Investment Property Due Diligence

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By Jay Redding
June 26 2010

As an investor, you want to find the best deals out there. Performing a little due diligence can go a long way to making those smart investments.

At the top of your due diligence list is how the property presents itself from the street. Does it have curb appeal? Ensure the value of your potential investment is in line with others in the neighborhood.

Have a thorough property inspection done by a good inspector. Know the age and type of your roof, the age and efficiency of the heating and air conditioning units and if all the appliances work. Are the windows efficient and the wiring safe? How is the foundation and is there mold in the basement? Make sure the property has a sufficient perk.

Is the home located in a historic district requiring you jump through hoops to make improvements if necessary? And, how about the locations of the bedrooms, baths and kitchens? Are they in line with current tastes? Does the type of construction require maintenance? A clapboard house is quaint as long as you’ve budgeted to have it painted periodically.

Obtain all necessary documents pertaining to the investment property. Have a survey done so you know exactly what land you are purchasing. Perform a title search to ensure there are no liens against the property. During negotiation is the time to address any issues.

What is the proximity of the schools and are they considered good ones? What kind of shopping is nearby and does the investment property sit near easy access to major roads? Is the house zoned for its current use or the use you intend it for?

Are there any service contracts in place that are tied to the property? Do you wish to continue them and if not, do the contracts have termination rights? Are there tenants in place? If the investment is currently a rental property, get copies of all leases and review them. Do they provide for a purchase by a new landlord and what is included in that provision? Can you change other clauses you may not like or do you have to live with the lease in its entirety? If a tenant is in the middle of his/her lease term, does he/she have good credit? How has their payment history been? If you are purchasing a multi-tenant property, the tenants in place hold a value to you. Make sure you understand that value.

Depending on the property, there may be additional questions which should be answered as part of the investors’ due diligence prior to closing on a property. Knowing the good and bad of the property gives the investor a better negotiating position. After all, you wouldn’t pay top dollar for a bag of organic apples if half of them were bruised. But, you might pay half price. Performing your due diligence will ensure you only pay what the property is truly worth.

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