I've found a lot of expensive surprises in real estate. Broken side sewers. Unpermitted remodels. Termite infestations. Lease agreements that materialized after closing. One property where the seller forgot to mention that four feet of the backyard sat in a flood zone, which meant mandatory flood insurance.
Here's the thing about every single one of those: they were all catchable during due diligence. Due diligence is the window between "the seller accepted my offer" and "I own this thing forever," and it's where good deals are confirmed and bad deals are escaped. An inspection fee and some earnest money are cheap. A problem you inherit at closing is not.
This is the exact process I run on every property, physical and financial.
Physical due diligence
Inspect everything, and follow the inspector like a hawk
A real home inspection means a licensed professional going through every unit and checking the major systems: plumbing, electrical, siding, windows, crawlspace, attic, heating and cooling, fixtures, and appliances. There's no such thing as a perfect inspection report, but the point is to avoid surprises after closing.
Be there, and follow the inspector closely. I've pointed out plenty of issues that would have been passed right over. When I'm buying out of state, my agent is my eyes and ears in that walkthrough, and ideally my property manager shows up too, plus a contractor if I plan to renovate. Getting the inspector, the property manager, and the contractor all weighing in on condition is how you really understand what you're buying. I go deeper on running this from a distance in the out-of-state investing guide.
Hire an inspector who carries E&O insurance
One more thing about who you hire: check that the inspector carries errors and omissions (E&O) and liability insurance, and read the liability clause in their inspection agreement. I bought a property once where, sixty days after closing, a pest company found termites in the foundation and the sill plate (the support under the floor joists) rotted out in several spots, none of it disclosed in the inspection report. Because our inspector carried E&O, we recovered the repair costs through his insurance. Had we hired one whose agreement capped liability at the cost of the report, which is common, we'd have eaten every dollar ourselves. Some states require inspectors to carry E&O or liability coverage, so look up your state's requirement before you book.
Scope the side sewer. Always.
I'll admit I used to skip this on my own deals. Then I learned why you never should.
We were in Maui when a partner agent asked if we wanted a sewer scope on a bank-owned property. The city had told him it didn't even look like the place was on sewer. We dug in, decided it had to be, and ran the scope. About 71 feet from the house, the camera hit a massive root ball. Worse, that line served three houses with no easements, running straight through everyone's yards. The fix involved an attorney and the city council, estimated around $25,000. The bank offered a $7,000 discount. We walked, and found a better property two days later.
That scope cost us $350, plus a $400 inspection, on a house we didn't buy. I call that the cheapest insurance in real estate, and I make the full case for it in why you should always scope the sewer line. A blocked or broken line runs $10,000 and up to repair. A scope is a few hundred. Do it on every purchase, even where it isn't customary, even on older homes where the plumber has to pull a toilet to get access.
Verify the flood zone
FEMA remapped their flood zones a few years back, and many sellers have no idea their property is now affected. I helped an investor buy an off-market house miles from the nearest river, but a small creek nearby meant four feet of the backyard was newly in the flood zone, triggering required flood insurance. Because it was a quick close, we didn't catch it until after closing, and the seller had checked "no" on the disclosure because they genuinely didn't know. Now I check the current FEMA map during every due diligence period.
Look for water and drainage evidence
Past water problems hide in plain sight: bubbled ceilings, water lines on foundation walls, stained sheetrock, a bubbled-up entry floor. One property's listing photos showed sandbags by the garage. I asked about drainage before offering and was told it was a one-time, fixed event. During due diligence, the tenants told a different story: every heavy rain, they had to move their stuff away from the door. That's a grading problem, not a quick drain fix, so I passed.
Check permits and violations
Spend a few minutes on the county website. On one deal I found an open building permit for an attached three-car garage. The seller had answered "yes, all permits finalized" on the disclosure, so I used the open permit as a bargaining chip and had them finalize it before closing. Permit records also surface complaints and code violations. This is also where vetting the broader neighborhood pays off, the crime and location data that tells you whether the block itself is a buy. I run that piece through DoorProfit before I get attached to any property.
Read the seller disclosure, then ask more
Every deal should come with a seller disclosure. Some are thorough (Washington runs seven pages), others are thin. Read it fully, and know it's completely reasonable to ask the seller to elaborate. On a bluff-front property with erosion concerns, the standard form didn't ask what we needed, so we typed up our own questions, labeled it Exhibit B to the disclosure, and sent it with the offer. You can do that.
Financial due diligence
Before I spend a dollar on inspections, I want the numbers, so I can catch income or expense errors first. Request these from the seller (usually through the agent) as soon as you're under contract:
- The trailing 12 months of profit and loss statements (or the property's Schedule E if a mom-and-pop seller has no P&L)
- A current rent roll and all lease agreements
- A recent survey, especially on commercial
- Twelve months of utility bills for anything the owner pays
The pre-offer underwriting that all this verifies is in the fast and simple way to analyze multi-family deals. This is also the point to line up coverage so it binds the day you close, since waiting even a day is one of the insurance mistakes that can wipe out a deal.
The 5 surprises that show up under contract
After hundreds of deals, the same issues recur. None are deal-killers if you handle them.
- No written leases. Roughly a third of the investment deals I've seen had none. Get the seller to state in writing that there are no leases and document the actual rents with proof, or have them sign month-to-month leases before closing. An at-will tenancy is often easier to work with than a long below-market lease. (Once, a tenant produced a long-term lease after closing that I didn't know existed. Get it in writing.)
- No move-in condition checklist. In Washington it's actually a violation to hold a security deposit without one, and similar rules exist elsewhere. Without it, a tenant can cause damage you can't charge for. Ask for a credit, or do a checklist at closing and collect the deposit from the seller.
- Utility misrepresentation. "Tenants pay all utilities" often excludes water, sewer, and garbage. Verify in the lease, the P&L, and with the utility company before you offer. If the owner is actually paying, get a year of bills and a price reduction, or bill it back (I add a flat $60 to $75 monthly fee to rent on my single-meter duplexes).
- Major inspection findings. Standing water in a crawlspace, attic mold, electrical or plumbing problems. Renegotiate. The seller is already mentally spending the proceeds, and any other buyer would find the same thing, so they're motivated. Have them repair before closing or discount the price so you can.
- Wrong advertised rents. It happens constantly. Ask for a price reduction for the error. It's a bigger problem only when the real rents are much lower and there's a long lease left to run.
Don't skip contractor due diligence
If you're renovating, vetting the contractor is part of due diligence too. (Fun fact: I'm a licensed general contractor in Washington myself, which I got with a $130 bond, insurance, and some paperwork. That's how low the bar is in some states, which is exactly why bad contractors are everywhere.)
Watch the red flags: a contractor available same day (good ones are booked out), one demanding full payment up front, pushiness, cash-only requests, or dodging your questions. Then protect yourself:
- Find them through investor and property-manager referrals first, online reviews second.
- Verify the license is active on your state's website, and check for violations.
- Get a W-9 up front and a detailed written bid.
- Pay on a milestone draw schedule, never the final payment until the work passes a punch-list inspection.
- Put everything in writing, and always send a photo for anything specific. I once got the wrong flooring in a living room because the scope just said "new flooring."
- Inspect what you expect. Even great contractors need weekly check-ins, and on my remote Indianapolis duplex I had my agent and property manager swing by to confirm the work.
And never let a non-licensed person or a tenant do work on your property in exchange for reduced rent. The liability isn't worth it. Vetting the contractor yourself matters even more once you realize what your real estate agent can't legally tell you, since they often can't hand you a rehab estimate or a referral without risk.
The mindset
Here's what years of this taught me: I'm willing to put up with a lot for a good deal. No leases, a missing checklist, a utility surprise, none of those scare me, because I know how to handle each one. What I refuse to do is find out about a problem after closing, when I've lost all my leverage.
That's the whole purpose of due diligence. It's not about finding a flawless property, because there isn't one. It's about knowing exactly what you're buying while you still have the power to renegotiate or walk away. So this week, build yourself a standing checklist of every item above and run it on the next deal. The $350 scope you almost skipped is the one that saves you $25,000.
This article is educational and reflects my own experience. It isn't legal advice. Inspection requirements, disclosure forms, and landlord-tenant rules vary widely by location, so verify the specifics where you buy and use licensed professionals.
