If you are looking towards buying an assisted living facility that is put up for sale, the norm is that you should first contract experts to carry out standard inspection and appraisal of the property before submitting your offer. In addition to a standard inspection and appraisal carried out by professionals, as a buyer of an assisted living facility, you should also do your own investigation of the property.
Due diligence is the investigation or exercise of care that a business or person is expected to take before entering into an agreement or contract with another party, or an act with a certain standard of care. Here are very important due diligence tips you should follow if you want conduct due diligence on an assisted living facility that is put up for sale;
16 Due Diligence Checklist for Buying an Assisted Living Facility for Sale
Table of Content
- 1. Compare and Contrast
- 2. Conduct Your Homework
- 3. Get Multiple Bids for Your Mortgage Financing
- 4. If You Are Financing, Expect an Appraisal
- 5. Have the Assisted Living Facility (Property) Inspected
- Types of Inspection to Carry Out On an Assisted Living Facility
- a. General Facility Inspection
- b. Wood – Destroying Organisms (WDO) Inspection
- c. Lead – Based Paint Inspection
- d. Radon Gas Inspection
- e. Defective Drywall Inspection
- 6. Is the Assisted Living Facility (Property) Eligible for Insurance?
- Types of Insurance for your Assisted Living Facility
- a. Homeowner’s Insurance
- b. Dwelling Insurance
- c. Empty or Vacant Property Insurance
- 7. Search the Title History and Get Owner’s Title Insurance
- 8. Check Out the Homeowners Association Covenants & Restrictions
- 9. Hire an Experienced Real Estate Attorney, if You Are a Beginner
- 10. Why Are They Selling the Business
- 11. How Did the Business Fare in the Last Five Years
- 12. Ask About the Profitability of the Business During Peak Period
- 13. What is the Average Running Cost of the Assisted living facility
- 14. The Terms and Conditions Attached To Buying The Business
- 15. What Are The Liabilities and Assets of The Assisted Living Facility Business
- 16. How Long Has The Business Been Put Up for Sale
1. Compare and Contrast
When it comes to carrying out due diligence on any business or facility that is put up for sale, the first thing to do is to make sure you check other similar businesses and then compare and contrast before going on with your intention. It is common to find a good number of first – time buyers look at just a few businesses before putting in an offer and purchasing real estate.
The drawback here is that you have no idea what else is out there because your sample size is so small. Comparing different assisted living facilities and spending several months shopping around to see what the market has to offer before you buy will eliminate a quick, uneducated, and emotional decision.
2. Conduct Your Homework
In actual sense, due diligence simply means doing your homework. So, if you have found an assisted living facility that you are interested in buying, the first two items on your due diligence checklist should be to order an inspection and appraisal. Doing your due diligence in this regard also involves walking the property, reviewing documents (before signing), calculating insurance and other out – of – pocket costs, market values and trends in the area, etc.
Essentially, doing everything you possibly can to ensure you are purchasing an assisted living facility that is a good deal and will produce a positive return on your investment. Be thorough and meticulous as you weigh the pros and cons of each potential investment. Please note that, when it comes to due diligence, no detail is too small.
3. Get Multiple Bids for Your Mortgage Financing
If you are financing a property (assisted living facility), make sure you compare multiple interest rates. As little as 20 percent of buyers get just two bids for financing and have no idea if competitors could offer a better deal. By taking a little extra time on your due diligence and getting multiple bids for mortgage financing of the assisted living facility, you will know you are getting the best deal out there.
4. If You Are Financing, Expect an Appraisal
An appraisal determines the value of the assisted living facility and the property the business is situated on. So, if you are planning on taking out a mortgage, lenders will require an appraisal be performed to ensure the assisted living facility cum property is worth what it is selling for. Following an appraisal, if a business or a property is not worth the sale price, the loan will not be approved unless the seller reduces the price to its value.
An appraiser and home inspector will both inspect the property, however the appraiser considers things like property size, lot size and location, upgrades, overall condition and compare other similar properties (“comps”) in the neighborhood. Having an appraisal done keeps sellers from attempting to inflate costs without value.
5. Have the Assisted Living Facility (Property) Inspected
Interestingly, there are different types of inspections that can and should be performed on a property you want to purchase. No doubt, some of these inspection cannot be done by you but by professionals hence it is worth paying some of your own money to have certain inspections done prior to buying.
Please note: it is always a good idea to be present for the inspection, as this will give you a good idea of the condition of the property, along with the opportunity to ask any questions. Some of the inspections to carry out include;
Types of Inspection to Carry Out On an Assisted Living Facility
a. General Facility Inspection
This type of inspection should always be performed before moving forward with the purchasing process. It is also required by most lenders if you are using financing to buy the property. Most commonly, a certified home inspector or licensed contractor will inspect the overall condition of the house.
This includes a full report on the condition of: roof, plumbing, electrical, heating and cooling, kitchen appliances and water heater. The inspector or contractor will provide a full report on any issues found and how severe the issues may be.
Following an inspection, it is not uncommon to find extensive necessary repairs (new roof, old or deteriorating plumbing and pipes, electrical issues, etc.), that present potential risk and cost. Sometimes the cost of these necessary repairs is enough to cause the buyer to cancel their offer. Make sure your purchase agreement uses language and stipulations that allow you to cancel your offer following an inspection, without losing your deposit.
b. Wood – Destroying Organisms (WDO) Inspection
A good number of lenders also require a WDO inspection of a property. This inspection checks for wood rot in the structure of a property. Wood rot can be caused by termites or water damage. Inspectors will look for wood rot on exterior siding and interior walls (including baseboards), as well as the garage (if applicable).
Extensive wood rot can cause severe structural damage to a home. The inspectors report will outline how extensive or minimal the wood rot is, in turn, providing additional information to help you decide if the risk outweighs the reward.
c. Lead – Based Paint Inspection
This inspection is legally required for any property that was built before 1978. If the seller is already aware that lead – based paint is present in or outside of the home, federal law requires that they disclose this information to potential buyers.
Buyers can also perform their own lead – based paint test as part of their due diligence process. Paint containing lead is a health hazard and will require additional costs to extract before you or tenants inhabit the property.
d. Radon Gas Inspection
A lesser – known inspection, radon is a radioactive gas that is present in homes all over the United States. Long – term exposure to radon gas has proven to contribute to thousands of lung cancer deaths every year, according to the EPA and Surgeon General.
e. Defective Drywall Inspection
Also a lesser – known and fairly new inspection that tests for defective Chinese drywall. Found mostly in properties built in Florida, between 2001 and 2009, this type of drywall corrodes building materials and wiring over time and produces a strong sulfur smell. Additionally, it has been known to cause certain health problems.
6. Is the Assisted Living Facility (Property) Eligible for Insurance?
Another tip when it comes to due diligence is to know if the assisted living facility is eligible for insurance. The only reason an assisted living facility (property) may be ineligible for insurance is if it doesn’t meet minimum standards required by the insurance company. When searching for insurance, make sure your home or property meets minimum requirements. Here are the different types of insurance you may be eligible for to protect your assets;
Types of Insurance for your Assisted Living Facility
a. Homeowner’s Insurance
If you are planning on living in the home you purchase, you will need homeowners insurance. This type of insurance covers major losses such as, liability, natural disasters (like floods or earthquakes), private property losses, fire and theft. Be sure to compare several insurers to get the best deal possible. How much insurance will cost depends on several factors?
For instance, if your property is in a “flood zone” or “tornado – prone” area, insurance rates will be much higher or even difficult to get coverage at all. Make sure you have an idea of how much insurance on your property will cost every month before purchasing.
b. Dwelling Insurance
Planning on renting out the home or property you purchase? You’ll need dwelling insurance to cover liability and protect the landlord’s (that’s you!) assets. This insurance does not cover the renter’s belongings, thus it will be a good idea for tenants to purchase rental insurance to protect their belongings.
c. Empty or Vacant Property Insurance
If you are planning on buying an assisted living facility (property) and then reselling or “flipping” within a short timeframe, you will want to buy this insurance to protect your assets. Because nobody is living in the home and renovations may be in progress, there is more risk of theft, vandalism or fire, causing this type of insurance to be more expensive than others.
7. Search the Title History and Get Owner’s Title Insurance
You are expected to search the title history of the assisted living facility (property) and then get the owner’s title insurance. The truth is that, performing a title search before the final purchase of a property is essential to ensure you will receive the title free and clear of any defects in ownership.
If the previous owner had work done on the house and failed to pay the contractor the full amount, there could be a lien attached to the property that must be paid before it can be sold. If the buyer is not aware of this lien, they could end up paying for the amount owed before the title can be released free and clear in your name.
Please note that as soon as you done with the title search, buyers should get the owner’s title insurance to protect from issues that may not have been discovered during the title search. Such issues may include, omissions in deeds, undisclosed heirs, forgery, or mistakes in records. Owner’s title insurance protects buyers from any unknown liens on the property that may arise after closing, in which the insurance company is responsible to pay.
8. Check Out the Homeowners Association Covenants & Restrictions
If you are buying an assisted living facility that is situated inside an apartment, townhome or a family home in certain communities, expect to adhere to HOA requirements. HOA’s often have strict rules and covenants that owner’s must follow. These covenants are made and enforced in order to protect the appearance and values of the neighborhood.
For instance, the color you paint the outside of your property or parking an RV in your driveway or on the street, may be limited or prohibited. If these covenants are broken, property owners are subject to fines paid to the HOA. Covenants and restrictions of the HOA can and should be reviewed before final closing of the property.
9. Hire an Experienced Real Estate Attorney, if You Are a Beginner
The process of buying an assisted living facility (property), especially if you are a beginner, can seem overwhelming and stressful. With so many different factors to look at and consider before purchase, it is wise to consider using an experienced real estate attorney to ensure all necessary due diligence is performed and no detail is overlooked. It is always advisable that when in doubt, ask for help from an experienced professional.
10. Why Are They Selling the Business
Of course, there are many reasons why a business owner would want to sell his or her business and some reasons might not be what a new owner would want to deal with. For example, if the owner is selling the business because they have not been able to make profits, you might want to reconsider buying such business.
But if the owner is selling the assisted living facility because of relocation, retirement or no longer interested in the business, then it makes sense. But over and above, you don’t have to take whatever answer the seller gives to you hook line and sinker hence the need to carry out your own investigation. You can do this by asking neighbors or customers about the business.
11. How Did the Business Fare in the Last Five Years
Another key question that you should ask before buying an assisted living facility business is the success story of the business, what are the wins and testimonies of the business that they are proud of and will be willing to share with the whole world. If they don’t have any, then you may want reconsider the decision of buying the business.
12. Ask About the Profitability of the Business During Peak Period
The truth is that no one would want to buy a business that is not profitable and one of the easiest ways of knowing how profitable a business can be is to see the profitability of the business during the peak period. If the seller will be willing to let you into the company’s books, it will help you make an informed business decision. You might want to also check the highest loss they have recorded during their lowest period.
Another due diligence or good question that you should ask if you want to buy an assisted living facility is the average running cost of the business. The truth is that; some businesses aren’t as profitable as they ought to be because of over the board running cost of the business.
When a business owner fails to eliminate some not too necessary expenditure, they will always fall short of their profit margin or even struggle to make the business profitable. This question is important especially if the owner is selling the business because the business is not making profits.
14. The Terms and Conditions Attached To Buying The Business
Please note that when you are buying any business or signing any contract, there are always terms and conditions attached to the contract. Some investors fall prey to dubious business owners selling their business with hidden terms and conditions that will trap them.
For example, if you are buying an assisted living facility business from Mr. A and Mr. A has hidden debt that you are not aware of, if you buy the business and the debtor shows up to claim his debt, you will be held liable as the new owner of the business. This is why it is very important to ask of the terms and conditions attached to the company.
Some of the terms and conditions might not be favorable to you so ensure that you critically look into them before making your decision to buy. If need be ask the seller to sign an indemnity that will protect you from any debt that has been incurred before you bought the business over.
15. What Are The Liabilities and Assets of The Assisted Living Facility Business
When it comes to doing due diligence and valuing a business, you should be able to have a clear picture of the liabilities and assets of the business. No doubt, no investor will embark on the journey of buying a business without having a true picture of the assets and liabilities. So, if you have plans of buying an assisted living facility then you must make it a point of duty to know the liabilities and assets of the business and what you will be inheriting.
16. How Long Has The Business Been Put Up for Sale
Another due diligence cum important question that you should ask the seller of the assisted living facility business is the duration the business has been up for sale. The essence of this question is to know if the business is attractive or overly priced.
The bottom line is that if the business has stayed longer in the market, it could be that the business is not worth the hype and that will help you price the business below the listed price. An assisted living facility that is attractive or rightly priced will not last in the market.
Carrying out due diligence before buying an assisted living facility allows the buyer to assess all aspects of a potential acquisition to determine what the benefits, liabilities, risks and opportunities are. It is generally the best way to ensure that what you pay is justified.