those around us, that we respect our time and we respect ourselves and by doing this we reduce anxiety.  We feel like we’re in the driver’s seat, rather than reacting to what’s thrown at us.  The more we manage our lives, the less chaotic we feel, which puts us on top rather than grasping at straws, which can make us feel helpless.  The less stressed we are, the more productive we are.

WFH Time Management

Managing Time When Working From Home

When working from home or remotely, it’s even more important to manage time effectively, otherwise it can lead to burnout as well as being ineffective.  The lines between work and personal are extremely blurred when working from home.  If you work from home, gone are the days where you left the office at 5pm and work was finished until 9am the following day.  If we don’t take control of our time, then we can end up always working, which is unhealthy and ultimately doesn’t produce the best work.

There are various ways to manage time at home, for example:

• Create a distinction between the office space and personal space and don’t work in the personal space.  This can be in the form of a curtain, or a barrier or even a line down the room

• Close the laptop and the phone for an hour during the day and go for a walk

• Have strict rules about working during meals (don’t do it!)

• Have a firm cut off time at night and start time in the morning, where unless it’s an emergency you will not cross that line

• Most important: Communicate all of this to everyone in the house, so each of you can hold the other accountable

Now what are some actual best practices that we like to follow?

1. Create a System That You Enjoy Using and Looking at

The best way to manage time effectively is to create systems that work for you and make you feel good every time you look at it. 

If you like ‘old fashioned’ pen and paper, then put your to-do list on that.  If you enjoy apps, or want everything in your calendar, that’s fine.  The important thing is that you need to like your system so that you engage with it and don’t run from it. 

If you don’t like the system you’re using you’ll resist opening it and using it, which will work against you being productive.

2. Be Realistic

It’s one thing to want to get everything done, it’s another to be realistic about what you can do and the time frame you can do it in.  Managing time effectively, means managing expectations realistically.  

One way to do this is by taking the task at hand and figuring out how many hours it’ll take to get done.  Then break down the hours per day, doing a bit of work each day until the task is complete.

For example, if you have a large project that you think will take about ten hours to make a dent in, look at your calendar and figure out when you can realistically dedicate those hours. 

Can you do two hours each morning for the next five days?  Can you do one hour for ten days, or three hours over the course of three weeks?  Be realistic and then commit to what you decide to do.

3. Work When You Work Best

It’s not enough to have a to-do list, but you have to carve out time in your day to focus on that list, at times that make sense for the task at hand.

For example, if you have a project that requires a lot of concentration and you are at your best in the morning, then carve out time in the morning to do that project.  Even if it’s just three hours, work on things when you are at your best to work on them.

Don’t just put it on the to do list and assume you’ll get to it at some point.

4. Have a “Filler” List

There are always breaks in the day from the more intense work and when these breaks occur, one of the best ways to increase productivity is by filling that time with a few lighter things on the to-do list.  Some people call this the ‘filler list’. 

These are things that need to get done, but perhaps don’t need hours or a quiet space. Maybe it’s sending a few text messages or answering emails or making calls you’ve been putting off.

Think about all of the 15-20 minute chunks of time you have in the day.  If you add it up, there’s at least 1-2 hours where you could be ploughing through a ton of things.

5. Break it Down

Part of the reason we do not have effective time management is because we often don’t want to do a task that seems too daunting, so we hope it goes away, or we put it off, or we put it on the list as a whole project, but then never get to it. 

This leads to procrastination and experts tell us that procrastination is more emotional than it is logistical.

We procrastinate when we get overwhelmed or anxious and one way to combat this is by breaking things down into baby steps and asking ourselves: What’s the next step? When we do things one step at a time, it helps move us forward and take actions that eventually build momentum and ease that feeling of fear and anxiety.

“Procrastination is not a time-management problem, it’s an emotion-management problem.” - Tom Pychyl

Main Takeaways

Time management is both practical and emotional, which means that we have to keep our mental and emotional health in check.  The more conscious we are about what works for us and how and when we work best, coupled with taking stock of how a task or a job is impacting us emotionally, will help us take more control of our time.

The more we take control, rather than letting our time control us, we’ll be more productive and feel more fulfilled.

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Interested in partnering with us? Join our investors list here. 

“Before you start trying to work out which direction the property market is headed, you should be aware that there are markets within markets.” - Paul Clitheroe, ipac

“How about this market?”  

This seems to be a question everyone asks us.  In fact, this seems to be the question we are asking ourselves… everyday!

Today, when it comes to market supply, we are finding that there is no shortage of opportunities.  On the other side, however, we have discovered that market demand is off the charts (i.e. there is certainly no shortage of buyers).

There are a number of factors that are creating this unique environment we are seeing in current times, some of which we will discuss in a future discussion.  For now, let’s focus on the market cycle.

So, let’s cover the basics first: “what is the market cycle?”

Four Stages of the Market Cycle

Phase 1: Recovery

“First Half of a Seller’s Market”

Common Characteristics: 

• Declining vacancy

• Little or no new construction

To CF Capital, while there are great opportunities in every part of the market cycle, this is where we look to buy -- the contrarian’s realm (see post on contrarianism).  Overall sentiment is weaker than normal, but that means there are opportunities for value investors like ourselves, to purchase a property at a more attractive price.  

Less investors are in the market because they are still shaken up from the recession that recently occurred (Phase 4 of the looping cycle).   Although a majority of the real estate markets emerge from this phase and move onto the expansion phase, some do not, which makes the market seem riskier to a number of parties tied into real estate.

With many of the signs for “happy hunting” to contrarian investors present, it is not all smooth sailing.  It is common for property investors to have a harder time getting financing because the financial system is still adjusting from the last phase. 

Phase 2: Expansion

“Second Half of a Seller’s Market”

Common Characteristics: 

• Declining vacancy

• Some new construction

Inventory of new property slowly creeps in after a few years as real estate developers cater to the changing market forces.  With a decreased supply and rising demand, we typically see prices, rents, and occupancy moving upwards as more (optimistic) people realize that property investments could be more attractive.  

This phase can still be a great time to invest for us because good deals can still be found, and the market may have some lingering foreclosures from previous times. With that said, these deals still take quite a bit of work in order to be discovered. 

Lastly, speculators start to appear - those who make a huge bet on future growth on individual real estate markets and use that as a foundation of their projections.  This means they begin to pay less of a discount or even a premium for investment properties.

Phase 3: Hyper-Supply

“First Half of a Buyer’s Market”

Common Characteristics: 

• Increasing vacancy

• New construction picking up

We like to think of this phase as the market “boom” as hyper-supply impacts the market and conditions for investors worsen.  Currently, many markets are revealing signs that we are most likely in this phase.

It is not uncharacteristic to see skyrocketing prices, mass building projects, and everyone rushing to buy real estate.  Builders should recognize what is occurring and should put the brakes on new construction and buyers should approach things with more caution.  

The first part of Warren Buffett’s famous quote seems appropriate here: “Be fearful when others are greedy.”

Deals are harder to find, but we would still pursue them in select “pockets” in our target regions.  We know that our usual emphasis on quantitative discipline and due diligence is important as ever.  After all, it is all about the bottom line (speaking of, ask us about our new e-book on this topic).

Phase 4: Recession

“Second Half of a Buyer’s Market”

Common Characteristics: 

• Large increases in vacancy

• New construction halted

Think 2008.  Twice the trouble -- less renters on top of new property inventory.  Rental rates and occupancy tanked, which, in turn, caused a large downturn in real estate property values. The building projects that initially seemed so promising are now unable to sell, causing the prices to shoot downwards.  Another part of the domino effect is skyrocketing foreclosures -- more property owners are becoming underwater while investors find themselves unable to pay.

For contrarian CF Capital, this can be exciting.  Although, everything must be carefully examined to avoid any value traps (i.e. “catching a falling knife”), especially for bad debt.  

The second half of Warren Buffett’s quote aligns quite well with this phase of the market cycle: “Be greedy when others are fearful.”  

Although we believe it is extremely hard to market time, we remain patient and wait for signs.  Among many indicators, we like to look for the market supply to dip below the market demand.  This is where the gems can be found. 

When the market hits the bottom, which is not always easy to tell, this is the best time for real estate investors like us to capture some excellent property deals (while “elevating communities together”).

Important Considerations: A (Very) Brief Overview

As we go through our investment process, we like to focus on many metrics when navigating the market cycles.  But we also favor a few criteria when investing in multifamily properties.

1. Cash-on-Cash (“COC”) Return:  We expect to earn an absolute minimum of 7% COC return over the hold period of a property.  We focus on acquiring multifamily assets that provide stable cash flow, capital appreciation, and a margin of safety.

   It may be more difficult to find these deals in the current market, but we trust that our strict discipline will serve us right even if it means analyzing a lot more deals.

2. Debt-to-Service-Coverage Ratio (“DSCR”):  We shoot for something over a 1.25 DSCR (= Net Operating Income “NOI” / Annual Debt), which goes above and beyond what most lenders typically require.  Put simply, a property with a 1.25 DSCR is generating 25% more income than the amount that is needed to pay the debt. For distressed opportunities, in the short term while repositioning we would like to see a minimum of 1.0 DSCR while capitalizing reserve accounts appropriately.

3. Cap Rates: As the market continues to appreciate across the nation, we continue to see further cap rate compression. That’s because of the inverse relationship between property values and cap rates; as property values increase, cap rates decrease. In our target markets, we aim for garden style, Class B, or Class C assets with a cap rate greater than 5%, generally, even though we are more cash-on-cash driven and less driven by cap rate (that said, cap rate is a great barometer on the appropriateness of value).  If we can’t find the risk/reward ratio  we are looking for, we will just move on unless there are exceptional value-add opportunities to increase the NOI significantly. 

In one way or another, we would like to think that we have a leadership mindset.  As such, we know that consistency and discipline in the investment process allows us to analyze deals faster and become better and better at our underwriting.  

We take away the emotion from the process, and the numbers as well as the qualitative facts become our focal point.  We don’t make the mistake of falling in love with a deal as that can lead to poor outcomes.  Instead, we fall in love with what we know, including the numbers.

What Market Are We in Today? Closing Thoughts

At this point you are likely asking yourself, “Okay… so which phase of the cycle are we in today?”

Although each region and submarket differ, we believe that we are in the "oversupply phase" broadly across the nation in the multifamily asset class.  It is certainly ironic to think about as we are in the midst of a unique economic situation brought down by the pandemic.  New construction continues to increase and prices continue to rise.  

It’s important to remember that the dependable real estate cycle is never certain. We can count on the boom and bust real estate cycle being fed by supply and demand.  But, general trends and estimates can be made by looking at the facts from the past.  Timing is always a source of uncertainty, as external forces (e.g. interest rates, politics, etc.), can make a huge difference on the roller coaster ride of the real estate market.

We understand this.  We also understand when fear, rather than educated decisions, drives prices down, it is probably a good time to work harder to find opportunities when the crowd goes running for the hills.

CF Capital knows that investments can be made in any market if there is focus and an avoidance of getting caught up in the “hype.” We will remain diligent and focused on success for our investors in the long term, rather than making rash decisions on the short term nature of the market cycle.

So we would like to leave you with these questions: 

What do you think?  What market are we in? Where are we headed?

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Interested in partnering with us? Join our investors list here. 

A few of our readers have been asking us about more details of our value-add program.  More specifically, “How is CF Capital making targeted improvements to a property?”  

We could (and would love to) give you a long detailed response, but essentially we do this through our asset repositioning process.  Asset Repositioning is the strategic use of improvements implemented at our properties in an effort to improve their position within the marketplace.  

The overall purpose of an asset reposition is to ultimately improve the asset so that there are improvements in the financial performance of the asset.  If you take good care of an asset and are diligent in your application of these principals, it will be rewarded in cash flow and asset value among other areas. 

Of course we must have a vision for the asset, but we cannot stress enough how important it is to back up that vision with data and a real rationale.  

“By failing to prepare, you are preparing to fail.” - Benjamin Franklin

In our post about due diligence, we discuss our process in how we gather all information after the initial underwriting process.  That is, any information from a comparable standpoint and a market standpoint so that we can further understand what we are missing.   An example of a goal is answering the question, “What can we do to bring an asset from a class C to a class B property, and is it in demand in the marketplace?”

We also discuss this further in our post about CF Capital business plans.

Along with asset management, asset repositioning is one of the key components in the execution of our business plan.  Essentially, we are bringing the business plan to life.

So what are some examples of repositioning?

Aesthetic, Cosmetic, and Building Performance Improvements

Any improvements made to the interior and exterior of the asset are considered to be a part of repositioning.  With the interior, it could be adding granite countertops, installing new wood flooring, connecting recessed lighting, or any of the features that might be attractive to the tenant marketplace.

With regard to the exterior, it could be something as simple as painting the exterior of the buildings.  It could also include improvements to common areas such as an updated clubhouse or fitness facility, an addition of outdoor lighting, and an improvement to the property’s landscaping.  

Additionally, we make an effort to add value by implementing energy-efficient improvements such as low-flow toilets and shower heads, LED lighting, and potentially new windows.  Some tenants are attracted to this feature not only for its environmental benefits, but for the savings they are able to realize on their utility bill.

Our post about capex also discusses asset improvements in further detail.

Property Element Repurposing

Repurposing is just one of the many opportunities where we are able to be creative.  In this case, a sizable extra maintenance shed could be turned into an extra workplace or a small clubhouse for tenants.  Or a common area could be repurposed to be a lobby with mailroom and concierge service attendants.  

When repurposing, it is also important for us to keep our asset’s location and target tenant in mind.  For example, if our asset is located near an area that contains many technology companies, outfitting an apartment complex with high speed technologies and amenities can attract the people who work at these companies.  Another example is if our asset is in the suburbs, implementing family-friendly features such as playgrounds or extra parking spaces can go a long way.

Operations, Property Management, Branding and Marketing

As it relates to operations, property management, and personnel, the goal in repositioning an asset is to provide an improved community for our tenants.  Having maintenance personnel on-site and/or on-call 24 hours a day is one example of this.  This could also mean having specific amenities on the property that attract the ideal tenant.

In branding and marketing, we may want to want to update the external world’s view of our property in a light that more closely aligns with our updated property.  Examples of this could be re-naming of the asset and/or changing the aesthetic of the branding. 

The list is seemingly endless.

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The planning process of our value-add is more or less the asset repositioning portion in our business plan.  Without repositioning there would be no value-add program.

The bottom line is that any asset can be repositioned and improved.  As operators, it is necessary to back up the decisions by answering “is this in demand?” or “is there a gap that is being presented?”  It all starts with the research and becoming well-informed.  From there it is about understanding and bringing all of that to life through sound execution.

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Interested in partnering with us? Join our investors list here. 

Last week, after we posted our article on the business plan, another reader reached out to us over email:

“Hey guys -- I love the idea of how you go about formulating your property specific business plan.  I know that capital expenditures must be a big part of this plan, but what is your process for choosing and handling the specific improvements?  It seems to me that choosing the right capital expenditures has a lot to do with the cash flow and value of a property.  Could you shed a little light on how CF Capital approaches this portion of the business plan?”

It would be easy to refer this reader to some of the popular books and articles talking about Capital Expenditure -- CapEx -- but since our process is different and ties to our unique business plan, it is worth discussing this topic with all of our readers.  So thank you for your email!

As a quick review CapEx is money used for improvements in a property beyond normal repairs or maintenance.  

On the finance side, it is treated as an investment in assets that can have an impact on cash flow and the overall value of a property.  In a separate article we can discuss how we handle CapEx with depreciation/amortization and its impacts on tax, but today we will stick to our approach.

In our previous article about our business plan, we discussed how we arrive at a point that allows us to picture what it is going to take to get the property where we want it to be.  That means what income and expense changes can be made to raise the cash flow and NOI, thus increasing the value of the property.

The business plan lays the groundwork for us to be able to visualize our path from “acquisition to exit.”

By implementing our CapEx projects we can make the necessary improvements needed to properly reposition the property.  From this point, it’s all about getting granular.

Does the property need a new roofing? Does the property need new windows?  A common misconception is that making improvements in those two specific areas will automatically increase the value of the property.  This is not totally true.   

But if it is not true, then why would we dedicate any money to these areas?  Here it is more about protecting the property and giving it longevity so that other costs in areas like maintenance do not get out of control.  In other words, they’re a necessary investment, and expense.

Our approach in selecting “new roofing” or “new windows” comes down to a cost-benefit analysis.  If we project that the benefits exceed the costs (immediate and long-term), we start collecting quotes and taking bids from professionals who can help us arrive at those numbers.

These contractors also provide insight about the “numbers” we are looking at now as well as in the future.

We follow the same process for areas like heating, cooling, electric, and plumbing.  Similarly, we can make additions or improvements to amenities, parking lot enhancements, signage, etc.  Capital expenditures can be invested across anything that goes towards the operation of the property itself.  

The ultimate goal is to ensure that the asset is protected. 

It also means that we can think about efficiency and the types of benefits we can receive by “going green.”  We can qualify for green financing if we make a substantial amount of eco-friendly improvements to the property, thus lowering the interest rate on our loan.

Regardless of what we do in the CapEx area, we want to make sure it all relates back to the business plan and supports our investment thesis, while enabling us to go out, execute, and perform for our investors while providing quality product for our occupants.

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