Value-add apartment due diligence checklist

What physical due diligence should produce

By the end you want three things: a renovation budget you trust, a list of problems that must be fixed or priced into the offer, and a maximum price you are comfortable with. The contract sets the deadlines, so ask your attorney and your lender what they are the day you go under contract, and work backward from them.

Documents to ask the seller for

• Rent roll: every unit with its number, floor plan, size, status, rent, lease dates and deposit
• T-12: income and expenses for the trailing twelve months, by month
• Property tax bill, and the county's assessed value
• Insurance policy and the claims history of the last several years
• Service contracts: trash, landscaping, pest control, laundry, elevators, alarms
• Utility bills, and how residents are billed back for them, if they are
• Capital work history: roof, boilers, heating and cooling, paving, with dates and invoices
• Offering memo, unit mix and floor plans with square footage
• Open code violations, permits and any notices from the city or fire marshal

Ask for everything in one request with a due date, and keep a list of what has and has not arrived. A seller who is slow on documents is telling you something.

What to compare

• Rent roll against the T-12. Multiply the rent roll by twelve and compare it with the T-12 income. The gap is vacancy, concessions and unpaid rent.
• Rent roll against the walk. Every unit marked occupied should look lived in. Every vacant unit should be on the list you walk.
• Offering memo against what you see. Units described as renovated should look renovated. Check the finish, the fixtures and the flooring.
• Expenses against your own estimate. Taxes and insurance can change after a sale, so ask your lender and tax adviser how to plan for them.
• Capital history against the building. A roof listed as new should look new.

Unit walks

Walk every vacant unit and a spread of occupied units across each building, floor and floor plan. Rate each one good, needs turn or down, photograph every problem, and note what you could not see. The full room-by-room list is in the unit walk checklist, and the method for pricing what you find is in How to estimate renovation cost per unit.

Building systems, roof and site

• Roof: age, material, leaks, patches and ponding on each building
• Plumbing: pipe material, water heater age, signs of past leaks, drain backups
• Electrical: panel age and condition in several units and in the common panels
• Heating and cooling: type and age of the equipment, and how often the seller replaced it
• Structure: stair-step cracks, sloping floors, balconies and stairs
• Site: parking, drainage, lighting, fencing, landscaping, trees close to buildings
• Common areas: laundry, clubhouse, pool, fire and life-safety equipment

Red flags

• Many vacant units with no clear reason, or vacant units the seller will not show
• Repeated water stains on top-floor ceilings, which point to the roof
• New paint over old damage: fresh cosmetics on units with worn systems
• A rent roll that does not match the T-12
• Work with no permits, additions, or converted spaces
• A roof at the end of its life with no repair history
• Seller reluctance to give access, documents or a straight answer

A red flag is not always a reason to walk away. It is a reason to ask a question, get a specialist, or lower the price.

Specialist inspections and when to order them

Order specialists early, because reports take time while the due diligence clock keeps running. A good order: do your own walk first, then hire for whatever it points to.

• Roof: a roofer or roofing consultant, when the roof is near the end of its life or leaks show
• Sewer scope: a camera inspection of the main sewer lines, especially on older buildings
• Structural: an engineer, when you see cracks, sloping floors or weak balconies
• Environmental: a Phase I environmental site assessment, which many lenders require
• Mechanical: heating and cooling, boilers and fire-safety equipment, when age or condition is unclear

Until a specialist reports, carry the item as an allowance in your budget. When the bid arrives, replace the allowance with it.

Set your maximum offer from your own inputs

Work backward from the return you need. Use your own rents, your own expenses, your loan terms and the renovation budget from your walk. Do not borrow rent growth from the seller's projections without checking it against the market. The highest price you can pay is the one at which your return target still works after all of that.

Every dollar of work your walk finds that the offering memo did not assume lowers that price by roughly a dollar, before the effect of financing. Example: if the walk finds $150,000 more work than the memo assumed, you either ask the seller for about $150,000 off or accept a lower return. Decide before the deadline, not after it.

Where DoorWalk fits

DoorWalk covers the walk and the numbers that come from it: findings, a cost range by unit and area, a renovation budget, and a deal summary with the highest offer from your inputs. It does not replace a roofer, an engineer or a lawyer. Open the example property to see the output.