When it comes to real estate transactions, single-family homes and multifamily properties provide their own nuances and processes despite being marketed similarly and featuring similar contracts to purchase. For real estate investors, understanding the differences between these two asset types is critical in getting transactions done. Unlike single-family home sales, multifamily transactions require a deeper level of due diligence, involving unique contingencies and procedural elements that are vital to ensuring a successful transaction. This article explores the distinctions between single-family and multifamily transactions, with a particular emphasis on the personal walkthrough contingency, the role of due diligence, and how earnest money is handled. By understanding these differences, buyers and sellers can approach multifamily transactions with confidence, clarity and with realistic expectations.

The Tenant-Occupied Nature of Multifamily Properties

One of the most significant distinctions between single-family and multifamily sales is the tenant-occupied nature of multifamily properties. Single-family homes are often sold vacant or are occupied by the sellers themselves making it easier for buyers to view the space prior to writing offers or being under contract. In contrast, multifamily properties are typically sold with existing tenants in place. This tenant-occupied dynamic introduces complexities that require careful management.

The Personal Walkthrough Contingency

A hallmark of multifamily transactions is the personal walkthrough contingency. This contingency gives buyers the opportunity to physically view the property and assess its condition after writing an offer and it being accepted. The personal walkthrough contingency must occur moving forward with the sale before and other important timelines start. Unlike single-family homes, where the inspection process often occurs after an offer is accepted, the personal walkthrough in multifamily transactions occurs once an offer is accepted. Yes, it is normal for buyers of multifamily buildings to submit offers without seeing the interiors. The personal walkthrough contingency allows the buyers to size-up the deal after price and terms are initially agreed upon.

Why Is the Personal Walkthrough Contingency Important?

• Buyers can evaluate the physical state of the property, identifying any deferred maintenance or capital expenditures that may affect the property's value.
• A walkthrough provides insight into tenant behavior and the overall atmosphere of the property, which can impact future management decisions.
• Once the buyer completes the walkthrough and is satisfied with the property's condition, they can choose to remove the contingency. This action signals their intent to proceed with the transaction and triggers the next phase: due diligence.
• Generally Constant Commercial Real Estate Inc. provides a clause in the Purchase and Sale Agreement that provides a walkthrough of all or a certain number of units within X amount of days of a fully executed contract. The buyer then has 24-48 hours to remove the personal walkthrough contingency or the transaction shall terminate automatically. This walkthrough is to get a feel for the property condition and do your first walkthrough - Yes, oftentimes it is required to be under contract first before viewing the units. If the property is not what was anticipated - it is easy to terminate the transaction at no cost to the buyer or seller and continue your search.
  

Due Diligence in Multifamily Transactions

Due diligence is a critical component of multifamily transactions, requiring a comprehensive examination of the property's financial, legal, and physical aspects. While single-family transactions also involve inspections and appraisals, the scope of due diligence in multifamily deals has a few extra steps. These steps occur following the removal of the personal walkthrough contingency removal.

Inspection:

• Conduct a thorough inspection of all units and common areas to identify potential issues such as plumbing, electrical, or structural concerns.
• Evaluate the condition of major systems, including HVAC, roofing, and parking facilities.

Investment Property Addendum:

• This document outlines specific terms related to the property's use as an income-generating asset, including details about tenant leases, rent increases, and management.
• This provides the buyer a review period of the financials, insurance loss/run,  and requested information
• Ensure the property complies with zoning laws, building codes, and local rental regulations.
• Review any pending legal actions or code violations that may affect the property's value.

Title and Insurance:

• Conduct a title search to identify any liens or encumbrances on the property.
• Secure appropriate insurance coverage, including liability and loss-of-rent policies.

Tenant Rights and Leases:

• Buyers must review all active lease agreements to understand the terms, rental income, and tenant obligations.
• Local and state laws often grant tenants certain protections that may impact the timing and terms of the sale.
• Upon purchase, the buyer inherits the existing tenant relationships, including any security deposit liabilities, ongoing lease agreements, and property management responsibilities.

Operational Disruptions:

• Showing tenant-occupied units can be logistically challenging, as tenants must be given proper notice and may resist disruptions.
• Buyers and sellers must communicate clearly to ensure cooperation from tenants during the sale process.

Earnest Money and Its Role in Multifamily Transactions

Earnest money is a deposit made by the buyer to demonstrate their commitment to the transaction. In multifamily deals, the handling of earnest money can be tied to the personal walkthrough contingency removal.

Initial Deposit:

• Once the buyer and seller agree on terms, the buyer places an initial earnest money deposit into escrow within X amount of days AFTER removal of the personal walkthrough contingency. This deposit signals the buyer's intent but remains refundable until contingencies are removed. In a standard residential transaction this is due usually 3 days following the fully executed contract.

Finalization:

• If the buyer successfully completes due diligence and proceeds to closing, the earnest money is applied toward their down payment and/or closing costs. Should the transaction fall through due to the buyer's fault after contingencies are waived, the seller typically retains the earnest money unless they have written it to be non-refundable.
  

Final Thoughts

Multifamily transactions represent a unique and rewarding opportunity for investors, but they require a higher level of expertise and attention to detail compared to single-family sales. By understanding the tenant-occupied nature of these properties, prioritizing the personal walkthrough contingency, and conducting thorough due diligence, buyers can mitigate risks and make informed decisions.

Whether you're a seasoned investor or new to the multifamily space, partnering with a knowledgeable real estate broker experienced in working with income-property can make all the difference. At Constant Commercial Real Estate, we specialize in guiding clients through the complexities of multifamily transactions, ensuring that every step of the process is handled with precision and care. Contact us today to learn more about how we can help you achieve your investment goals.