Investing in real estate is often a high risk/high reward scenario. All it takes is one oversight either on the property or the numbers to completely change the deal. In order to know exactly what you are getting into you need to do your homework. Due diligence may not be as exciting as finding financing or meeting new contacts but it is by far the most important thing you can do for your business. The time you spend before you buy helps ensure that you will get the deal you expect. Even before you see a new property there are a few important due diligence steps you need to take all the way to closing. Here is a quick purchase due diligence checklist.
- Property Inspection. So, you get a call from your real estate agent regarding a new property that just came on the market. You know that time is of the essence and you need to see the property immediately. Even though you must act quickly you also need to be efficient. Putting eyes on the property is not enough. You need to develop a checklist of how to inspect the property upon arrival. Starting with the exterior write down any issues you see with the foundation, roof, driveway or landscaping. As you will find the cosmetic issues are the easiest to fix. When you enter the property you want to confirm the data you received from the listing sheet. If there are three bedrooms make sure they are all good sized and have ample closet space. Move on the major structure items such as the electrical, plumbing and give the foundation another look from the basement. The only way to assign value to the property and know what to offer is by giving it a full inspection. Gather as my data on the property before you do anything else.
- Valuation. It is not enough to get a potential deal at a good price. A property that you have a difficult time selling is not much of a deal at all. As you evaluate the property there are several things to keep in mind. The first is the physical condition and cost of repairs. One of the ways to add value is by doing the right work to the property. You need to know exactly what these repairs will cost. To give yourself a cushion you need to always overestimate these costs and underestimate the return. By doing the opposite you can run the risk of leaving yourself little margin for error. Once you fully grasp the costs you can estimate the after repair value. Upgrading the property alone is not a guarantee for profit. You need to compare your property with other properties in the area. Adding too many upgrades can actually have a negative impact. Buyers are willing to pay for quality but will not pay for amenities that aren’t practical. Hot tubs and fancy trimmings may not do much to get your property sold. You need to look at what has sold in your market and what is currently listed. The cost of repairs and after repair value all play a part in determining the best price to offer.
- Title. You should focus a majority of your time on deals that will actually close. Once you recognize that you have a property worth making an offer on you need to take a look at the title. There are many deals that are held up strictly because of the title. Some investors may balk at paying to have the title pulled before you acquire the property but by doing so you can save weeks of time. If there are any additional mortgages or liens found on title they can ruin the deal. Not only would paying them off skew the numbers but it can bring the transaction to a halt. Old liens must be removed from the title before the sale. This means finding the lienholder and settling on an amount. The amount of any mortgages listed on the title could also be different that the information you were originally provided. If the title is clean and without any liens you can move forward with the transaction as planned. If there are unexpected issues you should be prepared to renegotiate or even consider walking away.
- Financing. As you work towards making an offer you need to make sure that your financing is firmly in place. If you are using funds from a hard money lender you need to make sure these funds will be available when you anticipate. If you are using lender financing the process is more complicated. You need to get your bank statements, tax returns, business license and anything else the lender requires in place. Some of these items are easier to obtain than others but with most closings time is of the essence. The quicker you get things over to your lender the quicker you can close. A seller may grant one extension but anything more than that is a roll of the dice. Prior to starting the process you should get everything you need in one simple file or folder. You never want to let your financing get in the way of a good deal.
Due diligence also requires you to know your market and stay on top of any potential zoning issues. Finding a new property and working on a deal is an exciting time but you need to always do your due diligence every step of the way.
