DD "Top Three" Lists

26.12.22 03:38 PM By Due Diligence Partners

What Top Three(s) Came To Mind From Our Team?!

These TOP THREE lists are some of our top things to check for in different categories. Any one of these items,

if done improperly, could make your deal a bad deal.

We asked our team…
After hundreds of due diligence jobs performed, what are some "TOP THREEs" that come to mind?

They are…
#1 How To Effectively Check Sewer & Electric – Don’t Be A Rookie!
  • How does a rookie check the sewer? They call one plumber, ask them if they can "camera some lines," and don’t ask any of the right questions. Hey, no judgement here, we all started at the same place – learning from mistakes.
  • How does a rookie check the electric? That’s a trick question, they usually don’t.
  • Best Practices:
    • Get a plumber and a backup plumber. Ya, it’s a pain and takes more time, but 20% of the time, the plumber you booked might not show up, might get stuck on another job, might show up without equipment as promised, or a junior plumber shows up that doesn’t know how to operate anything. VERY FRUSTRATING! Don't miss checking this one because your vendor dropped the ball!
    • ii If you are comfortable, open up all electric boxes and if you're not, hire an electrician for a few hours. Sometimes, electric boxes can be locked up so having an electrician snip off the safety locks to check them can be helpful. The reason it’s critical to open each one is because the outside is NO reflection of the inside. Stuff we have found on the inside includes - missing connections, terminals, breakers (may be stripped if on a vacant lot), rusty/bad connections, terminals, breakers, old school and/or not to code connections, terminals, breakers such as fuse-style breakers, missing breakers, dangling or badly terminated wires, animals and insects nesting, and other craziness. In addition to checking the inside, ensure any pedestals are not rotting or the number one catch all, tilted! 
    • iii Ask the right questions when you hire the plumber. Otherwise, you will get screwed 90% of the time. Pardon the candor but this is on purpose - you will get screwed. Ask for a scoping run that is at least 200 foot long, an updated color video system, an updated system that saves to SD card or thumb drive, camera rollers for lines that are larger than 4 inches, a locate (to pinpoint broken sewer lines), spray paint to mark exact breaks or separations, a flat fee for the whole job or at a minimum per each run (or you may get a bill for THOUSANDS, move on to the next plumber if plumber is not willing to give any quote over the phone), a PVC sheath in case entry points are deep, a lid opener if there are manholes onsite, and a jetter if you know the system is backed up or retaining as  you cannot scope what you cannot see. Caution when undertaking jetting as this can damage some failing lines and then you have a whole other can of worms. Lastly, you will need to confirm multiple times a few days out that plumber is still scheduled to come out as scheduled. 

#2 How To Really Check Park Owned Mobile Homes & Other Assets!
  • Best Practices:
  • When you mention to a Mom and Pop that you’re going to check the park owned homes, the likely outcome is that when you show up, there will be no keys to get inside the homes, no one will be available to help, and every excuse in the book will be used for why you can’t check some or all the homes. Verify with the seller that they have access to ALL homes, that they have given proper notices for entry (requirements vary by state), that they have rekeyed any doors they don’t have keys to, and that any animals that need to be secured have been secured. Inevitably, you will still need to re-verify multiple times before visit to ensure everything is accessible. You also need to enter homes with a statement versus a question. IE, you don’t ask a tenant if you can enter, you simply tell them that you are inspecting for a few things quickly and that you will be in and out in a jiffy. Asking a tenant for permission to enter is a big mistake – you will get a lot of rejections. Remember, these are just the recommendations to START looking at park owned homes. 
  • ii Think "Top to Bottom" and create a checklist that covers the structure from... you guessed it! top to bottom, roof to clean outs. Have your checklist nailed down before entering homes – take pictures of each item on your checklist to support items that fail and to document the status of the property when you took over. Look in each room and at the major systems. Major red flags are mold, sagging roofs or flooring, all likely from water damage, and water damage is $$$.  
  • iii Get into ALL of the structures. Demand that you enter ALL structures or regret it later. We have found everything from hazardous chemical barrels that Phase I missed to rotted animals and flooding, so demand it. Think about the location of secondary structures. Are sheds/ garages/ carports going to cause the park to fail a fire safety inspection because they are too close to neighboring lots? 

#3 How To Really Check Occupancy & Income!
  • Best Practices:
  • i This section may be #3 on the diligence list but it is #1 of performance. You need to verify the income being reported matches up with reality. Look onsite to ensure homes are actually occupied by looking at electric, trash cans, cars parked, and other clues that will reveal if the home has been vacated, abandoned, or otherwise empty. If you are purchasing from a professional operator, then this is probably not a big deal. Otherwise, looking for "proof of life" goes hand in hand with double checking the rent roll. 
  • ii GET BANK STATEMENTS and MATCH THEM. Bank statements are worthless if park income and expenses are being co-mingled with the seller’s personal finances. If the last three months of bank deposits do not match the rent rolls provided cleanly, then move on to plan B. Plan B is tax returns, estoppels, and/or rent payment receipts if seller accepts cash and bank statements cannot be reconciled. Lastly, and this dovetails nicely with onsite inspection, look at utility usage. Is the seller reporting 300 lots occupied but you only have water usage at 30 lots? 
  • iii Think outside the box to catch any funny business. Is it possible the seller could have padded the income by putting in their own money? Are the balances provided realistic for what has been seen onsite? Have any of the tenant’s rents been paid by the seller as charity or have several rents been paid by government aid, Covid relief funds, or other assistance programs? Ask a sampling of the tenants what they are paying in rent, does this match the rent roll? Have you required move-in dates on the rent roll? Auditing move-in dates is a critical step to help understand tenant base stability. Short tenant tenure aka high turnover can clearly lead to all sorts of trouble and you really have to ask yourself, is this the problem or the symptom? 

We hope you found these items helpful. Remember, performing diligence is just a starting point. A savvy investor can extrapolate these ideas to find problem areas and dig in where they begin to find problems. Keep pulling that string! 

Share with us if you had a great take-away from this article or if there is a "Top Three" you have seen at your parks.
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