Due Diligence Overview
Due diligence typically spans 30-60 days and covers four critical areas: financial verification, physical inspection, legal review, and market analysis. Cutting corners on any of these can lead to costly surprises after closing.
Critical Reminder
Never waive or shorten the due diligence period to "win" a deal. Problems discovered after closing become YOUR problems.
1Financial Due Diligence
Income Verification
- Rent roll verification: Obtain current rent roll showing all units, tenant names, lease terms, rent amounts
- Bank statements: Request 12-24 months of bank statements to verify actual deposits match claimed income
- Lease audit: Review all lease agreements for terms, expiration dates, rent concessions, and tenant obligations
- Security deposits: Verify security deposit amounts and ensure they'll transfer at closing
Expense Verification
- Property taxes: Verify current tax bill and check for upcoming reassessments
- Insurance: Get quotes for your own policy; seller's rate may not reflect current market
- Utilities: Review 24 months of utility bills if owner-paid; verify who pays for what
- Maintenance history: Request all repair invoices for past 2-3 years to identify recurring issues
- Service contracts: Review all vendor contracts (landscaping, pest control, etc.) for terms and assignability
2Physical Inspection
Hire qualified inspectors for a thorough property evaluation. Don't rely solely on seller disclosures.
Structural Elements
- Foundation condition
- Roof age and condition
- Exterior walls/siding
- Windows and doors
- Drainage and grading
Mechanical Systems
- HVAC age and condition
- Water heater
- Plumbing (supply/drain)
- Electrical panel and wiring
- Appliances
Capital Expense Red Flags
- • Roof older than 15 years ($8,000-$15,000+ replacement)
- • HVAC older than 15 years ($5,000-$10,000+ per unit)
- • Polybutylene or galvanized plumbing (full repipe needed)
- • Federal Pacific or Zinsco electrical panels (fire hazard)
- • Evidence of water intrusion or mold
3Legal Review
Title and Survey
- Title commitment: Review for liens, easements, encumbrances, and exceptions
- Survey: Order new survey to verify boundaries, identify encroachments, and confirm improvements
- HOA/condo docs: Review CC&Rs, bylaws, meeting minutes, and financial statements
Zoning and Permits
- Zoning verification: Confirm current use is legally permitted and understand restrictions
- Permit history: Pull permits for all major work; identify unpermitted additions
- Certificate of occupancy: Verify CO matches current use and unit count
4Market Analysis
- Rent comparables: Survey competing properties to validate asking rents are achievable
- Vacancy rates: Research area vacancy trends and absorption rates
- Neighborhood trajectory: Identify new development, infrastructure projects, or concerning trends
- School ratings: Check school quality as it significantly impacts tenant demand and property values
- Crime statistics: Review crime data for the immediate area and surrounding neighborhoods
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