Whole building due diligence 101: the basic things you need to know before buying a whole building

 

Whole building is an asset type that offers a lot of freedom of use more than individual condominiums. With a whole building, you are the Home Owner’s Association and thus, decision making isn’t put towards a vote but is more up to your intuition and relevant data.

 

That said, buying a whole building isn’t something one approaches lightly. A lot of research and due diligence must be done prior to purchase. We will discuss some things that are imperative to the process below.

First; what are the demographics in the area where you are thinking of purchasing? Is the population rising or declining? Needless to say, if the population is declining then the supply of renters will dwindle thus lowering rents due to less and less demand.

Second, when compared to a condominium purchase where a Home Owner’s Association has managed the maintenance and repairs of the common areas, whole building maintenance and upkeep has been let entirely up to the previous owner(s). Have they done a responsible job not only on the repairs but also the record keeping of the repairs? It isn’t enough for a broker to say “the seller tells me that most repairs have been done properly.”

There should be repair dates and detailed records that show what was done and when. Many investors out there are familiar enough to know when the data presented in an Excel spreadsheet that is supposed to show repair history looks thin.

Third, who is the property manager you plan to work with after you purchase the building? Who will be the building manager? Most times people confuse the two terms and to set it straight the property manager is your first point of contact for all things related to the building; vacancy rates, finding and contracting with tenants, assisting with tax return preparation.

A building manager works under the property manager specifically for maintenance and upkeep of the building. A building manager can be a separate division within the property management company or a third party outsourced company. Either is fine as there are capable, long standing companies that work both ways.

The question is; do you comfortably understand all this at the point of purchase?

If not then chances are you are about to buy something you’ll end up regretting. Too often we see people who have purchased whole buildings without doing anywhere near the amount of due diligence that was necessary prior to purchase.

Whole buildings in certain parts of Japan can be a profitable investment. It is best to make sure you are making an informed decision and not a rushed one.

 
 

Editor’s Note: Hashimoto San is a co-founder & president of Housing Japan. He writes a weekly column specifically for investors looking to take advantage of Japan’s more complicated real estate investment structures.