When you’re just getting started as a real estate investor, doing due diligence is critical to making the best possible deal. For individuals who are just getting started in real estate investing, this initial investigation into the property you’re considering can get confusing, frustration and downright annoying and unpleasant. To avoid making costly mistakes due diligence is essential to evaluating the deal. Otherwise, you’ll learn the hard way how a lack of due diligence can cost you.
One example would be purchasing a residential property that has extensive structural flaws or damage, such as foundation problems, pest infestations, electrical or plumbing problems. If these issues don’t get identified before making the initial investment, a property that on the surface appeared to be a promising investment can quickly become less lucrative or even result in losses on the investment.
When purchasing investment homes and smaller multi-family apartment units, including fourplexes and duplexes, investors typically have 30 days until closing and approximately two weeks to complete all inspections. During the inspection period, if you decide that you don’t want to buy the property, you can recover any earnest money paid for the acquisition. However, since each deal is different, it’s critical that you negotiate and know the terms of every transaction to avoid confusion or misunderstandings later. Always remember that reviewing contracts and sales terms are part of the due diligence process.
The next step in the due diligence process is checking on the status of essential utility services including gas, electric, and water. If they’re turned off, you’ll need to get them turned back on to test them. Be sure to look for problems with the electrical work, plumbing leaks, and other defects that require immediate repair or replacement.
Other areas of the home you’ll want to examine includes the roof, the foundation, weight bearing walls and supports, and the basement. Any old and outdated equipment should get replaced with newer, safer, and more energy-efficient units.
As a new investor with limited experience, it is in your best interest to consider hiring or working with a qualified inspector to review the property, as well as the inspection report, painstakingly. A pest and dry rot inspection help you identify these issues, giving you more leverage throughout the negotiation process. Additionally, scoping the sewer line on any property over 30 years old identifies issues with damaged or broken sewer lines, so you know right away if you’ll have to deal with making these costly repairs. Scoping services are available from plumbers and cost a couple of hundred dollars.
If you are unable to make a favorable deal, never be afraid to walk away from it!
We hope that you found this article on performing due diligence helpful. If you would like to learn more about how to become a professional real estate investor, we urge you to schedule an appointment to speak with one of our representatives today!