Thanks to attorney and multi-family investor Charles Dobens for this excellent and insightful article on due diligence, which we found on the MultiFamily Insight Blog:

“What is the biggest mistake new investors make in multifamily due diligence?  Due diligence is where many new investors start to go astray.  They find a deal, make offers, get an offer accepted, put it under contract and then start the due diligence process.  During the due diligence process their entire focus is centered around the real estate. They interview and negotiate rates with property inspectors.  They set up a date and time that they will go through each and every unit looking for the most egregious example of poor management so that they can go back to the seller and negotiate a repair allowance.

“The owner of a bad property will see this coming a mile away and be prepared for it.  They will inflate their purchase price to make you pay the repair allowance WITH YOUR OWN MONEY.  They will play hardball with you and structure the terms of the repair allowance such that the dollars come out of the deal in an in-kind transfer and not in cash.  You, at the end of the day, end up with a property that has a list of needed repairs and no cash to fix it.

“But that is not where your focus needs to be.  Here’s where the new investor goes astray.  After the property inspector has completed his task and submits his beautiful 100-page report that you pay for, you will review it and look at the last page that gives a dollar amount as to the needed repairs.  You then go back to the broker and open the negotiations all over again and I can assure you, they are lying in wait for you to return.

“But the problem with this over-dependence upon the inspection report is that, no matter what the inspector finds, it can be fixed with one thing – Money.  Just name your price and the roof is fixed. Get three bids and the foundation is fixed.  The brokers focus, along with yours and everyone else is on the real estate.  This is exactly where you should not be focused.  More…