The due diligence process on any investment starts long before you submit an offer. It begins with some level of desktop underwriting followed by the property tour. Your property tour checklist is one of the primary items in your investment toolbox. This guide will give you a brief overview on what to look for and how to approach a property tour.
A good property tour checklist will begin with some office work prior to heading over to the property. Spend some time understanding the property from a transactional perspective. Explore who owned it in the past, when was it built and renovated, and what vendors are involved with the property. Look at the surrounding area with an aerial map for access roads, national and local retailers, office buildings, and proximity to other demand drivers.
In addition to demand, get a high-level understanding of the competing properties and comparable sales. If you’re working with a broker, ask for a report from CoStar or Real Capital Analytics that shows recent transactions in the market. They should have this at the ready, particularly if they did a broker opinion of value (BOV) for the property.
Drive and walk the comps!
Block out some time before and after your tour to get a good idea of your competition. Get out of your car and walk into the property. Ask to speak with the general manager or a sales manager. See a room or two. A few extra hours on the road committed to this tour will have a huge impact on your knowledge of the market. Go all in. Otherwise, you’re just wasting time.
The first thing you notice when you arrive at the property is the quality of the approach. Take special note of signage, landscaping, and paving. The hotel grounds take a beating from traffic, sun, and inclement weather. Further, the cost to maintain the grounds varies tremendously depending on materials used in the design. Walk or drive around the property to get a sense of areas that need special attention when you get inside.
Some considerations include:
- Paving material
- Monument signs
- Wayfinding signage
- Access gates
- Indigenous or exotic landscaping
- Manicured hedges
- Planting beds
- Swimming pools
The building envelope is the exterior that keeps the interior protected from the elements. This includes foundations, walls, roofing, windows, doors, and anything else that protects the interior. Take note of the quality of each penetration in the exterior for signs of water pooling or entry. You won’t be able to get a sense of the roof from the ground level, but you look for an indication about how water is being directed off the roof.
Your mission is to find water damage. If you see it on the exterior, you’ll know to be on the lookout when you get to the interior. This includes rust, cracking, and erosion. Water is your enemy in a hotel. Guests can’t stand a damp room, and the resulting mold and mildew present potential health hazards. The building envelope is your first line of defense.
Take some time before you meet your contact to get the lay of the land. You’ll want to get a sense of the guest arrival with a consideration for all potential guests – leisure, business, banquets, catering, contract. Each of these guests has a different need when they arrive at the property, and it doesn’t all start with the front desk. Some arrive for functions, while others are meeting friends at the bar. Consider how easy it would be for your different guests to find their way, as you may want to reconfigure space or add a staff member at key areas to provide direction.
The quality of finishes in the public spaces is a good indication of what you’ll find in guest rooms. Take note of how the floors, walls, and ceilings have been treated. Find a public restroom, and evaluate the cleanliness of plumbing fixtures, floors, walls, and partitions. While the lobby is usually top-of-mind for guest impact from renovations, the quality of your public restrooms will leave a lasting impression on guests, even though they’re not likely to discuss it.
Look at ceilings and windows for indication of water intrusion. Water can only enter a building in two ways – supply pipes and openings in the exterior. The solutions can be very different in both cost and approach depending on how a water spot appeared.
Your official tour will probably run through a lot of the spaces you’ve already seen. Highlight areas of concern or question with your guide. Put on your “nagging guest” glasses for the tour. You know – the one that posts photos of the smallest paint chip on TripAdvisor. You’ll probably only see one room of each type on a typical tour so pay special attention to every corner.
Ask questions, take pictures, and keep copious notes. Sometimes, you’ll have a brand property improvement plan (PIP) available to compare against. However, you’ll mostly have to estimate based on current brand standards and comparable properties.
Your property tour checklist should contain an entire section that lists potential systems along with blanks for brand, model, capacity, and age. Building systems are the things that keep your guests comfortable, and they are often the maintenance items that are deferred the longest. Everyone wants to squeeze one more season out of a boiler before it’s absolutely necessary to replace it. Unfortunately, this strategy usually ends up with wildly unsatisfied guests when the heat shuts down or they’re left with a cold shower.
Building systems usually don’t get the attention they deserve on an investor’s initial property tour. They could have a major impact on property value, though. You’re going to be replacing one or many of these systems during your investment period, and even if you leave it for the next guy, you better believe that he’ll figure that into the purchase price.
You’ll probably pass through various back of house corridors and offices on your way to the belly of the beast. This layout is important to understand from an operational point of view. Talk to your guide about attributes and challenges that influence the employee experience. For example, are there improvements to the laundry process that would improve employee satisfaction and profitability at the same time.
Revenue management strategy is a critical discussion when you get some undistracted time with the hotel executives. Each hotel hosts a variety of guests – transient, group, and contract. They are there for different reasons and made their decision to stay at this hotel for another set of reasons. Understand the guest interests first. Ask about their top complaints next.
Your goal in the property tour is to get a leg up on your competition. Hotel operations are straight forward and universal, but the smallest improvement in revenue can have a huge impact on profitability. Each marginal dollar in revenue falls straight to the bottom line hitting very few expenses along the way.
Allow your tour guide to dream for a minute. Ask what improvements she would make if she had an unlimited budget and didn’t have to worry about operational disruption. The big dreams may not be feasible. They may be completely outlandish. Still, the exercise will give you a glimpse into the potential of the property from someone who interacts with it every day.
Delegate the research. Your internal property tour checklist is important, but it may be worthwhile to pursue the same strategy as those who tour properties for a living – environmental and property condition inspectors. They send a management questionnaire prior to every tour. You may get it back or not, but if you can unload some of the research and responsibility, it’s probably worth your while.
Get educated. You’re never going to have complete knowledge of every aspect of the business, but it is important that you learn something new on every tour. Take some time in your day to learn about roofing or HVAC systems. Read voraciously to learn about innovations in sales and marketing. Make a habit of continually sharpening your saw, so you will be a dominant player in every transaction.
The property tour is a strong indication of your interest in making a deal. It could even be the deciding factor between your bid winning over a competitor with a higher price that didn’t tour. Sellers are interested in two things – price and performance. These are explicitly linked by the fact that a broken transaction is perceived poorly in the market. Further, your knowledge of the asset provides comfort that a re-trade is less likely.
Good luck out there!