What have been your biggest discoveries during due diligence?

Question

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.

Frank Wong · Answer

I had a client purchasing a home and it was recommended by the home inspector to have the foundation checked out.  We got a structural engineer to do a complete foundation inspection.  During the inspection, I asked the engineer how bad is it?  The engineer took his hand touch the concrete and ripped a portion off with his hands. Never seen anything like that.  I guess the home didn't have any gutters and water had just been dumping into the foundation forever.   The bid for replacement was about $250k.  This was a 3500 sqft old classic Tudor home about 80yrs old.

JD Martin · Answer

Sometimes it's the deals you *don't* do that make you rich! :D

Brian Ellis · Answer

I jumped into my first house like I was unstoppable. But I had zero experience. I let the inspectors suggestions go in one ear and out the other, I was just too excited. Although I got myself a good deal price wise, in an awesome area, I was still stuck with a can of worms. Once I opened that can, they started piling out.

I don't regret it one bit though. I put a lot of equity into that home. I worked my a$$ off, and I learned A LOT. Filled up 6 forty yard dumpsters, one after the other. Then had to rebuild everything I just tore out. The biggest lesson learned is not to buy a pre-fab home ever again. When I went to rip out the sub-floor (to install hardwood), I quickly realized the framing was done ON TOP of the particle board subfloor. Imagine walking around the perimeter of the home scouring particle board with an un-guarded skillsaw. No fun.

Safe to say I was hyper-vigilant on the next property, and knew exactly what I was getting into.

Steve Vaughan · Answer

A blanket line of credit lien hiding like a snake in the grass.

In 2013 I was under contract for $110k on an owner-financed SFR.  I did my initial title search and it looked good.  Ordered up a specific O&E from my fave title co for $85.

Referenced only by the APN was a blanket cross-collateralized line of cedit the seller had for $180k.  He couldn't get this house  released.  There were like 8-10 other properties under the same blanket.  No deal, no loss of EM. Haven't worked with this rat since. Phew!

Andrew Syrios · Answer

Yeah, aluminum wiring + Federal Pacific Panels basically makes me think of this:

I haven't ran into that problem with roofs much, but I'll definitely keep my eye out for it. Thanks for the tip!

JD Martin · Answer

Biggest one I had was a cash offer under contract. When I went to have the electricity turned on for inspection, the city refused. Had to dig through a couple of offices before finally tracing back to the utility company pulling the meter & permit because of a total hack job on the electric, where the writeup said the house needed rewired before permit would be reissued. Seller knew this before we offered because they had tried to get the electric on themselves several months earlier, but never disclosed - probably hoping we would just close on it being cash without doing the inspection.

Ended up walking on the deal because of numbers (I was still willing to buy but with the electric rewire costs included in my new offer). They ended up selling it $10k less than my last offer (I wish I would have bought it for that!).

Russell Brazil · Answer

What has gotten me a few times recently is there are these 3 tab shingle roofs that are multicolored......so visually they look like a newer architectural shingle until you get very close to them.  So you think you are looking at a relatively new 30 year shingle, but they are a really old 20 year shingle.  Big difference.

Federal Pacific panels...I dont mind, I look for them in every property and just know its going to cost me $2200 to replace. What I dont like though, is non-remediated aluminum wiring, especially in conjunction with a Federal Pacific panel...that's just waiting to burn down.

Andrew Syrios · Answer

Wiser words have seldom been spoken my friend!

Julie Fullmer · Answer

It's only by God's grace that we didn't drown! I thought we were going to a few times! 😂 But after that trailer and two foreclosure purchases that were in pretty bad shape and another off market property that we put a ton of sweat equity into later, Wow, what an education! 😁

Andrew Syrios · Answer

They built the wall in the middle of window? That's hard to envisage, but sounds terrible. Those old mobile homes can be a massive headache. But learning experiences are worth while as long as they don't sink you.

What have been your biggest discoveries during due diligence?

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