Walk... Every... Unit...

A friend of mine, in the midst of a bad divorce and after a long look for a new real estate project, purchased a 40 unit apartment while relying primarily on a subordinate to do the "grunt work" of the due diligence. Yes, he walked the property, but he didn't go into each unit or even most of them, instead leaving that to his employee.

Well, as you can probably guess, that employee turned out to be less than trustworthy. He probably would have said anything was a good deal to insure he had plenty of work lined up. The property was much worse than it appeared at first. Not only were the tenants unsavory and unlikely to pay on time (or at all) and not only were the units in desperate need of an overhaul, but there was a major drainage issue and outstanding code violations.

All of this ended up costing a small fortune and leaving him with dis-equity when the project was finally finished. In other words, he worked his butt off for 6 odd months and ended up losing money. An investor with shallower pockets would have gone under. The moral of the story is simple when it comes to real estate: buyers are liars... and sellers are liars.

Not to paint humanity in such negative terms, but there is no way you can know up front if someone is honest, so take nothing on faith. Even if it's just one house and the owner swears the tenant is paying, demand proof; at the very least a rent roll, preferably a receipt or bank statement. And when it comes to apartments, walk every unit and work up an approximate cost to repair or upgrade them individually. Then breakdown the cost to repair the down units and vacant (physically or economically) units as well as at least a rough idea of what your turnovers will cost when the tenants move out of the rented units.

If those costs are substantially more than the seller stated before getting the property under contract, that is a good grounds to retrade. And if it's too much, you can always walk from the deal and potentially save yourself from a massive mistake.

Dave Lindahl makes this point as do many others in commercial real estate; walk every unit. I wholeheartedly agree. Don't walk every other or anything like that. Take the time and do your due diligence right. Yes, if you have to skip one unit in a 50 unit complex for whatever reason, that's probably (key word 'probably') fine. But overall, don't ever skimp on due diligence, walk every unit.

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