Key Takeaways
- Physical DD requires 20-30% unit sampling and contractor bids for major repair items.
- Financial DD compares rent rolls to estoppels, T-12 to tax returns, and identifies missing expense categories.
- Title issues (unreleased mortgages, encroachments) must be resolved before closing or covered by endorsements.
- Not all environmental findings are deal-killers—below-threshold contamination is manageable with monitoring and insurance.
This lesson recaps the applied DD workflows covered in Track 2: physical inspection, financial audit, legal/title review, environmental assessment, and issue resolution. Test your applied skills with the review questions below.
Applied DD Workflows Recap
Physical DD uses specialized inspectors, 20-30% unit sampling, and contractor bids for major items. Financial DD traces seller numbers to source documents: rent roll to leases and bank deposits, T-12 to tax returns and invoices, lease abstracts for all tenants. Legal DD reviews title commitments (Schedule B-2 exceptions), ALTA surveys (encroachments, easements, flood zones), and zoning verification (conforming vs. non-conforming use). Environmental DD follows ASTM E1527-21 Phase I standards, with Phase II testing triggered by recognized environmental conditions.
Issue Resolution Recap
Issues are categorized as deal-killers (terminate), price adjusters (negotiate credit/repair), and acceptance items (plan for post-closing). The go/no-go framework recalculates all-in cost including DD findings and re-tests investment criteria. Environmental contamination above cleanup thresholds is typically a deal-killer; contamination below thresholds can be managed through monitoring, insurance, and seller credits.
Key Takeaways
- ✓Physical DD requires 20-30% unit sampling and contractor bids for major repair items.
- ✓Financial DD compares rent rolls to estoppels, T-12 to tax returns, and identifies missing expense categories.
- ✓Title issues (unreleased mortgages, encroachments) must be resolved before closing or covered by endorsements.
- ✓Not all environmental findings are deal-killers—below-threshold contamination is manageable with monitoring and insurance.
Sources
Common Mistakes to Avoid
Conducting physical inspections without a standardized scoring methodology for each building system
Consequence: Inspector reports vary in format and rigor, making it impossible to compare conditions across properties or track deterioration over time
Correction: Use a 1-5 condition rating scale (per ASTM E2018 PCA standards) applied consistently to every system: roof, HVAC, plumbing, electrical, structural
Skipping the financial audit portion of due diligence because the seller provided clean T-12 statements
Consequence: Undisclosed concessions, related-party transactions, or off-books expenses distort the true financial picture by 5-15%
Correction: Request bank statements, credit card statements, and vendor invoices to independently verify every material expense and revenue line
Test Your Knowledge
1.What percentage of unit interiors should you inspect during physical DD?
2.What document should you compare the T-12 operating statement against to detect manipulation?
3.What does "REC" mean in a Phase I Environmental Site Assessment?