- Residential Real Estate Investor
- Kansas City, MO
- Votes |
What have been your biggest discoveries during due diligence?
So I just wrote my "masterpiece" (at least, I kind of think so) on due diligence, which I would recommend checking out if you're interested in that subject. And that got me thinking about what other investor's best due diligence stories were. What did you miss, or find to get the price down, or find to realize you needed to back. out. immediately.
The best example we have is of a 72-unit apartment we had under contract in 2012 for $1.4 million. We were told the occupancy had just reached 90%. Once we started due diligence, we found the following:
- The occupancy was actually only 77%
- The leasing office was counted as a unit (which is common, but I was unaware of at the time) and so it was really only 71 units.
- The electrical panels were all Federal Pacific, which are junk and need to replaced:
- The roof was a flat roof (which we obviously knew), but the torch down wasn't properly installed (we had a roof inspector look at it) and so it would probably only last another 5-10 years.
- All the patio doors were aluminum and some had broken panes that were letting in moisture
- There were consistent tenant complaints about the utilities. They cost too much and it didn't get cool enough in the summer or warm enough in the winter. (Most seller won't want you to tell any tenant you're buying the building, but you can still ask them how they like it and if they're are any problems)
- And finally, one of the tenant's was an epic hoarder.
After putting all this together, we realized our initial rehab estimate was waaaayyyy to optimistic. We asked for $200,000 off and they came down $80,000. But we decided that we weren't ready for this type of project and eventually walked. And we did so during the inspection period so we were able to get our earnest money back.
So I'm curious, what all have you guys found? This can go for anything from a house to a 100-unit apartment.