Due Diligence in 500 words or less

Try to get a property under contract based on a cursory level of due diligence, then you can safely dive deeper into a more thorough analysis without the risk of losing the unit to another buyer.  Due diligence varies based on the classification of property you are purchasing.  A 200 unit apartment requires a different level of due diligence than a single family home.  Let’s focus on a single family unit for this discussion.

When you make an offer on a house, you are basing that value off of information provided by the seller or seller’s agent.  Do you think some of that information could be accidentally or intentionally inaccurate?  It’s your money and therefore up to you to confirm all aspects of the property that led to your estimate of value.  Areas I like to review are property taxes, insurance, utilities, recent maintenance/repair costs, current lease (if currently a rental), a survey and a property inspection.  Let’s expand on a few of these.

Property taxes vary greatly from county to county and state to state.  I invest in the great state of Texas where we boast the lack of a state income tax.  Guess what?  The money has to come from somewhere, if not an income tax, then the property tax bills, auto registrations, etc must compensate.  A house that cashflows in Arkansas, may not in Texas due to much higher property taxes.  When a home sells, the taxing authority often times adjusts the property price up significantly.  Keep this in mind when you forecast your monthly expenses after the purchase.  Protest the increase in taxes year #1, it’s your best chance in reducing an ongoing monthly expense.

Property inspections can be formal or informal.  Many experienced home buyers will complete this step on their own or with the help of a few subs they utilize on a regular basis.  A formal home inspection is nice, but remember they have 40+ pages to complete so you’ll get a lot of fluff.  However, you might be able to renegotiate the purchase price based on unexpected findings.  There may be significant findings uncovered on an inspection which might cause you to walk away from the deal as well.

Have your insurance agent give you a quote on the new property.  You can ask the seller’s insurance agent to provide a loss runs sheet to verify any claims that the seller may have made.  If they forget to disclose the little kitchen fire that required replacement of cabinets, you can often tease that out of a loss runs sheet.

The survey is helpful to ensure all improvements (house, fence, shed) are within the property boundaries.  Encroachment of improvements on the neighbors property can be costly to remediate, don’t let this be a surprise you learn after the closing.

I hope this short summary helps you to understand the rationale behind doing your own due diligence in a real estate purchase.  You can find nice checklists online to guide you step by step.  Take the time before closing to verify and you’ll be less likely to add a “money pit” to your real estate portfolio.