Due Diligence: Why it matters

[Cassi Justiz]

Let's talk due diligence. We started last week by getting several properties under contract for some of our out of state clients. We are starting this week by getting out of several of those contracts. 

These are a few reasons why you want to do your due diligence and NEVER buy based off first impressions. 

Contract 1: MFH. Vacant units 100% rent ready based on initial walk-through. New paint, new carpet, etc. 50/50 of tenant occupied and vacant.

Contract 2: SFH. Tenant occupied. Good condition house with slightly above average market rents in B+ area. Well above the 1% rule.

And here's what we found during the due diligence period:

MF had major sewer line leaks, plumbing leaks, flooded crawl space (from said sewer/water leaks), leaking "new" roof and damaged decking because the flashings weren't installed correctly, foundation issues, bug infestations from multiple nasty tenants and EVERY system in the property was well over the life expectancy. (Most were 30+ years old). So not exactly the "turn-key" experience that we were planning on. 

SFH had a surprise provision that landlord pays ALL utilities and internet. (This is not common, especially in a free standing SFH.) This dropped cashflow by almost $200/month and took the house from a 15% CoC ROI to barely hitting 8% CoC ROI. The seller said a few landlord paid utilities "shouldn't make a difference" because the lease is up this summer and they can "make the numbers work on their next lease."

The moral of this story is ALWAYS get a home inspection, especially in older homes and ALWAYS review your leases for turn-key properties. 

What are some of the fun things that you've found by doing your due diligence?