There is one thing every investor should have at the forefront of their mind on any deal: due diligence. However, it is not enough to simply remember it. Due diligence must be a priority. Whether you have yet to close your first deal or are a seasoned veteran, due diligence should always be the first check box on the to-do list. To that end, you need to put in the work to ensure nothing is overlooked. Due diligence is the single most important thing you can do to ensure that a respective deal goes smoothly. On the other hand, neglecting due diligence is a sure-fire way to sabotage your investing efforts altogether.
If you want to maximize your chances of realizing success in the real estate industry, be sure to mind due diligence in the following areas:
1. Know The Area: You don’t need to be in real estate to know the importance of location. That said, minding due diligence requires an understanding of the area you are investing in. It is always better to buy a worse property in a better location than the alternative. A strong area will hold its property value longer, and appeal to a greater number of tenants.
Of course, knowing an area will require a bit of research. You need to find out which way local employment and population numbers are trending. Is a major employer moving out of town, or is a large plant coming in? Look at current comparable listings and everything that has sold in the last six months. Read the listing sheet and find out all the information that is available. Drive by the property at different times of the day and see what the traffic and area are like at night. The more research you can do, the better. It is better to be over prepared than surprised, but don’t suffer from analysis paralysis.
2. Know The Property: Once you are confident that the area is worth investing in, you can focus your attention on the property. Even if you know the listing agent or the seller, you need to do your homework. Inspect the exterior and see if there are any physical defects. Look at the roof, windows and foundation. If you cannot get to an area, insist that you look at the basement or crawl space with a flashlight or in daytime hours. Once inside the property, examine the HVAC, furnace, water heater and oil tank. If there is a basement, look at the walls to see if there are any visible signs of mold. Any buyer will notice the flooring and the appliances, but those aren’t the areas that will break your budget. Dealing with foundation or roofing issues can quickly turn a profitable property into one you wish you never get involved in.
3. Know The Seller: Understanding a seller’s motivation is perhaps the best way to facilitate a good deal. If the property is banked-owned, however, it may be worth looking into any previous offers that were made. Check out how long the house has been on the market for. If it isn’t banked-owned, try to gauge why the seller is selling. Are they selling because they have to, or because they want to. The difference could mean a quicker sale on your end, and at a discounted price. With any short sale, the first thing you should do is find out who your assigned negotiator is. With a little prying, they may be able to give you some idea as to what they may accept. Just making an offer without knowledge of the seller puts you at a disadvantage. Do your homework and get to know your seller.
4. Know The Deal: If everything looks good, you can proceed to make an offer on the property. With every offer, however, you need to be comfortable with the specifics. Trying to back out of a deal after a contract is signed is difficult, if not impossible. Take a few minutes and read the contract. See if there are any contingencies that you may not be comfortable with. If you want a piece of furniture left or removed, make sure it is in the contract. Understand how much you are putting down, and when you need to close by. You never want to get pressured into moving forward, unless you are completely comfortable. During this stage you should rely heavily on your attorney and Realtor. They are working for you, not the other way around. If you have questions, now is the time you need to ask them.