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Apartment Due Diligence Checklist and Tips

What is due diligence?
Due diligence is the process of “doing your homework” on the investment property. It is the process of checking, double-checking, and confirming any important information that was used as a basis on determining if the particular property is a good, average, or bad deal. This process takes you on an information-gathering and fact-finding mission. Proper due diligence takes persistence and weeks to accomplish. Due diligence is not used as an excuse to back out of a deal, but it is primarily a means to protect you financially and legally.

Why due diligence?
Proper due diligence will enable you to uncover potential problems with the property or as we call them, “elephants underneath the carpet” before the deal is closed. These potential problems can be very costly (time, money, legal) and can turn a good deal into a bad one very quickly. An educated real estate investor knows and understands the importance of completing their due diligence tasks.

4 Main Parts to Due Diligence:

• Inspections

• Financials

• Legal

• Modeling


Inspection Checklist

• Walk-thru inspection of units by yourself, realtor, and property manager first (before you hire and pay for an inspector)
• Then, hire a professional inspection company that includes walk-thru of ALL units, structural, mechanical, electrical, pest (termites)
• Get detailed written report from inspectors
• Get estimates of repairs needed
• Get 5-yr history of capital improvements made

Financial Checklist

• Income and expense statements for last 3 years
• Rent rolls for current month
• Lease agreements of all tenants
• Utility bills for last 12 months
• Property income tax returns for last 3 years (link figures to I/E above)
• Property real estate tax receipts for confirmation
• Do your own market rent survey of the local competition to know if your currents are under market and can be increased or if your rents are at the market maximum
• Get list of sales comparables from realtor and convince yourself that you are not over-paying. Hint: make sure the comparables are actually comparable are similar properties (age, class, amenities, and location)

Legal Checklist

• Title report (you want clear title)
• Check for building code violations and zoning
• Get insurance policy and claims – a treasure trove of info
• Get service and vendor contracts and review
• Get copies of all surviving guarantees and warranties
• Personal property inventory list (furniture, computer, fixtures, etc.)
• Police reports – research the reputation of the property

Modeling Checklist

• Spreadsheet/model the income, expense, debt, returns, and investor pay outs (if any). See our spreadsheet for this.
• Forecast the income and expense model for the next 3 to 5 years
• Have someone (more knowledgeable than you) review your model and come into agreement with you
• After all of this is complete, does this deal still meet your investment objectives?

Critical Tips to Follow During Due Diligence

The mindset we must have: “The seller is guilty until proven innocent”

• Know how many days of due diligence you have to perform. Know the exact start and end dates. You may have the following contingencies in your purchase contract: inspection, title, financing, and appraisal. Each one has its own due date and typically they are tied to your earnest money deposit. If you fail to pay attention to those due dates, you may have waived your rights to getting your earnest money returned to you if you decide to back out of the deal.

• Always follow around the professional inspector and ask plenty of questions – this is a great source of wisdom. Plus, you’re paying for it, right?

• Never believe what the Realtor tells you verbally in terms of any financials such as income and expenses. Get everything IN WRITING. It is absolutely your responsibility to double-check.

• If you are getting close to running out of time on any of your contingency periods – ask your realtor for an extension. Usually, they will give you a 5 to 10 day extension.
• Be Present. What is the opposite of being present? Answer: absent! And what are the possible consequences of being absent during due diligence? NOT GOOD!