Key Takeaways
- Use specialized inspectors for commercial properties—a general home inspector is insufficient for 5+ units.
- Inspect 20-30% of unit interiors minimum, looking for patterns that indicate systematic issues.
- Get contractor bids for major items during DD—do not rely solely on rules of thumb for negotiation.
- Add 15-20% contingency to all repair estimates for unforeseen conditions discovered post-closing.
Physical due diligence is the most tangible pillar—you can see, touch, and measure the issues. This lesson provides the detailed workflow for conducting physical DD: selecting and managing inspectors, conducting walk-throughs, interpreting inspection reports, and quantifying repair costs for negotiation.
Selecting and Managing Inspectors
For residential properties (1-4 units), a licensed home inspector covers all systems. For commercial and multifamily (5+ units), use specialized professionals: a general inspector or Property Condition Assessment (PCA) firm for the overall building, a roofer for detailed roof assessment, an HVAC contractor for mechanical systems, a plumber for waste and supply line scoping, and a structural engineer if foundation or structural concerns are identified. Select inspectors based on: relevant experience with the property type and size, availability within your DD timeline, quality of sample reports, and professional licensing and insurance. Provide the inspector with the property's age, unit count, and any specific concerns before the inspection.
Conducting the Property Walk-Through
Attend the inspection personally—do not rely solely on the inspector's report. Your walk-through checklist: Exterior—roof condition (from ground and roof access), siding/facade condition, windows and doors, grading and drainage, parking lot condition, landscaping, signage. Common Areas—lobby, hallways, stairways, laundry room, amenity spaces, mail area. Mechanical Rooms—boiler/HVAC equipment age and condition, water heaters, electrical panels, fire suppression systems. Unit Interiors—inspect 20-30% of units minimum, focusing on variety (different unit types, different floors, different condition levels). Note which units you were NOT allowed to inspect and why. Look for patterns: if 3 of 6 units show water stains on ceilings, suspect a systematic plumbing or roof issue rather than isolated incidents.
Quantifying Repair and CapEx Costs
Convert inspection findings into dollar estimates using three methods. Contractor Bids: for major items (roof, HVAC, parking lot), get actual bids from contractors during the DD period. This is the most accurate method but takes time. Cost Databases: use RS Means, HomeAdvisor, or Craftsman cost databases for standard repairs with regional adjustment factors. Per-Unit Rules of Thumb: for comprehensive estimates, use industry per-unit costs—light renovation $5,000-$10,000/unit, moderate $10,000-$20,000/unit, heavy $20,000-$35,000/unit. Always add 15-20% contingency to any repair estimate for unforeseen conditions. Create a repair cost summary table with each item, estimated cost, urgency (immediate, 1-2 years, 3-5 years), and whether you are requesting seller credit or planning to self-fund.
Case Study: Physical DD on a 24-Unit Apartment Complex
You are conducting physical DD on a 1978-built, 24-unit garden-style apartment complex with a 45-day DD period.
- 1Day 2: Schedule general inspection for Day 10. Order roof assessment, HVAC evaluation, and sewer scope for Day 12.
- 2Day 10: General inspection reveals aged electrical panels (Federal Pacific, known fire hazard), water stains in 4 of 8 units inspected, and deteriorating parking lot.
- 3Day 12: Roof assessment shows 3-5 years remaining useful life ($144,000 replacement estimate). HVAC evaluation: 8 of 24 units have original 1978 equipment requiring replacement within 2 years ($48,000). Sewer scope: tree root intrusion in main line ($8,500 to clear and line).
- 4Day 14: Get electrical panel replacement bid: $52,000 to replace all Federal Pacific panels. Get parking lot bid: $36,000 to mill and overlay.
- 5Day 16: Compile repair summary: immediate needs $108,500 (electrical + sewer), Year 1-2 needs $48,000 (HVAC), Year 3-5 needs $180,000 (roof + parking). Total estimated CapEx: $336,500.
- 6Day 18: Present findings to seller requesting $150,000 price reduction for immediate and near-term items. Seller counters with $75,000 credit. Negotiate to $110,000 credit.
Physical DD identified $336,500 in total repair needs, with $108,500 needing immediate attention. The negotiated $110,000 credit covers immediate items plus a portion of Year 1-2 needs. The remaining CapEx is incorporated into the updated pro forma, reducing projected IRR from 19% to 16.2%—still above the 15% hurdle rate.
Key Takeaways
- ✓Use specialized inspectors for commercial properties—a general home inspector is insufficient for 5+ units.
- ✓Inspect 20-30% of unit interiors minimum, looking for patterns that indicate systematic issues.
- ✓Get contractor bids for major items during DD—do not rely solely on rules of thumb for negotiation.
- ✓Add 15-20% contingency to all repair estimates for unforeseen conditions discovered post-closing.
Sources
- ASHI — Standards of Practice(2025-01-15)
- RSMeans/Gordian — Repair and Maintenance Cost Data(2025-01-15)
Common Mistakes to Avoid
Hiring a residential home inspector for a commercial multifamily property
Consequence: Residential inspectors may lack training in commercial building systems, fire codes, and multifamily-specific concerns
Correction: Hire inspectors with specific experience in the property type—commercial multifamily, not single-family residential
Skipping the sewer scope because the plumbing appears to work during inspection
Consequence: Underground cast iron and clay pipes can fail catastrophically within months, costing $15,000-$50,000+ to replace
Correction: Always order a sewer scope ($250-$500) for any building built before 2000—the cost is negligible compared to the risk
Test Your Knowledge
1.What qualifications should you verify when hiring a property inspector?
2.What inspection technique provides the highest ROI for identifying hidden plumbing issues?
3.How should repair costs from inspection findings be quantified?