Due diligence is something all investors have heard about, but very few investors really understand.
It is one of the most important things you must do before closing on a property. During the due diligence period it is imperative that the buyer identifies and evaluates any and all potential problems. You must thoroughly research, evaluate, and confirm all information and representations made about a property. If you do your job correctly then you will buy properly and make a lot of money avoiding expensive mistakes.
As a new investor I was afraid to make mistakes, so I’d do my due diligence to make sure I was completely comfortable with the transaction BEFORE making an offer. Three times another buyer showed up and put the property under contract while I was out doing my research. That’s very frustrating, especially after researching everything and learning I had found a gem.
If you find a property that looks good at first glance, then get it under contract. Just be sure to put contingencies in place that allow you to get out of the contract if you find something unacceptable during your due diligence period. This way you’ll have the opportunity to ask the seller to either solve the problem, reduce the price, get other concessions, or if needed cancel the contract.
Many times you have much more negotiating power when the property is under contract then when negotiating to put it under contract. Once under contract the seller mentally thinks the deal is done. Usually the seller doesn’t want to lose you as a buyer and is many times much more flexible then they’d otherwise be, especially when you bring them legitimate issues that need to be resolved.
Unfortunately, in this day and age you can’t trust what people tell you. One of the most important things I tell other investors is “don’t trust anyone. This is your business and you must be responsible for it.” People misrepresent the facts and sometimes down right lie. It doesn’t matter who it is, including nationally respected real estate gurus. You must verify everything! Do not ever just take their word for it.
There are people out there looking to take advantage of the uniformed out of state investor. Don’t let that stop you, just be sure to implement your due diligence. Keep searching for new information up until the day you close. There have been times I’ve found something that killed the deal the day before I was supposed to close.
Know your exit strategy up front. Are you planning to buy and hold the property making it a rental? Or do you plan to fix it up and sell it right away through lease/option or seller financing? If you plan to sell it right away then be sure that there won’t be any seasoning issues with the buyers lender. Always have back up exit strategies because things don’t always go as planned. I always look at the best case scenario and the worst case. If I can live with the worst case then I’ll move forward.
I’ve purchased many properties sight unseen, however when possible it is always best to do everything mentioned in this article yourself. If you’re not in the area then you must have someone you trust see the property inside and out. If you’re being represented by a real estate agent then they should not only see the property but also take pictures of everything including the neighborhood. You want to see and evaluate as much as possible. It’s also important to drive the neighborhood at night because many times it becomes very different when the sun goes down.
There was a property in South Carolina I had under contract. I was in California and not using an agent, so I contacted a local investment club and asked investors if they’d help me out. I also called a couple of local real estate agents and property managers. I’d need both an agent and property manager in the future and so it was mutually beneficial for them to help me. I had them all go by and give me their opinion on the property and the area it was located in. It was very informative hearing what they all had to say. They not only sent me pictures but also gave me an idea of what damage there was and what needed to be fixed.
Another great tool is Google Earth. This allows you to see an aerial view of the property. This can be very useful seeing what’s around the property. I had a property I was buying in San Antonio, Texas and using Google Earth saw railroad tracks not just near the property but right next to it. I could have pretty much reached out of the property window and touched the train as it went by. Then there were other times I found a dump nearby, or an airport, or a treatment plant! You never know what you’ll find and having this aerial tool is very beneficial.
After someone you trust has seen the inside and outside of the property and everything looks reasonably good, then next you would hire a home inspector. Be sure the home inspector is licensed and insured. If possible be present when the inspection takes place; if not just be sure to discuss with them that you want them to be very detailed. You want them to write down anything and everything they see, and the more pictures the better. Once you get the report look it over and make a 企业尽职调查 list of questions, then call the home inspector to clarify anything that is needed. Many times what I thought was a big problem ended up being minor after discussing it with the inspector.
Don’t be alarmed when the inspector finds problems, they can be fixed. I’d be more nervous if they didn’t find problems because that means they probably didn’t do their job correctly. Even brand new homes should be inspected.
Many times something serious shows up that may need additional inspections by a specialist. If there are potential issues with the foundation then call a foundation specialist. Maybe the inspector found evidence of environmental contamination so you’d call a contamination specialist.
Remember, with the right contingencies you can cancel the contract if something comes up that is too big of a problem or too expensive to research further. Before calling the specialist see if the owner will pay for that extra inspection or at least split the cost with you. If not, you’ll have to decide if you want to move forward or not.