Residential Care Home Due Diligence Checklist

Establish the transaction perimeter

Identify the provider, operating entity, property owner and parties holding material contracts. Describe whether the buyer proposes an asset acquisition, entity purchase, property transaction or another arrangement. List included and excluded assets, balances and obligations.

In Washington, CHOW can arise from a change in provider or control, including events beyond a deed transfer. Have counsel assess the actual arrangement rather than assuming the chosen transaction label resolves licensing. (Source: WAC 388-76-10105)

Verify the license and its conditions

Obtain the current license, approved capacity, service conditions, renewal records and relevant agency correspondence. Review actual residents and services with qualified professionals to understand whether the operation stays within its authority. Do not rely solely on a listing description.

California RCFE rules provide a separate nontransferable-license example requiring a new application on specified changes. Use the California guide only within that framework, and the Washington guide for AFH-specific questions. (Source: CDSS RCFE regulations)

Assess the buyer's qualifications before forecasting capacity

Determine who will be the provider, entity representative, administrator or resident manager as applicable. Collect evidence of required experience, training, qualifications and available coverage. A buyer with capital may still need an appropriate operating team.

For Washington seven/eight-resident homes, WAC 388-76-10032 imposes specific applicant and inspection conditions. Review those before assuming the buyer can retain the seller's capacity. A financial model based on all existing revenue needs a supported licensing premise. (Source: WAC 388-76-10032)

Reconcile financial results to supporting evidence

Compare tax returns, financial statements, bank receipts and resident-account records over consistent periods. Explain unusual receipts, refunds, uncollected charges and related-party transactions. Identify accounting changes that make periods difficult to compare.

Prepare an adjustment schedule with the amount, reason, supporting record and post-sale assumption. Separate genuine one-time costs from recurring expenses and projected improvements. The buyer should understand which earnings are historical and which depend on future changes.

Test the owner and family duty schedule

Interview the seller about recurring tasks, then compare the explanation with schedules, payroll and available operating records. Include direct support, nights, weekends, meal preparation, cleaning, purchasing, maintenance, admissions, billing and urgent response.

Use the owner-replacement-cost definition to create separate owner-operated and managed scenarios. Estimate the cost of qualified coverage and related employment expenses. Do not presume that one replacement employee can cover every task or that unpaid family support automatically continues.

Read resident agreements alongside accounts

Review included services, charges, deposits, refunds, notice terms and responsibilities. Determine whether the financial records consistently reflect those agreements. Have the appropriate professionals assess service suitability and obligations that could affect staffing or resource needs.

Identify resident-held funds and advance payments separately from earned revenue. In Washington, the incoming owner's CHOW duties include preserving funds in an equivalent account and specified notice if the depository changes. Build those balances and responsibilities into closing reconciliation. (Source: WAC 388-76-10105(6))

Define occupancy and model a vacancy

Reconcile resident counts with rooms, licensed capacity and space actually available. Review shared rooms, offline space and restrictions. Use the occupancy glossary to avoid mixing different denominators.

Model a vacancy using the actual charge and costs that can responsibly change. In a fictional example, losing $6,000 of monthly revenue while avoiding only $900 of variable costs reduces contribution by $5,100 before other changes. These invented figures are an arithmetic illustration, not local rates or a recommended staffing response.

Verify payer and specialty-service dependencies

Review program contracts, rate terms, eligibility processes, authorizations and collections. Separate housing charges from funded services. The cited HCBS waiver rule has a scoped room-and-board exclusion with exceptions; it does not determine the target's full payment arrangement. (Source: 42 CFR 441.310)

DSHS separately warns that specified AFH specialty contracts do not transfer on CHOW. Identify the actual specialty revenue at issue, the incoming operator's requirements and the effect of any delay. Do not generalize that statement to every contract or assume the operating license settles payment authority. (Source: DSHS)

Review inspection history through the current response

Collect inspection findings, plans of correction, follow-up correspondence and evidence of completed work. Ask whether conditions affect staffing, residents served, admissions, property or the buyer's qualifications. Review unresolved issues with the appropriate specialists.

Distinguish a past finding from an ongoing condition, and an accepted correction plan from verified performance. Washington's CHOW rule assigns the new owner responsibility for existing deficiencies, so the purchase analysis should identify the work and its cost before closing.

Examine property rights and capital needs

Review title or lease rights, permitted use, assignment, renewals, insurance and repair responsibilities. Obtain appropriate property, accessibility and life-safety assessments. If the seller lives onsite, identify the intended post-sale accommodation and approved use of space.

Separate business earnings from property value using consistent rent assumptions. The OpCo/PropCo guide helps organize that analysis. Fund necessary work, consider any interruption to service and reconcile the capital plan with lender conditions.

Build the approval and notice schedule

Record each required application, consent, notice and responsible party. Washington's ownership notice is sixty calendar days before the proposed change, with specified recipients and contents. It is distinct from the relocation notice and is not a promise of agency processing speed. (Source: WAC 388-76-10106)

Keep confidentiality aligned with required communication. A management or transition agreement needs case-specific review; do not treat it as permission to operate without the required license or other authority.

Protect records and make the handoff testable

Use aggregated information for early review. Later access to protected records requires appropriate authority, purpose and safeguards; an NDA alone does not resolve those requirements. (Source: HHS minimum necessary guidance)

Assign responsibility for payroll, supplies, resident support, account access, records custody and urgent decisions. Walk through a normal week and a key-person absence. The buyer should know which staff, vendors and advisers will be available and which arrangements still depend on approval.

Turn findings into a decision record

For each material issue, state what was verified, what remains uncertain, who evaluates it and how it affects price, funding, conditions or readiness. Distinguish historical liabilities from future operating cost and avoid counting the same concern in multiple adjustments without explanation.

The completed record should help the buyer decide whether the home is appropriate for its team and capital. It should also give the seller a concrete list of records or corrections needed, rather than a vague claim that diligence is ongoing.