The undercoating in the rear wheel wells was chipping off in some spots. I scraped off all of the loose material with a scraper and then a wire wheel on the die grinder.
Most of the undercoating was still good.
I then used steel wool and paint thinner to prepare the surface for Herculiner truck bed liner. The stuff is like brownie mix. I used a disposable paint brush to put a heavy coat in the spots where the undercoating had chipped off. I then took a small roller and applied a coating to the entire wheel well.
While the bed liner was drying I got the new parts ready to go in. New Bilstein Sport shocks and Stage II springs were delivered from Ireland Engineering earlier this week. Notice the difference between the blue Ireland springs and the black BMW springs.
Here are the results. I can't wait to finish the front end and get this thing on the road.
Afterthought: The Herculiner did a great job of filling in where I was missing undercoating. I don't think I would recommend it though because of the texture. Since it is meant for truck beds it has a non stick texture. It's tough, but it'll mess up your knuckles if you're turning wrenches near it. I am using POR-15 for the front wheel wells.