Why DD Is Non-Negotiable on Seller-Financed Deals

In a bank-financed deal, the lender's underwriting process catches many problems: title issues, appraisal gaps, zoning violations. When you buy with seller financing, the bank is removed from the process - and so is their due diligence. Every item that a bank would have caught is now your responsibility.

Do not skip DD because you trust the seller or because the deal moves fast. Move fast on the offer. Move methodically on the investigation.

The 25-Point Checklist

Title and Legal

1. Title search. Order a full title commitment from a licensed title company. Confirm the seller has clear, marketable title.

2. Lien search. Search for all liens: mechanic's liens, tax liens, HOA liens, judgment liens, federal tax liens. Any lien attaches to the property.

3. Mortgage payoff verification. If the seller has any mortgage, get a written payoff statement from the lender. Confirm it will be paid at closing.

4. Deed type. Confirm the seller can convey a general warranty deed (or at minimum a special warranty deed). Quit claim deeds signal title weakness.

5. Ownership verification. Confirm the person you are dealing with is the legal owner of record. Estates, LLCs, and trusts add verification steps.

6. Survey. For commercial or larger residential, order a current survey. Confirm boundaries, encroachments, and easements.

7. Zoning confirmation. Confirm the property's current zoning allows your intended use. Call the municipality directly - do not rely on the seller's representation.

Financial and Operational

8. T-12 operating statement. Get the trailing 12-month profit and loss statement. Verify income and expenses against supporting documents.

9. Rent roll. Get the current rent roll: tenant name, unit, lease start/end, monthly rent, security deposit held.

10. Lease copies. Review all active leases. Note rent amounts, expiration dates, renewal options, and any unusual terms.

11. Lease estoppels. For commercial tenants, request estoppel certificates confirming lease terms directly from tenants.

12. Security deposit accounting. Confirm security deposit amounts and that they are held in a compliant escrow account.

13. Bank statements. Request 12 months of operating account bank statements. Verify deposits match the rent roll.

14. Delinquency report. Get a current tenant delinquency report. Understand who is behind and by how much.

Physical Condition

15. General inspection. Hire a licensed inspector. Full interior and exterior inspection including roof, HVAC, plumbing, electrical.

16. Roof report. Get a separate roof inspection and estimate remaining life. A 2-year-old roof and a 22-year-old roof have dramatically different capital exposure.

17. HVAC inspection. Inspect all HVAC units. Get age and condition report. HVAC replacement is expensive - know what you are getting.

18. Plumbing and drain inspection. Camera the main sewer line. This catches one of the most expensive and least visible problems.

19. Deferred maintenance estimate. Based on the inspection, get a contractor estimate for all deferred maintenance. This feeds your acquisition budget.

Environmental and Regulatory

20. Phase I environmental. For commercial properties and any older residential, order a Phase I environmental assessment. Identify potential contamination.

21. Lead paint and asbestos. For properties built before 1978, confirm the seller's lead paint disclosure. Test if condition warrants it.

22. Permits. Verify all improvements have permits pulled and closed. Unpermitted work creates title and insurance issues.

23. Certificate of occupancy. Confirm a valid CO exists for the property's current use and unit count.

Insurance and Taxes

24. Insurance history. Get 3-5 years of insurance claim history (CLUE report). Multiple claims signal a problem property or negligent management.

25. Property tax verification. Confirm current tax status - are taxes current? Any pending appeals? Taxes due at closing are your responsibility if you do not account for them.

The Seller-Financing-Specific Checks

Beyond standard DD, seller financing adds a few specific items:

  • **Confirm the seller's authority to carry a note.** If the seller is an estate, trust, or LLC, their operating agreement or trust documents must authorize the sale on these terms.
  • **IRS installment sale eligibility.** Confirm there are no restrictions on installment sale treatment for this seller (some recapture rules apply to depreciated property).
  • **Note terms match the property's cash flow.** Run the numbers in Woosung with actual T-12 data before finalizing the note terms. The payment must leave positive cash flow.

After the Checklist

Do not close until every item is resolved or knowingly accepted. "I'll handle that after closing" is how operators get burned. Fix it before or price it into your offer.

When items come up - and they will - use them as renegotiation points. A $15,000 roof replacement finding is a $15,000 price reduction or a credit at closing. Document everything in writing.