The Importance of Doing Your Due Diligence: A True (and Almost Disastrous) Story

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Today I had a new experience in my real estate investing… it came down to just hours before closing that I discovered some underlying issues with a property I won at auction 2 weeks ago. Here’s the story…

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The Setting

I attended my first property auction on October 29th, 2013 – I was excited and nervous. The seller auctioning off the properties was a familiar one and I had purchased two properties from them already through the MLS. So I couldn’t wait to see what kind of deal I could get since they had been sitting on around 200 properties for a year without being able to sell them on the MLS.

The Deal

There were three properties I had interest in. I only won one of them, but it was also the least expensive property. It was advertised as a 2 bed, 1 bath property that had a non-paying tenant/squatter and no lease. I thought no biggie, I’ll offer cash for keys and hopefully get him out without anymore damage to the property. I signed the papers with the understanding I will be receiving a covenant deed and marketable title, taxes, water, and any other outstanding fees paid.

The Research

I was able to contact the tenant by leaving a card on the door as well as talking to one of the neighbors. I set it up for the city to fix the water meter to get a final read before closing after discovering the meter wasn’t functioning. I set the stage to work out a deal with the tenant/squatter after closing.

I verified all the normal things you should when buying a property such as true ownership, property history, taxes, and so forth. The seller was paying the taxes, back water, ordinance tickets/violations and all that other jazz that goes with a normal property purchase.

I was also able to walk the property 2 days prior to the scheduled closing since the tenant let me into the property. I took my uncle to help prevent any issues that may arise from being alone. The tenant was nice and talkative and the property was in much better shape than what the pictures showed and what the listing had stated. I started getting excited because this property needed maybe $5000 into it and I was only paying $4400 to purchase it! Not to mention that it was really a 3 bedroom, not a 2 bedroom. Can you say CHA CHING????!!!!

The Surprise

So during the walk-through, I found out that the tenant DID have a lease and I found out what really happened the past year with the company who owned it. I was willing to overlook this until I received and reviewed my closing package the morning of closing. (ok, I received it 3 days prior but got lazy about reading it) In any case, what I found was three more discrepancies from the original deal.

This closing package stated that:

  • I will be responsible for the property maintenance fees to the city,
  • I will only receive a quit claim deed but will be getting title insurance,
  • and that the tenant was a squatter with no lease which was what was portrayed at the auction as well.

This was all contradictory to what the original deal was at auction and in regards to the lease at hand which I personally read myself when I met the tenant. Plus, now I was only going to receive a quit claim deed and I was being charged for the weed cutting.

To make matters worse, I spoke with the tenant this morning and instead of his initial request to be evicted so he can get state aid, he was now demanding cash. He insisted I need to help him find a new place to live. After I told him I would not pay him his requested $2500, we continued talking about his rights as a tenant.

In the end, his final request was $13o0 and move-out on January 1st 2014. This was not acceptable to me, especially after the conversation we just had because I no longer trusted this tenant’s word. Not to mention I had already put into motion for the seller to resolve the issues and one of my stipulations that the auction house recommended was to have the seller forfeit any backrent they were legally allowed to collect. This way the tenant wouldn’t have to worry about a lawsuit.

But this didn’t matter to the tenant. He now started rambling on that someone has to help him move financially or he will just take his lease to the court and let them know that he and his kids were being wrongfully evicted. His kids did not live with him full time but I’m thinking he would make it look that way for the court.

The Result

So now I was starting to see the light! This was a professional renter and he knew how to play the game… a game I wanted nothing to do with. I am too inexperienced in this matter and don’t have the financial means to deal with this kind of thing right now.

In the end, I contacted the auction company as well as the title company again. Since the seller’s conveyed incorrect information to the auction company and was documented that way, the owner of the auction company agreed that the seller withheld information not only from me but to them and legally I can withdraw from the contract. So I did just that and they sent me a release form so I can get my EMD back.

The Lesson

The moral of this story is that no matter how much researching you do (and trust me… I do some seriously extensive research!) there is always something that can rear it’s ugly head when purchasing Real Estate. Always do your due diligence – check, check, and recheck. My gut actually gave me a feeling about a week prior to closing and I started making calls at that point but everything seemed to pan out at that time.

So do your due diligence! If you are not capable then hire someone who is. Read the fine print. Learn to tell the difference between your ‘gut feeling’ and just being scared to move forward though or you may never get your first deal if you are new and get that feeling every time you look at a property.

Photo Credit: Victor1558

About Author

Aaron Yates

I am strong willed and motivated. I have been building my personal Real Estate portfolio as well as always looking to learn more. More recently I have been trying to help others with the experiences I have acquired in my investing business. Currently building a local investors group to help people learn from each other and create deals. My experience is 2+ years buying, rehabbing and renting out properties. Extensive Property Researching abilities Project Evaluation Rehab cost estimations Project Planning and managing


  1. Aaron

    Great post, reminds me of the closest call ive ever had at the closing table (or close to it). Mine was, however entirely my fault. I simply misjudged how much work the houses needed, and didn’t realize un til I did a walk through the day before. That said, the previous owner left the house completely trashed, so that only added to the rehab costs. I thought about just walking away and giving up my EMD but I decided to close on it, fix a few minor things (broken windows and such), clean it up and throw it on the MLS. I ended up getting out from under it with a small profit. Did you ever thing of that? I don’t know what the house was worth but if you paid $44k for a 2 bed, and it was actually a 3 bed, did you ever think about paying the tenant the $1,300 and trying to make a dollar ot two selling it as is?

    • Aaron Yates

      Hey Kevin, actually it was $4400 not thousand. It’s in a working class neighborhood that I planned on fixing and keeping for a rental.

      So the cash difference for me would have been in the amount of rent I could charge. It wasn’t only the $1300 that became the issue because I did think about it.

      It was the fact of everything else with the seller and the original purchase agreement terms and then the change of mind from the tenant that just snowballed and gave me a bad ‘gut’ feeling about the whole thing.

      The tenant made it very clear the morning of closing that he wasn’t going to leave easily like we had discussed prior.

      The property fully rehabbed is only a $25,000 house. So it wasn’t worth the risk of him tearing up the inside and me having to put $15,000 into the property to fix what he may have damaged if I didn’t agree to his terms.

  2. Jeremy Reynolds on

    Thanks for the post, Aaron. I just have a quick question about something you mentioned. What is the problem with a quit claim deed if you have title insurance? I don’t know a lot about all the legal documents involved in real estate but I’m trying to learn. Thanks a lot for your help!

    • Aaron Yates

      Morning Jerry,

      As for the quit claim deed, this is where the issue lyes. I couldn’t get a straight answer from the title company or the auction house.

      The title company said the title insurance ‘SHOULD’ protect me in the event of a lien or judgement appearing down the road but they couldn’t be certain.

      They claimed it to be a marketable title but as I mentioned to Kevin above, it was the fact of all the things combined that eventually told me to just walk away because it could get ugly and cost me more than the house was worth.

      Sure it may have worked out but I wasn’t willing to take that chance as my budget doesn’t allow for this type of risk.

  3. Interesting post, and thanks for including the exact details as far as what was happening, that helps me to learn the complexities of buying at auction, which I’ve stayed away from. So far buying at auction is risky for my taste.

    • Aaron Yates

      Hi Kimberly,

      This experience won’t keep me from buying at auction again, I will just most likely steer clear of ANY tenant occupied properties for now.

      Maybe later as my experience grows and my capital allows, I will be able to take on risks like this one. But for now, I have to be very careful with my money because the way I invest is already very very risky from how most investors would recommend doing.

  4. Terence Edwards on

    Is there a name/title for someone who can do due diligence for you? Referring to your last paragraph where you said it is possible to hire someone to do due diligence for you…

    • Hi Terence,

      That i a very good question. The answer is yes, ME!!! Ha ha ha…
      Seriously though, i never thought about it. I guess I assumed there was such a person or you may be able to get much of the info from an agent. But now that you bring up the question, I have had many scenarios where I had more information than even the sellimg agent.. I have learned my process over the past 9 years since buying my first house.

      I was tired of relying on other people so I took matters into my own hand. And to this day every house I bought I have foumd myself and passed the info to an agent to handle the paperwork.

      Over the years I learned to look up tax history, sale history, ownership information, code violations, comps, and so on. Mostly for free also. It is time consuming even today. But without access to the MLS which essentially gives you much of this information I assume, I did it how I like to do things. Im hands on and like to know how things work and whether Im being lied to or not.

  5. Aaron,

    Terrific example of performing due diligence and taking extra steps making sure all is well (dotting i’s and crossing t’s) even when it looks like its going to be a bright sunny day; storm clouds can show up out of the blue.

    What’s really important here is that disclosure is not to be trifled with no matter what. If for whatever reason the seller failed to disclose crucial information the buyer can walk away even at the 11th hour and secure all of their monies. The law is fully on the side of the buyer in that case.

    So investors need to heed that when they are wearing the sellers shoes…

    Thanks for sharing Aaron

    • Aaron Yates

      Thanks Mary,

      I hope this will help others, especially newbies, with what to watch for when buying a property. If this was my first or second deal I never would have caught this and most likely would have ended up in huge mess.

  6. Honestly not sure what the issue was.
    How hard is it to evict there?
    The guy wasn’t paying so what defense does he have?

    What would the 3br rent be? Even if the guy did $15k of damage and you pay something high like $2k on the eviction with a $4,400 purchase it sounds like worst case isn’t terrible.
    If things go smooth and he doesn’t trash the place you’re in for like $10k.

    I think I’d have rolled the dice on this.

    • Ok, first I will answer about the costs and value of the property. Fully rehabbed and updated the house would only sell for about $25,000. The area it is in has dropped dramatically no appreciation is to be expected like surrounding areas.

      Since it was a small 3 bedroom I would have been able to rent it for $700 a month and all utilities would be paid seperately.

      Rehab if the tenant was to leave willingly was about $5000-$7000 depending on what may be discovered after digging into the work. If he didn’t leave without busting up the house then that would obviously add to the costs.

      Plus the purchase and closing costs came to about $5500 total. Plus holding costs, plus eviction costs or paying him to leave. The numbers add up fast.

      So after learning what the guy was like, I wasn’t willing to take the chance of dumping $25,000 into the house when I can spend that much on a bigger property in a nicer area and charge $800 for rent and can sell them for around $40,000 after rehab.

      So for me the numbers don’t work. Too much headache risk, too much financial risk for my level right now.

      As for the eviction. It all depends on what the ‘Professional Tenant’ makes up along the way. Being winter and claiming he has kids, plus he has a lease that he admittedly pays once in awhile, plus in the end demanding someone is going to pay him to leave the house… All signs lead to headache, stress, and financial issues.

      On the other hand, yes everything could have went smooth. I could have been all in for around $12,000 and he leaves willingly. But the conversation on the phone with him the morning of the closing in no way led me to believe that smooth would be the outcome.

      So you see, I actually was going to go through with it if the seller agreed to give me a covenant title, pay the back grass cutting charges from the city, and forfeit any back rent from the tenant.

      He directly told me he doesn’t care who tries to sue him. He has nothing and they can’t get anything. The tenant took only cash jobs. He had worked the system for a year now with a company who has many millions of dollars. He was very clear that he felt he was wrongfully done. People owed him for taking care of the property for the past year. On and on and on…

      All in all, to tell the whole story was a bit much to write in a blog so I just wanted to get the point out of what happened and to help people realize it’s very important to research everything.

      • Thanks for the clarification.
        I can see why it was less appealing to take the chance things went well vs. what the more worst case could be.
        If you can find deals like you described fairly easily in your market the risk reward on this one does seem to be less in favor of going through with it.

        I still think I might have done it, but I can totally understand why you didn’t.

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