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Real Estate Investing Basics Jan 30, 2020
The Ultimate Guide to Due Diligence

Andrew Syrios
Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental 179
Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Articles
Investing Basics, Personal Development Written
Due diligence may be boring, but it’s absolutely critical to get it right.
https://www.biggerpockets.com/blog/due-diligence-ultimate-guide 1/59
Here we’ll take a deep dive into what is perhaps the least fun but most indispensable part of
real estate investing: the dreaded due diligence.
What Is the Meaning of Due Diligence?

While an entire book could be written on all the ins and outs of this subject, the de nition
of due diligence is rather simple. It’s the “investigation or audit of a potential investment or
product to con rm all facts,” according to Investopedia.
Basically, the purpose of performing due diligence in real estate is to con rm what you
believed to be true about a property when you got it under contract.
While it can be arduous, following the steps outlined below will help you avoid any unwanted
surprises and greatly increase your con dence in the investment. And what do new investors
need more than con dence?
Checklist: The Process

Performing due diligence can be broken down into several distinct stages.
1. Pre-O er Due Diligence

1. Area Analysis
2. Value and Financial Estimate
3. Rehab Estimate
2. Post-Acceptance Due Diligence

1. Physical Due Diligence
2. Financial Due Diligence
3. Legal Due Diligence
4. Inspections
3. Retrading (if necessary)

4. Final Decision and Walking Away (if necessary)
Use this as your due diligence checklist. Make sure you never to skip a step! Note that while
there are di erences in how to approach houses and apartments (as well as commercial), the
fundamentals are the same.
Let’s take a closer look at each part.
Pre-O er Due Diligence

Area Analysis
Before any analysis of value should be done, you want to make sure the area you’re looking to
invest in meets your criteria. Some of the most important things to consider are:
Crime Rate
Median Income
Occupancy Rates
Population Growth
School Rankings
People generally want to avoid high crime areas, and families are extremely particular about
which school district the home is in. If you intend to invest in low-income housing, that’s one
thing. (In my opinion, newbies should shy away from this sort of investment.) Regardless, you
should know what you are getting into before you buy.
Fortunately, there are some very good free sources you can look to for information (in addition
to just talking to people in the neighborhood). City-Data.com and CLRSearch.com are good for
demographics, and GreatSchools.org can help you evaluate the school district. There are also
more advanced, albeit expensive, tools available.
Value and Financial Estimate

The next step is to determine a property’s after repair value (ARV). This is best done by looking
at comparable sales. I won’t go into too much detail here, but a wealth of ARV guidance is
available on BiggerPockets.
Related: The Ultimate Guide to Quickly Estimating a Property’s ARV (After Repair Value)
You will also want to make sure the property will cash ow by creating a pro forma. This is
particularly true for multifamily properties but is helpful for houses, too.
Review the actual nancials of those properties (particularly the T-12 operating statement) as
seller-provided pro formas (future estimate) are almost always too optimistic. The best way to
create your own pro forma is to base it o the property’s actual performance.
With regard to pro formas (at least for apartments), you will have three income categories and
10 expense categories:
Income Items
Gross Rental Income
Other Income (i.e., laundry, utility chargebacks, late fees, etc.)
Vacancy Loss (include both vacant units and economic vacancy)
Expense Items
Property Taxes
Insurance
Utilities
Management Fee
Repairs and Maintenance
Contract Services (i.e., lawn care, snow removal, etc.)
General Administration (i.e., phone lines, eviction processing, etc.)
Marketing
Payroll (for larger properties with on-site sta )
Recurring Capital Improvements (i.e., roof replacement, HVAC replacement, etc.)
Related: Building a Pro Forma: an Essential Skill for Real Estate Investors
After subtracting the gross expenses from the gross income, you will get the net operating
income. From this, you subtract any debt service you expect to have in order to come up with
the anticipated cash ow.
It should also be noted that, with apartments and commercial properties, you will use the cap
rate to compare to other recent sales. Why? Because it is usually too di cult to nd properties
that are similar enough for a direct comparison.
More on cap rates and other nancial calculations can be found here: A Guide to Internal Rate
of Return & Other Must-Know Financial Metrics.
Overall, your pro forma will look something like this:
Finally, you’ll want to evaluate the rent. Rentometer.com is a good place to start but shouldn’t
be relied upon exclusively. In addition, RentRange.com o ers helpful reports for a reasonable
fee.
But I’ve found the best way to assess rent is to look at the map feature on Craigslist or Trulia
for similar properties that are for rent in the area. Calling the numbers listed on lawn signs of
nearby rentals or asking neighbors what they pay can also help.
Rehab Estimate
There are simply not enough hours in the day, nor days in the year, to do a thorough
inspection of every property you make an o er on. That being said, throwing out blind o ers is
usually a big waste of the seller’s time, as well as yours.
What you want is a “down and dirty” sort of due diligence pre-o er. The question to ask is,
roughly speaking, what is the general condition and an approximation of the required repairs
for this property?
For this, I designed a one-page estimation sheet based on J. Scott’s The Book on Estimating
Rehab Costs. Typical rehab expenses are broken into 25 categories; however, I added a 26th by
splitting the foundation from the basement. Here is what my sheet looks like:
As you can see, when I initially go through a house, I make a quick estimate of all the repairs
required for each major category. (For apartments, depending on the size, I will either use
several sheets, or for something over four units, take broader notes about the general
condition.)
Then, I add a little bit for the knickknacks, estimate the holding costs (which are often
forgotten), and throw in a 20 percent contingency for unforeseen expenses. (If the electrical
looks questionable or the property is older, I may throw in an additional contingency for the
electric and/or sewer line.)
I should stress that this is not the only way to do this. There aren’t any real estate dictionaries
that de ne due diligence by laying out the perfect method to go about it.
For example, J. Scott doesn’t add a broad contingency. Instead, for each line item, he rounds
his “estimate up to either the next $100 or next $500 (depending on how big the expense is).”
The important part is to get the basic idea of due diligence and create a system that works for
you. Then, use that system every time to the T.
Key Things to Look for When Estimating Rehab Costs

There are a lot of things to look for when doing your initial (as well as post-contract)
walkthrough.
The rst thing is to simply get a good feel for the property. Would you grade it as being close to
rent ready or bulldozer bait? Maybe somewhere in between? You should always note a
property’s general condition.
More speci cally, the following items should be on your radar:
Furnace and A/C: Are they old or rusty?

Fuse Box: These really need to be replaced with an electric panel.
Electrical Panel: Make sure it’s in working order, at least 100 amps (unless it’s in a small
apartment), and not a Federal Paci c or Pushmatic panel, both of which you should
probably replace.
Ungrounded Electrical Outlets: You can use a plug tester from Home Depot or Lowe’s to
test for this.
Plumbing Leaks: Run the water, check each of the faucets, and look in the basement (if
accessible).
Galvanized Plumbing: Lookout for steel pipes, which have a tendency to rust.
Foundation Cracks: These could be signs of bad grading or roots pushing on the wall and
should be epoxied and likely shored up with braces.
Foundation Movement: Anything over four inches should probably be braced or have

dead men added. Much more than that and the wall might need to be pushed back, which
is very expensive. (Pro tip: If you can’t tell how much the wall has moved, go outside and
run you nger along the bottom of the siding. It should go about to your knuckle. But just
running it along the foundation wall should give you an idea of where and how much the
wall has moved.)
Mold: This usually occurs in the basement. Also look for the bottom half of the drywall
missing (like in the second picture below). This virtually always means mold was torn out.
Mold isn’t hard to remove, but the key is to nd out where water is getting in so new mold
doesn’t grow back. This could be easy or very di cult, depending on the house.
Roof Leaks or Damage: It will be hard to tell if the roof leaks unless it’s raining, but you
can see damage by getting on the roof. How many layers are there? More than one is a
problem. Check from a side view, too. If the edges of shingles are lipping up, that means
the roof’s old and on borrowed time. If you see what look like small, discolored impact
craters on it and granules are missing, that’s probably hail damage.
Help With Estimating Rehab Costs

Unfortunately, learning how to estimate rehab costs isn’t an easy thing to do. And doubly
unfortunate, the best way to learn is through experience.
I’ve found that comparing the costs of previous projects that were of equivalent size is the best
way to get a feel for the costs of upcoming projects. This goes for individual expenses, too, like
gutting a bathroom. Newbies don’t have this luxury, though.
In the meantime, one of the best alternatives to experience is to use contractor bids to get an
idea of various costs. For instance, a standard toilet is around $150 and a standard medicine
cabinet will cost around $100. You'll start to learn this as you look at more and more bids.
You can ask a contractor to give a you bid up front, and many will do so. But don't abuse this
privilegeâ they'll quickly stop returning your calls if they don't get any actual work from you.
You can also ask seasoned investors to share their thoughts. (Maybe o er them a free lunch
for it.) Plus, J. Scott has some good tips in his previously mentioned book. There are also
websites like HomeAdvisor.com that can help—although their estimates should be taken with
a grain of salt.
Post-Acceptance Due Diligence

When people think of due diligence’s meaning, this is what they really think of. Post-acceptance
due diligence is when the rubber hits the (very tedious) road.
First and foremost, it’s critical to understand the timetable you’re under, which depends on
what’s in the purchase and sales agreement.
Every contract is negotiable, but most residential contracts have a 30-day period to close and
will allow 15 days for inspections before your earnest money “goes hard” (is no longer
refundable).
With most contracts for apartments and other commercial properties, there is a 30-day
inspection period and the close is in 60 days. However, it’s possible to add a clause that
extends the contract an additional 30 days with another earnest money payment, just in case. I
would recommend adding something like that, particularly for larger transactions.
You can always ask for extensions if something comes up during your due diligence (although
you may not receive them without a clause like the one mentioned above). The critical thing is
to know exactly what the contract says so you can plan your due diligence accordingly.
Physical Due Diligence

First things rst. When you walk a property, walk all of it. As I mentioned in a previous article
on apartment due diligence,
“Many sellers and even some real estate agents will tell you it’s OK to walk
every second or third unit. Ignore this “advice” with extreme prejudice. If you
only view every other unit, do you think the seller will show you the best or the
worst units? How many hidden problems are you leaving behind closed doors,
only to nd out later once the property is in your name? It is critical to know the
condition of each unit, even if there are 100 of them.”
In order to do this properly, you will

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When going through a house, I use the

following sheet to put together a
detailed scope of work that includes
every line item I believe will need to be done. The document is six pages in its entirety, but
here’s the gist:
I then transcribe these items and budget them individually using a spreadsheet program
designed for project management. It ends up looking like this:
I break out the categories into four major subheadings:
Pre-Construction Work: Work that must be done before the main work can start (i.e.,
removing trash or repairing electrical issues).
Construction: Everything you plan on having done by the main contractor.
Vendors: Anything that will be done by a vendor other than the main contractor (i.e.,
painting, ooring, plumbing, etc.).
Punchout: Last items to be done to button up the property (i.e., install appliances, put up
blinds, install outlet covers, etc.).
I recommend taking pictures of each issue. The project management software I use (called
Smartsheet) even allows you to attach the photos to that item’s cell within the spreadsheet.
This way, I don't have to be there when each contractor goes through to create a bid. I can
show them photos of the issue instead. Here's an example of a picture I attached to a line item
called "Replace supply vent â white."
Once you have a detailed scope of the work that’s needed, it’s a good time to re-assess your
rehab estimate.
Budgeting for each line item provides a much fuller picture of the costs. Then, you can
compare the new budget to the previous "quick and dirty" estimate to double-check whether it
was right. And with the property under contract and a line-item scope, you can ask a
contractor to get a full bid for you to verify your estimate.
I must once again emphasize that there is no perfect way to do this. For example, if the
contractor will do all the work, you won't need a vendor list.
But the method I’ve described ts within a general outline of an e ective system. Amend it to
t your own needs and follow it dutifully.
Now, returning to the walkthrough, you should also evaluate anything you questioned during
your original pre-o er walkthrough and make sure it is up to snu . This likely requires paying
for professional inspections (discussed below).
Finally, evaluate the tenants, if there are any.
If you encounter a lot of meeth (what I call meth teeth), that’s something to be concerned
about. If the house or several units of a property have been treated horribly by the tenant, you
can surmise the quality of that tenant quite easily. For apartments, I also recommend driving
by at night to see if it looks safe and tranquil or more akin to a war zone.
Here’s a “tenant watching” example of proper due diligence that comes to mind.
Once, a friend of mine was walking a fourplex just before the close. He got into a conversation
with a neighbor about the property, and it turned out she had a lot to complain about! Most
notable amongst her complaints was that she’d gathered many of the tenants were drug
dealers and prostitutes.
Needless to say, my friend walked away from that deal.
The key takeaway? Yes, talking to tenants and neighbors is a good idea.
The seller will usually not want you to mention you are buying the property, but you can ask
broad questions like, “How do you like it here?” Or say, “Have you had any maintenance
problems?”
Financial Due Diligence

Just as important as the physical due diligence is the nancial due diligence. This is especially
true of apartments and commercial properties, but it is also something you should look for
with occupied houses.
Sometimes, a seller won’t provide some or all of the nancials on a property until after it’s
under contract.
The seller is all but begging for you to re-trade in these cases (discussed below), but you should
absolutely demand the nancials once the property is under contract. When you receive them,
go through them with a ne-tooth comb.
The key documents you will want are:
T-12 Operating Statement: Minimally for the past 12 months—particularly for apartments

—but preferably for the last three years.
Current Rent Roll
Aged Receivables Report: A list of who’s behind on their rent and by how much.
List of Recent Capital Improvements
There are two major things to watch out for when reviewing nancials, speci cally with larger
properties:
1. Bad Debts
2. Misallocated Capital Expenses
If a property uses accrual accounting, then it is deemed that all the rents are received until the
bad debts (rent not collected) are charged o . Make sure that all the debts have been charged
o when reviewing nancials and you aren’t looking at phantom income.
The bigger problem I’ve found, however, is misallocated capital expenses. Many owners will
put operating expenses (i.e., maintenance, turnovers, etc.) under capital expenses so they
don’t show up on the operating statement. This makes the property’s performance look a lot
better than it actually is.
For this reason, I plead with new investors to consider recurring capital expenses (usually
called “replacement reserves” by banks) as a line item on their pro formas. Yes, you only need
to replace the roof once every 30 years or so, but you should understand such costs are an
ongoing part of owning the property.
Make sure to demand a list of all the owner’s capital improvements in the last year (or, even
better, the last three years) and their costs. Unless they were genuinely upgrading the property
(i.e., installed central air when it previously had window units) or were rehabbing an
underperforming property, these expenses should be considered recurring capital expenses
and included as part of the pro t and loss statement.
Many a time I have had to reconstruct a seller’s operating statement from the various pieces
they’ve provided (which are often poorly kept in the rst place). It’s no fun, but it is essential!
When performing due diligence, you’ll also want to get a copy of each lease that’s currently in
place. Make sure to demand this immediately upon getting the property under contract—
sellers notoriously drag their feet.
You’ll want to carefully look at the following:
Rent: Make sure it’s the same amount listed on the rent roll.
Type: Month-to-month or a year-long lease? When does that lease end?
Deposit: Again, make sure it’s the same as what the rent roll says.
Utilities: Who is responsible for paying what?
Pets: Do tenants have them? Is there pet rent?
Late Fee: When is it applied, and how much?
Special or Odd Arrangement: Do any tenants get a discount for doing maintenance or
something similar?
If you’re under contract on a commercial property (o ce, retail, or industrial), you should also
get an estoppel certi cate. An estoppel certi cate goes to the tenants of the building and asks
them to con rm the rent, deposit, and other terms of the lease.
With commercial properties, you usually only have a couple of big tenants who often have long
leases, so it’s very important to know exactly what the terms of the agreement are.
One nal note is that, oftentimes—particularly with houses—there won’t be much (if any)
nancial due diligence to do. If it’s a vacant, bank-owned house for example, there won’t be
any documentation to review. In those cases, just double-check your area, rent, and ARV
analysis, and move on.
Legal Due Diligence

Let’s start by discussing homeowner associations (HOAs). Many houses and all condos have
HOAs, and you will want to review their bylaws to make sure they’re in accord with your plans.
In the case of condos, you will also want to make sure the HOA has su cient money in reserve
for capital improvements. If they don’t, the association can impose a special assessment and
charge owners a portion of the cost to cover repairs.
Key things to look for in the HOA bylaws include verifying that the HOA fee is what the seller
says; checking that there aren’t restrictions on pets or other such things; and, most
importantly, ensuring that you are actually allowed to rent out the property.
I once bought a condo in an HOA that didn’t allow renters. I had requested the bylaws but
never received them and foolishly forgot to follow up. We had to ip that one and made a
“healthy” pro t of $1,700. (HOA fees can eat up pro ts like you wouldn’t believe.)
Another consideration: is the property odd in some way? For example, is it a house that was
converted into a duplex?
If the property is odd, you will want to verify that it is legally permitted. Ask if conversions were
done legally. If not, it may be “grandfathered in” and considered “legal nonconforming.”
This classi cation shouldn’t necessarily be a deal breaker, but it can come with added
restrictions and/or decrease resale value. Laws vary by region.
In Independence, Mo., for example, any legal non-conforming unit can continue to be rented
unless it sits vacant for six months, at which point it can no longer be rented.
If you intend to add more units or convert the property (say, from residential to commercial),
check to make sure the property is zoned correctly or whether it can likely be rezoned. This
may require a trip to the zoning department.
In addition, verify property taxes with the county. Usually you can do this on the county’s
website.
Finally, it is critical to always close with a lawyer or title company. They will run a title report to
make sure you are getting a clear title—not picking up some random mortgage or mechanic’s
lien from way back when.
If a lien is overlooked, title insurance will pick up the tab so you don’t have to. Again, there is no
gray area here. ALWAYS close with an attorney or title company, no matter what.
Inspections
If you’re just starting out, in my opinion, always get a property inspection. Even seasoned
investors would be wise to get them.
Property inspections can be a bore to read, but go through each point anyway. An inspection
will look something like this:
Some issues, like the above, are rather small. Others, like the one below, de nitely need to be
addressed.
You shouldn’t rely entirely on an inspector either. As mentioned earlier, thoroughly walk
through the property yourself, as well. But inspectors can certainly catch things you missed
and will generally know a lot more about building and safety requirements than you.
Furthermore, inspections can be used to verify your rehab expectations, realize you need to
look deeper into something, or be used for retrading. Many buyers demand a seller x all or
some of the problems an inspection brings to light before they are willing to close.
Additional inspections you may want to consider, depending on the property, include:
Lead, Asbestos and Radon Inspections: Lead inspections are only necessary if the
property was built prior to 1978.
Termite Inspection: Particularly if you see signs of termite damage, like damaged joists or
mud tunnels.
Roof Inspection: If the roof is older, appears damaged, or you aren’t sure about it.
Phase One: Environmental survey required for apartments and commercial properties.
ALTA Survey: Usually for larger properties with unclear easements, boundaries, etc.
Unsure of something? Ask a specialist. For example, you could ask an HVAC technician to look
at the furnace in a property if you’re unsure of its condition.
Lastly, get the sewer line scoped on any property over 30 years old. Replacing a sewer line can
be an expensive proposition (usually over $4,000), so you want to nd out whether the line has
collapsed or is ridden with roots.
You should be able to get a plumber to scope it for around $200. Make sure to view it with
them. Some will try to convince you to replace a line just because there are a few roots in it.
However, these lines can be snaked out.
Either way, you want to know what you’re dealing with ahead of time. You’re not going to win
the adoration of any tenants if they have raw sewage back up into their home.
When Is Re-trading Necessary?

There are two major reasons for due diligence. The rst is to make sure the property is what
you thought it was. The second is to give you the chance to renegotiate if it’s not.
With due diligence, real estate is not only safer but also more pro table.
For larger deals, I like to list my assumptions up front. Examples of assumptions might be that
approximately 90% of tenants are paying, the HVAC is in pretty good working order, the roof
needs to be replaced, and so on.
By documenting this, if assumptions are proven inaccurate when performing due diligence,
they can be referenced when asking for a price reduction.
But even without such a list, you can always ask for a price reduction or amend other terms if
you nd something amiss. Remember, everything is negotiable.
Aside from a price discount, problems discovered during due diligence might be resolved by
asking for certain issues to be xed, asking for nancing, asking to extend the closing or
inspection period, or some other way.
That being said, you shouldn’t plan on retrading from the get-go or retrade over something
trivial. If you do, you’ll quickly get a reputation and sellers will be less likely to want to do
business with you.
Final Decision and When to Walk Away
When all the hay is in the barn (as my old football coach would say), I like to play devil’s
advocate. I do this right before the inspection period expires, and I only do it for larger
acquisitions. But I’d recommend that newbies de nitely consider it—even for a house!
The problem we’re often ghting is our own con rmation bias. The tendency is to want to be
consistent or to simply be right. If you have thought the deal makes sense from the beginning,
you may ignore contrary evidence to maintain your initial belief.
To ght this tendency, I make the best case I can to not go through with the deal. Remember,
the person who usually wins a negotiation is the one who’s willing to walk away.
Always be willing to walk away, and never become emotionally attached to a property. At the
end of the day, it’s just an investment. No one becomes emotionally attached to their GE stock.
(I hope.)
And despite being under contract, until the ink is dry on the settlement statement and the deal
is funded, you’re still in negotiations.
Summary of the Process

Some parts of real estate investing are a lot of fun. Some aren’t.
Due diligence requires time, e ort, and attention to detail—but it’s absolutely worth it. Not
only will it save you from costly mistakes, but it will also provide you with opportunities to get
even better deals.
Furthermore, many new investors struggle with con dence and are scared to death going into
their rst deal. Knowing how to perform thorough due diligence can alleviate much of that
fear.
Nothing is entirely certain in real estate investing (or life!), but due diligence can provide a
much higher level of assurance.
Do you have anything to add about due diligence? Or would you like copies of any of the documents
I’ve referenced?
I’d be happy to share! Comment below.
By Andrew Syrios
Andrew Syrios has been investing in real estate for over a decade and is a partner
with Stewardship Investments, LLC along with his brother Phillip ...
Read more
89 Replies
Becky Zienkowicz from Madisonville, KY

Replied about 1 year ago
thanks for the details info in this article.
Andrew Syrios Residential Real Estate Investor from Kansas City,

Missouri
Absolutely Becky! I’m glad you found it helpful.
Nick Roberts
Great article Andrew thanks for all the detail references.

Missouri
Replied 12 months ago
Thank you Nick, I’m glad you found it helpful!
Eva Mackowski Rental Property Investor from Granbury, TX

Great article. I just need to gure out how to set up my business to protect my
assets… thanks

Missouri
Thanks Eva! And here’s a good article for asset protection:

https://www.biggerpockets.com/renewsblog/2015/12/04/protect-real-
estate-investments/
Bryon Andrews from Stillwater, MN

Great article, thank you Andrew!

Missouri
Thanks Bryon! I’m glad you got something out of it.
Victoria Seale from Santa Fe, New Mexico

Andrew, your in-depth article, photos, and explanations are well done and
greatly appreciated! thanks Victoria

Missouri
Thank you for the kind words Victoria, I’m glad it helped!
Fay Holt
GREAT INFORMATION THAT WAS NEEDED AND HELPFUL IN HAVING A GREAT

LOOK OUT IN GETTING OFF IN THE RIGHT DIRECTION

Missouri
Absolutely Fay, I’m glad you found it helpful and good luck!
Julie Fullmer
Thank you very much for the article! We are looking at our rst investment
property. It’s an ugly duckling but after using this information hope to gure out
if it can be a swan. Wish I didn’t have to do this long distance though. Any forms I
can use would be a great blessing. Thank you, Julie

Missouri
I would be happy to share the forms with you Julie, but we need to be
colleagues to share documents. So please accept my request and I will
send them right over.
Bill Syrios Rental Property Investor from Eugene, OR

If you know about the personality test Kolbe (kolbe.com), you know the term
Quick Start. Many RE investors and entrepreneurs, in general, score high on the
Quick Start scale…including me. That makes us, as the name suggests, fast, by-
the-gut decision-makers: “Yes, that seems to make sense. Let’s buy it!” Such
inclinations can serve us well in investment decisions, until it doesn’t. Quick
Starts–and you know who you are–especially need to slow down and take
Andrew’s advice by applying careful, patient attention to his lists of due diligence
items. One thing I would add that has helped me is to surround myself (in our
team) with Fact Finder types (see Kolbe again). Fact Finders more naturally follow
due diligence procedures in life which will normally come through in how they
approach RE purchase decisions. In just one example, “a Fact Finder” saved me
and partner a cool $100,000. We were in contract to purchase an apartment
complex in Dallas for $950,000. We knew the property needed lots of work but
felt like we were getting a solid price. What we didn’t take seriously, until our Fact
Finder friend dug it up by her careful attention, was how inconsistent the rents
were over the year before sale. As we dug more deeply we found out the seller
was padding the occupancy through his property manager by dropping rental
application criteria and in ating rents by giving concessions. Just a couple of days
before closing the sale we confronted the property manager and the seller about
what was going on. In the end the seller dropped his price from 950,000 to
850,000 and believe me, we needed those extra concession dollars as we
subsequently tackled the rehab job that was still more expensive than we
anticipated. For you Quick Starts out there…you can take a friend of mine’s
approach: double what you think it will cost you for rehab and then add another
10% on top of that. Or, maybe better yet, heed Andrew’s (Fact Finder) advice and
put in the time to do quality due diligence. It will help you avoid making bad and
really bad decisions not to mention, sleep better at night!
Jenn Keeney from Louisville Kentucky

I’d love a copy of your forms! Great article with details and depth! Normally
articles just barely touch on topics.

Missouri
Sure thing Jenn, but we have to be colleagues to share documents so

please accept my request and I will send them right over.
Ryan Dossey Real Estate Broker from Indianapolis, IN

I LOVE that you get into con rmation bias. It’s hard for investors to admit that
they’re wrong or that the deal no longer makes sense. Kind of reminds me of
sales guys cashing the checks in their head before the deal closes.

Missouri
Thanks Ryan and yeah, con rmation bias can be an absolute killer as
can entrepreneurial optimism (or over-optimism). Major things to be
aware of when investing in real estate.
Kevin Kern Wholesaler from Louisville, Kentucky

Great article, something that every investor should read. Did a nice job of
explaining everything in thorough detail. With there being so many di erent
moving pieces in a real estate deal, it is very easy to feel intimidated (if new) or let
something fall thru the cracks (experienced). Due diligence is key!

Missouri
Thanks Kevin! And yeah, I think that “overwhelmed feeling” can be

alleviated by having a checklist and simply following it step by step
instead of trying to think of everything that you need to do all at once.
Steve Hiltabiddle Lender from Pennysylvania

Andrew, I enjoyed listening the Syrios Brother’s Podcast #121. There was so
much information so I’m glad to read your post as this captures much of what
you shared about evaluating a property. Many thanks.

Missouri
Thank you Steve, I’m glad you found this and the podcast helpful. Good
luck investing!
Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
Por supuesto Kory y tenga un fantastico n de semana!
Ben Leybovich Rental Property Investor from Chandler/Lima, Arizona/OH

Andrew, I am commenting more out of respect for your accomplishments, and

respect for your desire to educate, both of which are second to none in my
opinion. I’d like to add a few points, which I hope will help a few folkjs. 1.
Rentometer.com is not particularly accurate. I tend to avoid platforms such as
this in my rent-setting. 2. In this way you and I are very di erent, but your CF pro-
forma indicated $0 for payroll. I understand that you run your own PM, but in my
world if the property doesn’t absorb management and payroll it is immediately
out. At $1000 rents you’re generally taking 90+ units. 3. Property taxes in your
example of $19,000 is more than $1,000/door. This is extremely high burden
inside of the OpEx, and tells me something about the general market that I don’t
like. Rents of much in excess of $1000 are needed to begin to underwrite such a
load. Same could be said about insurance in this case. 4. I am not seeing the IRR
calculation. I know this is a re-positioning project, but what does the exit look
like? I mean, you will do the work, but eventually, be it in 5 years, 7, or 10 years,
you’ll need to get out, and I want to know how much equity you are getting for
the work you are doing. What does this look like…? To give you an example, the
property we’ll close on in about 3 weeks looks like $13M all in and $19M-$20M
out. This is a necessary component of the DD – underwriting the exit. Hoping this
commentary helps someone a little bit. Thanks for a great article. It’s obvious you
put a lot of thought into this piece!

Missouri
I always appreciate some constructive criticism, especially from

someone as successful as yourself Ben. A few notes on your points: 1. I
generally agree, I would only start there to get a vague idea before
directly comping it. 2. Most of what we buy are houses and small
multi’s, so payroll is hard to allocate, so we charge an internal
management fee. We are looking to get into multi’s and syndications
more and I’ll be making sure to review your posts on those matters. 3.
This was a portfolio of houses (which I should have mentioned, even
after editing twice I still miss stu … the joys of writing amirite?). So the
taxes are usually (in KC) about $1000/unit. But the rents are higher
which compensates. 4. I do run an IRR analysis on apartments and
portfolios (although not on individual houses). I only link to my
discussion in that piece, but would be interested to get your thoughts:
https://www.biggerpockets.com/renewsblog/a-guide-to-internal-rate-of-
return-and-other- nancial-metrics/ Thanks again Ben!
Phillip Syrios Investor from Kansas City, Missouri
Stop giving away all our secrets! Haha, just kidding. Great article man! You’ve only
had to do this on 500 or so houses…

Missouri
Do you honestly believe I didn’t sabotage this piece with all sorts
disastrous advice???
Greg Whiteley
This is great ! You explanation of each step is thorough and complete with helpful
examples. I also like the list of websites that can assist me in the process. Thank
you !!

Missouri
Thanks Greg, I really appreciate the kind words!
Jessica Morelock from Emporia, Kansas

I always learn so much after reading and listening to your articles. Great job
Andrew!

Missouri
Thank you Jessica, I really appreciate that!
Luis Ortega Rental Property Investor from Fontana, CA

Andrew Very good information and perfect timing. I’m a newbie and will be
performing due diligence on a property very soon, I’m nervous about the whole
process, I will de nitely be using this article as a guide. Please share copies of
forms/docs Thank you

Missouri
Thanks Luis, knowing what to do and doing it thoroughly can really

calm those nerves.
Octavian Goncalves Real Estate Investor from Providence, Rhode Island

Please share all the forms and document resources you have when you have the
time on due diligence.

Missouri
I think we already communicated, but if not, send me a colleague

request and I will shoot them right over.
Tammie D Jordan from Waynesboro, Virginia
Thanks for this very informative article.

Missouri
Thank you Tammie, I’m glad you found it helpful!
Devin Moeser
Andrew, Thank you very much for the article. I read it last week and came back to
read a second time. I have been struggling to adopt some of the D.D. approaches
that I have learned working for larger construction and development companies
but sometimes they are overly burdensome for smaller operations. If the o er
still stands I would be interested in the docs that you reference in the article. It
sounds like they would be great assets. Thank you again for the article.

Missouri
Hey Devin, thank you for the kind words. It’s de nitely a lot to digest,
but it’s worth spending some time with it. I sent you a colleagues
request, please accept and I will send you the documents. (We have to
be colleagues to share docs.)
Ronnie Fielder Rental Property Investor from Triangle, VA

Andrew, really good article on due diligence. I love the practical tips and the
notion of taking emotion out of the equation.

Missouri

Thank you Ronnie, I really appreciate it!
Joe Steinheiser from Lansdale, Pennsylvania

Great article and very thorough. Thanks.

Missouri
Thanks Joe!
Jonathan Ja e from Lewisville, NC

Dear Andrew, Very informative and the format is exactly what I think many
people will nd very useful, obviously given the comments already here. If I could
also ask to be a colleague so that I can take you up on your o er to share those
documents. I’m about to go under contract with my rst, and your expert format
will no doubt prove very useful. Thank you for your generous o er!

Missouri
Thanks Jonathan and I just sent them.
Lisa Priestley Rental Property Investor

Thanks Andrew for all the great information. Is it possible to get the forms
mentioned? Cheers. Lisa

Missouri
Hi Lisa, I would be happy to share the docs. Please just accept my

colleague request and I will send them right over.
Michael Johnson Rental Property Investor from Columbus, GA

Thanks for this article!! Considering purchasing my rst commercial rental

property (13 units) and desperately needed this info! De nitely going to read this
thrice over before I o er!! Mike

Missouri
Absolutely Michael, and I hope things go well with that property!
Benjamin Hammond from Rosharon, Texas

Thanks for the valuable info. I would also like a “colleague” sharing of the docs
mentioned. I tend to look big picture and need tools that will help me also
consider the critical seemingly small items. What suggestions do you have for
due diligence on long distance properties? I’m new to investing but looking at a
long distance market. Thanks in advance.

Missouri
I just shot you a colleague request. Go ahead and accept and I will
shoot you over the docs. As far as out of state investing, I would check
out my article on it for a quick rundown:
https://www.biggerpockets.com/renewsblog/2014/12/23/investing-out-
of-state-essential-items-to-vet/ and David Green’s book for a more
extensive look: https://www.biggerpockets.com/store/long-distance-
real-estate-investing-ultimate
Jacob Dixon from Phoenix, AZ

I would love to have the documents you posted here in regards to due diligence!

Missouri
Hey Jacob, I just sent you a colleague request. Go ahead and accept it
and I will shoot them right over.
Jacob Dixon from Phoenix, AZ
Thank you sir!
Timothy Bell
Great article Andrew!

Missouri
Thank you Tim!
Preston Hall
There’s a lot of great information there. Good article!

Missouri
Thanks Preston!
Angelique Dodaro from Eugene, Oregon

Thank you for a useful guide with very valuable and concise information. I
speci cally appreciate the rehab estimation sheet.

Missouri
Thank you Angelique, I really appreciate that!
Jane J. from Los Angeles, California

Fantastic article and certainly highlighted what I need to know! I would also love a
copy of your forms if you don’t mind please Andrew. Thank you so much, I will be
sure to follow you.

Missouri
Thank you Jane! We have to colleagues to share documents so please

accept my request.
Yolanda Boateng
Hello Andrew, Really great information! Could I please get copies of your forms?

Missouri
Thank you Yolanda and sure thing. We just need to be colleagues to

share docs, so please accept my request.
Ilir Lako
Great article Andrew. I also watched the video that you and Ryan Dossey did on
the topic. I am new to the real estate world and I am trying to learn as much as
possible in order to acquire a property for additional income. I would love to get
a copy of the forms and templates you showed.

Missouri
Sure thing Ilir. But we have to be colleagues to share docs, so please

accept my request. Thanks
Ilir Lako
Thank you. Accepted.
Charles Salter Iii from San Diego
Andrew thanks a million for this post and the video you made back in december
on this topic. I have a property under contract and estimating the rehab has been
di cult without knowing exactly what to look for. The book by J. Scott on
estimating rehab costs will be my next purchase. Can I get a copy of the forms
you use in this article?
Charles Salter Iii from San Diego

Andrew thanks a million for this post and the video you made back in december
on this topic. I have a property under contract and estimating the rehab has been
di cult without knowing exactly what to look for. The book by J. Scott on
estimating rehab costs will be my next purchase. Can I get a copy of the forms
you use in this article?

Missouri
Sure thing Charles, I shoot them right over to you.
Scott T. from Florida

Andrew…… OMG!!! Wow, So much important information my head is spinning… I

will de nitely have to reread this a few times to digest. If you could send me over
these forms I would appreciate it greatly… We’re already connected, and

anything I could do for you in the future please don’t hesitate.. Regards, Scott

Missouri
Thanks Scott and I would be happy to share the documents but we

have to be colleagues rst so please accept my request.
Eduardo Prieto Rental Property Investor from Raleigh-Durham

Andrew, Great article I appreciate if you could share the forms. Thanks again.

Missouri
Sure thing Eduardo, we just have to be colleagues to share documents

so please accept my request.
Sessalli Obasuyi Rental Property Investor from Worldwide

I'm going to add you as a colleague. I was wondering if you could possibly send
me the checklists, forms, pro forma template you use? Also, why is vacancy loss
in gross income and could you clarify economic vacancy?

Missouri
Sorry I missed this, I will DM you the sheets. As far as vacancy loss being
with income is because it's not really a loss. It just represents the
"income" that you could have made but didn't. I.e. if the rent is
$1000/month and you have the unit rented for 11 out of 12 months, the
income is $11,000. But it could have been $12,000 if not for the
vacancy. So the vacancy loss is $1000. Economic vacancy is when the
unit is rented but the tenant isn't paying. This might as well be a
vacancy, in fact it's worse because you have to pay (and wait) to get the
tenant out and release the property.
Renee Stan eld from Los Angeles

Fantastic information! Thank you so much for posting this! I"m just getting
started in real estate investing (while working a very hectic, stressful job as a
cardiac nurse) - would love to have copies of your checklists for future reference.
Keep up the great work!!
Je rey L Jones II Rental Property Investor from Indianapolis, IN

Hi Andrew, excellent information in this guide! I'd love a copy of your forms as
well. Thanks so much for all this help!

Missouri
Sure thing Je rey, I will shoot it right over.
Tony Barbuto
Hello Andrew, thank you for taking the time to put this guide together! This will
prove invaluable when analyzing potential deals. Would you mind please sharing
the spreadsheets/forms noted in the guide? Thanks in advance! Tony
Marcus Graves Accountant from Chester eld, MO

Great article, Andrew! I will be looking for my rst investment property in a

couple of months in St. Louis, and this information is invaluable to me! If I shoot
over a colleague request, would you be willing to share the due-diligence forms
with me? Thank you Andrew!
Rogelio M. from San Antonio, Texas

Andrew, just now am getting around to reading your post on the topic of due
diligence. I noted with particular interest your discussion on the topic of miss-
classifying operating expenses as capital expenditures, and how this could
possibly distort the apparent pro tability of the project. Ultimately, the economic
pro t is derived from cash ows, whether they be operating expenditures, or
capital improvements; this then sets aside a debate as to whether a line item
expenditure is "above the line or below the line". Would you also be able to share
your documents?; that would be greatly appreciated. For some time now, I have
been following your posts, and have thoroughly enjoyed delving into them. Great
Job!

Missouri
Thank you Rogelio and sure thing. We just need to be colleagues to

share docs so please accept my request.
Deeandrea Burgos from Baltimore, MD

Replied about 21 hours ago
Awesome post!! Great way in consolidating a lot of information into one post. It
puts a lot of the things I have been reading into a clearer process. Thanks!
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2/1/2020 Due Diligence: The Ultimate Guide for Real Estate Investors | Blog

Real Estate Investing Basics Jan 30, 2020

The Ultimate Guide to Due Diligence

What Is the Meaning of Due Diligence?

Checklist: The Process

1. Pre-O er Due Diligence

2. Post-Acceptance Due Diligence

3. Retrading (if necessary)

fundamentals are the same.

Let’s take a closer look at each part.

Pre-O er Due Diligence

Value and Financial Estimate

Related: Building a Pro Forma: an Essential Skill for Real Estate Investors

that are similar enough for a direct comparison.

Overall, your pro forma will look something like this:

Key Things to Look for When Estimating Rehab Costs

More speci cally, the following items should be on your radar:

Furnace and A/C: Are they old or rusty?

Foundation Movement: Anything over four inches should probably be braced or have

Help With Estimating Rehab Costs

Post-Acceptance Due Diligence

Physical Due Diligence

In order to do this properly, you will

When going through a house, I use the

I break out the categories into four major subheadings:

Finally, evaluate the tenants, if there are any.

Here’s a “tenant watching” example of proper due diligence that comes to mind.

Needless to say, my friend walked away from that deal.

Financial Due Diligence

The key documents you will want are:

T-12 Operating Statement: Minimally for the past 12 months—particularly for apartments

You’ll want to carefully look at the following:

Legal Due Diligence

However, these lines can be snaked out.

When Is Re-trading Necessary?

Final Decision and When to Walk Away

Summary of the Process

I’d be happy to share! Comment below.

Becky Zienkowicz from Madisonville, KY

thanks for the details info in this article.

Andrew Syrios Residential Real Estate Investor from Kansas City,

Replied about 1 year ago

Absolutely Becky! I’m glad you found it helpful.

Great article Andrew thanks for all the detail references.

Andrew Syrios Residential Real Estate Investor from Kansas City,

Thank you Nick, I’m glad you found it helpful!

Eva Mackowski Rental Property Investor from Granbury, TX

Andrew Syrios Residential Real Estate Investor from Kansas City,

Thanks Eva! And here’s a good article for asset protection:

Bryon Andrews from Stillwater, MN

Great article, thank you Andrew!

Andrew Syrios Residential Real Estate Investor from Kansas City,

Replied 12 months ago

Thanks Bryon! I’m glad you got something out of it.

Victoria Seale from Santa Fe, New Mexico

Andrew Syrios Residential Real Estate Investor from Kansas City,

GREAT INFORMATION THAT WAS NEEDED AND HELPFUL IN HAVING A GREAT

Andrew Syrios Residential Real Estate Investor from Kansas City,

Andrew Syrios Residential Real Estate Investor from Kansas City,

Replied 12 months ago

Bill Syrios Rental Property Investor from Eugene, OR

Jenn Keeney from Louisville Kentucky

Andrew Syrios Residential Real Estate Investor from Kansas City,