Navigating Multifamily Transactions
Cory Carlson

January 23, 2025

A Comparison with Single-Family Homes


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.

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Delaware Statutory Trusts (DSTs): A Comprehensive Guide for Real Estate Investors

By Cory Carlson • March 12, 2025
Delaware Statutory Trusts (DSTs) have gained significant popularity among real estate investors, particularly those looking to defer capital gains taxes while maintaining passive income from real estate holdings. A DST is a legal entity that allows multiple investors to own fractional interests in high-quality, institutional-grade properties. It provides a hands-off approach to real estate investment while offering potential tax advantages under the IRS 1031 Exchange guidelines. This article will explore the profile of an ideal DST investor, the tax treatment of these investments, a step-by-step guide on how to execute a DST exchange, and the critical role of an experienced real estate broker in facilitating the transaction. Who Should Consider a Delaware Statutory Trust? DSTs are not a one-size-fits-all investment. They are best suited for a specific type of investor, typically those who: Are Nearing Retirement or Seeking Passive Income: Investors who want to step away from active property management but still earn rental income find DSTs an attractive option. Have Highly Appreciated Investment Properties: Those looking to sell a property that has appreciated significantly and want to defer capital gains taxes through a 1031 Exchange. Seek Portfolio Diversification: DSTs offer access to diversified, professionally managed commercial properties, including multifamily apartments, medical offices, retail centers, and industrial facilities. Want to Avoid the Hassles of Property Management: DSTs eliminate the burden of dealing with tenants, repairs, and ongoing property oversight. Are Looking for Predictable Income: Many DSTs offer stable, projected distributions, making them an appealing choice for income-focused investors. Have a Low Risk Tolerance for Real Estate Investments: Institutional-grade properties with professional management often provide a more secure, stable investment compared to direct ownership of real estate. Tax Treatment of DSTs One of the main attractions of investing in a DST is the ability to defer capital gains taxes via a 1031 Exchange. Here’s how DSTs are treated from a tax perspective: 1031 Exchange Eligibility: The IRS recognizes DST interests as “like-kind” property, meaning investors can exchange their real estate holdings into a DST without triggering immediate tax liability. Tax Deferral: By utilizing a 1031 Exchange, investors can defer capital gains, depreciation recapture, and state taxes on the sale of a relinquished property. Potential for Step-Up in Basis: Upon the investor’s passing, heirs can receive a step-up in basis, potentially eliminating deferred taxes altogether. Depreciation Benefits: Investors receive depreciation pass-through benefits, which can offset taxable income from distributions. Passive Income Taxation: Income generated from the DST is reported on Schedule E, and depreciation deductions may help reduce taxable income. How to Execute a DST 1031 Exchange A 1031 Exchange into a DST follows a structured process. Below is a step-by-step guide: Step 1: Sell the Relinquished Property The first step is to sell the property that you intend to exchange. The sale proceeds must be handled by a Qualified Intermediary (QI) to maintain 1031 Exchange compliance. Do NOT list the real estate until you have FIRST communicated with a QI. Step 2: Identify the DST Investment Within 45 days of selling the relinquished property, you must identify potential replacement properties. Investors typically work with a an experienced real estate broker specializing in DSTs and 1031 exchanges to review available options. Step 3: Conduct Due Diligence Before committing to a DST investment, it’s crucial to analyze: The quality and location of the underlying real estate. The financial strength and reputation of the DST sponsor. The projected income and risk factors. The loan structure, if any. Step 4: Work with a Qualified Intermediary (QI) The QI facilitates the transaction, ensuring the funds are properly transferred and that all IRS regulations are met. The investor never takes possession of the sales proceeds directly from the relinquished properties. A QI needs to be involved early in the engagement to ensure title and escrow is set up to remain compliant. Step 5: Close on the DST Investment Once the due diligence is complete and the paperwork is finalized, the investor formally acquires a fractional interest in the DST property. The transaction must be completed within 180 days from the sale of the relinquished real estate. Constant Commercial Real Estate can assist in multiple property dispositions if it pertains. Step 6: Receive Passive Income and Tax Benefits After the exchange is finalized, the investor begins receiving distributions, typically on a monthly or quarterly basis. They also continue to defer taxes as long as they remain invested in the DST. Why an Experienced Real Estate Broker is Essential A real estate broker with experience in DSTs plays a vital role in ensuring a smooth and successful exchange. Here’s why their expertise matters: Navigating the Complexity of 1031 Exchanges: A broker familiar with 1031 rules helps investors avoid costly mistakes that could disqualify their tax deferral benefits. Access to Institutional-Quality DST Offerings: Brokers have relationships with reputable DST sponsors, giving investors access to high-quality properties not easily found on the open market. Objective Investment Guidance: An experienced broker helps evaluate DST options, considering factors such as market trends, sponsor track record, and risk assessment. Tailored Investment Strategy: Brokers work with investors to align their DST choices with long-term financial goals, ensuring a suitable fit for their portfolio. Streamlining the Identification Process: Given the strict 45-day identification window, a broker can expedite the selection process, helping investors make informed decisions under time constraints. Compliance with IRS Regulations: Working with a knowledgeable broker reduces the risk of missteps that could jeopardize the exchange. Conclusion Delaware Statutory Trusts provide a compelling investment vehicle for real estate owners seeking tax deferral, passive income, and diversification. However, executing a 1031 Exchange into a DST requires careful planning, thorough due diligence, and strict adherence to IRS rules. For investors looking to transition from active property management to a passive investment structure while preserving wealth, DSTs can be an excellent solution. Engaging an experienced real estate broker is key to identifying quality DST opportunities, navigating the 1031 Exchange process, and ensuring compliance with all regulatory requirements. With the right guidance, investors can leverage DSTs to optimize their real estate portfolios while enjoying long-term financial benefits.
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