Due Diligence
Also called: DD, Diligence period
Due diligence is the contractual period after a purchase agreement is signed during which a buyer inspects the property, audits its financials and leases, and can typically terminate and recover earnest money.
Diligence converts assumptions into verified facts. The physical workstream covers unit walks, roof and mechanical inspections, and environmental review. The financial workstream audits the leases against the rent roll, confirms deposits, tests utility billing, and verifies the tax and insurance basis going forward.
The most common material findings are deferred maintenance larger than the seller disclosed, a rent roll that does not reconcile to actual signed leases, and a property tax reassessment at the new basis that reprices the expense load. Each is a re-trade point, and each is far cheaper to find during diligence than after closing.
Rules of thumb
- Walk every unit if the deal size allows it, and at minimum a stratified sample across unit types and buildings.
- Audit leases against the rent roll directly. This is where paper occupancy and real occupancy diverge.
Related terms
- Letter of Intent (LOI)
A letter of intent is a short, generally non-binding document submitted by a prospective buyer that sets out the proposed price and principal terms of a transaction before a purchase agreement is drafted.
- Trailing Twelve (T12)
A trailing twelve is an operating statement showing a property's actual income and expenses for the most recent twelve months, and it is the primary evidence base for underwriting a multifamily acquisition.
- Rent Roll
A rent roll is a unit-by-unit schedule of a property's leases showing unit type, square footage, current rent, market rent, lease start and expiration dates, and occupancy status.
- Capital Expenditures (CapEx)
Capital expenditures are investments in a property that extend its useful life, improve it, or reposition it, and they sit below the net operating income line rather than being treated as operating expenses.