Property inspection and due diligence can make or break a real estate investment. The key is tailoring your review to the property type, since each has unique risks and value drivers.
Here’s a breakdown of best practices by property type, followed by a general checklist.
1. Residential Properties (Single-Family, Duplex, Small Multifamily)
Inspection Focus:
- Structure & Systems: Foundation, roof, plumbing, electrical, HVAC, drainage, insulation.
- Pests & Mold: Termite inspection, moisture intrusion, radon levels.
- Code Compliance: Ensure past renovations or additions have permits.
- Neighborhood Factors: School district quality, crime rate, HOA restrictions, future zoning changes.
- Rental Readiness: For investment homes, assess tenant demand, average rents, and turnover costs.
Due Diligence:
- Review title report, property tax history, and any easements.
- Get a CMA (Comparative Market Analysis) for fair market value.
- Check insurance claims history (CLUE report if available).
2. Commercial Properties (Retail, Office, Industrial)
Inspection Focus:
- Building Systems: Roof, HVAC, elevators, fire suppression, ADA compliance.
- Environmental Concerns: Phase I ESA (Environmental Site Assessment); check for contamination or prior industrial use.
- Zoning & Use Permits: Verify property is zoned for its current and intended use.
- Parking & Access: Sufficient spaces per code, traffic flow, signage rights.
- Deferred Maintenance: Review service contracts and maintenance logs.
Due Diligence:
- Analyze leases (term, escalation, CAM recoveries, renewal options).
- Review tenant financials (creditworthiness, arrears).
- Examine operating expenses, NOI, and Cap Rate alignment with market comps.
- Review title, survey, and existing easements carefully — they often impact development options.
3. Multifamily (Apartments, Condos, Mixed-Use)
Inspection Focus:
- Unit-by-Unit Walkthrough: Random sampling may miss hidden issues — inspect at least 30–40% of units.
- Plumbing & Electrical Infrastructure: Shared systems can have expensive repair implications.
- Life Safety Systems: Fire alarms, extinguishers, emergency exits, security systems.
- Common Areas: Roofs, parking lots, landscaping, lighting, waste management.
Due Diligence:
- Review rent roll, lease agreements, delinquency reports, and maintenance logs.
- Verify occupancy rates and tenant retention trends.
- Check for deferred maintenance that could become CapEx.
- Confirm compliance with local housing, fair housing, and habitability laws.
4. Land (Vacant or Development Sites)
Inspection Focus:
- Survey & Boundaries: Confirm acreage, encroachments, and easements.
- Topography & Soil: Conduct geotechnical and percolation tests for construction viability.
- Utilities & Access: Availability of water, sewer, power, road access, and drainage.
- Environmental Review: Wetlands, flood zones, endangered species, contamination history.
- Zoning & Entitlements: Development rights, setbacks, FAR, height limits.
Due Diligence:
- Verify title, deed restrictions, right-of-way access, and mineral rights.
- Review planning department future land use maps and nearby infrastructure projects.
- Confirm tax status and any special assessments.
Universal Due Diligence Checklist
- Title & Ownership:
- Title report, easements, liens, encroachments.
- Verify legal description and chain of title.
- Financial Review:
-
- Operating statements (3–5 years).
- Property tax assessments and utilities.
- Cap rate, cash flow, and projected ROI.
- Legal & Compliance:
-
- Zoning verification and occupancy certificates.
- ADA, fire, and safety compliance.
- Environmental & Structural:
-
- Phase I ESA (and Phase II if red flags).
- Building condition assessment or PCA report.
- Market & Location Analysis:
-
- Demographics, traffic patterns, comps.
- Planned developments or rezoning nearby.
- Insurance Review:
-
- Coverage adequacy and premiums.
- Historical claims.
- Exit Strategy:
-
- Resale potential, redevelopment options, lease-up risk.
