Top Red Flags That Kill a Multifamily Deal During Due Diligence

When you’re buying a multifamily property in Los Angeles, due diligence is where good deals separate from bad ones. What looks like a solid investment on paper can turn into a money pit once the inspections, rent rolls, and financials are under the microscope. Here are the biggest red flags that can kill a deal — or at least demand a serious price adjustment — before you close.

1. Unverified Rent Rolls and Inflated Income

The first thing you should question is the rent roll. Never assume the numbers listed by a seller are accurate until you’ve seen the proof. Ask for bank statements, leases, and deposit records that match the rent roll. If you see discrepancies — like “cash tenants” or monthly totals that don’t add up — that’s a warning sign.It’s also common in LA for owners to claim “market rent” when they’re collecting far less. If the building is under rent control, you might not be able to raise those rents anytime soon, which changes the entire return calculation.

2. Deferred Maintenance Hidden Behind Fresh Paint

A new coat of paint doesn’t mean the property’s in great shape. In Los Angeles, a lot of older multifamily buildings — especially in areas like Mid-City, South LA, and the Valley — have decades of deferred maintenance. During inspections, look beyond the cosmetic work. Pay attention to plumbing, roofing, electrical panels, and parking lots. Cast iron pipes, old main lines, or knob-and-tube wiring can turn a “value-add” property into a financial sinkhole.If the owner won’t allow thorough inspections or limits access to certain units, that’s another red flag.

3. Unpermitted Units or Illegal Conversions

Unpermitted units are extremely common in LA, and they can kill your financing or lead to code enforcement issues later. If you’re buying a property that “claims” to have 10 units but the records show 8, you’re not buying a 10-unit building — you’re buying an 8-unit with two possible liabilities. Check certificate of occupancy records, permits, and zoning carefully. In Los Angeles, even a converted garage or ADU without proper approval can create major legal exposure.

4. Rent Control (RSO) and Tenant Issues

RSO properties in the City of Los Angeles limit rent increases and dictate how evictions are handled. If you don’t know whether a building is under RSO, find out early. Inherited tenants with below-market rents or long-term leases can severely impact your cash flow. Also, review tenant estoppels to verify rent, deposits, and lease terms. You want to confirm that what’s in the paperwork actually matches what tenants are paying — and that there are no side deals or handshake arrangements.

5. Overstated Expenses or “Creative” Accounting

Some sellers downplay operating expenses to make the numbers look stronger. Always ask for a T-12 (trailing 12-month) income and expense statement and verify line items. Watch for missing categories like property management, landscaping, pest control, or capital reserves. In LA, new owners should also factor in a property tax reassessment, which can drastically raise the annual expenses — especially if the property hasn’t changed hands in decades.

6. Low Vacancy… That Seems Too Perfect

If a building claims 100% occupancy with zero turnover, don’t celebrate yet. That can mean tenants are paying under market rent or the owner hasn’t adjusted pricing in years. A healthy multifamily building in Los Angeles typically has 3–5% turnover annually. Anything less can mean trouble down the road when you start bringing units to market and tenants decide to leave all at once.

7. Environmental or Foundation Concerns

Older LA buildings, particularly from the 1940s–60s, often have foundation cracks or seismic issues. Check if the property is soft-story retrofit compliant (a big issue in Los Angeles and Santa Monica). Retrofitting costs can easily reach six figures.If the seller hasn’t completed the retrofit, find out whether the deadline has passed — some cities fine owners who fail to comply.

8. Poor Documentation and Unresponsive Sellers

A disorganized seller can be just as dangerous as a bad property. If they can’t produce clear records — rent rolls, insurance, utility bills, or service contracts — that’s a red flag about how the property’s been run. It’s usually a preview of what your first few months of ownership will look like: messy and expensive. When documentation is incomplete, your lender might also flag the file, slowing or derailing financing.

9. Unrealistic Price Relative to Market Cap Rates

Finally, the math has to make sense. If the listing price implies a cap rate well below comparable sales, the deal might already be priced for perfection. In some LA submarkets, like Culver City or Studio City, sellers overvalue “potential” and ignore the work needed to achieve it. Always underwrite deals conservatively — with realistic rents, taxes, and expenses — to avoid chasing inflated returns.

The Bottom Line

A multifamily deal doesn’t fall apart because of one red flag — it’s when several of these start stacking up that it’s time to walk. An experienced agent who’s handled multifamily transactions across Los Angeles can help you spot issues early, negotiate repairs or credits, and know when to push forward or pull out. Due diligence isn’t about finding a perfect property — it’s about knowing what you’re really buying.