Real Estate Deal Analysis & Advice

Why Due Diligence is VITAL in Real Estate (Or How Something Buried Underground Killed 2 Deals)

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
161 Articles Written

As you all know, you are buying everything that comes with a property. That includes the good things like rent-paying tenants. But it could also include bad things that could come back and cost you lots of money in the future! Doing your inspections and investigations is extremely important on a purchase. You need to find the easy things like deferred maintenance on the building, but also need to do a deeper search for those things lying just beneath the surface.

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We are in the middle of two purchases right now, and BOTH of them have something hidden underground that could’ve cost us tons of money if we purchased the properties without knowing. Watch the video and find out what it is!

What issues have you discovered before a purchase that would have cost you money? Did anyone out there buy a property with a problem they didn’t find out about until after closing? Has anyone had a Phase 1 Environmental Study performed and discovered an issue?

I look forward to hearing from you! Have profitable week.

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Charlie MacPherson Realtor from China, ME
    Replied about 4 years ago
    I was showing an SFR / REO to a rehabber. We found that the oil fired finance was under the house in the dirt floor crawl space – and when I insisted on uncovering the crawl space in our initial visit, there was a distinct odor of fuel oil coming from that space. I don’t know how much of a spill is there, but the soil for perhaps 6 feet in all directions looks dark and probably contaminated. Had I not pushed the flipper to get into the crawl space, we could have acquired our very own environmental disaster.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 4 years ago
    Hey Charlie, Odds are you saved that flipper thousands of dollars in the long run. A traditional end buyer would have brought in a home inspector who would have gotten in that crawlspace and found the issue! Nice detective work, ha ha. Matt
    Peter Crisp Engineer from Surrey, BC
    Replied about 4 years ago
    This is an excellent video. My first fourplex is located kitty-corner to a brownfield site (which is slated for long-term redevelopment). I was going to do a Phase 1 ESA but before I did, I contacted the planning department (this is in Windsor, ON). They were extremely helpful, and without even asking they pulled out old fire plans dating back decades. From this, we were able to conclude that contamination in that area of the site was highly unlikely. This saved me a lot of money, but also I knew what to look for because I’m an engineer, and I’ve done a handful of Phase 1’s over the years. Another tip I can suggest – talk to ‘old-timers’ – people who remember the building and what was there. I bought a property where I wanted to be sure that there was never a dry cleaner. I was pretty sure, but a person long-since retired verified that nothing of the sort had been on the site. Dry cleaners are probably the worst commonly found problem sites. The solvents they used to use spread a long way because they are designed to dissolve things and they are heavy. Gasoline and fuel tanks are easier, but the costs can be very high even here. Matt found that his sites were clean, but I wouldn’t shy away from a site with some minor contamination (like a small underground storage tank or UST). But, you need professional advice. I noticed that Ohio has recently announced grants for brownfield remediation, and you may have access to grants and loans in your State or Province. I’m looking at a property with known issues right now, and they are very challenging. Without going into details, it’s a townhouse complex built on a former gas station site and abandoned. The Due Diligence process for this site is a matter of months, systematically obtaining data. It’s very much a specialty area, and not for the faint-of-heart. You have to have strong technical skills as well as political skills, because a lot of players can get involved. However, since very few buyers can or should deal in these areas, the field of buyers is smaller and there can be deals. There are a lot of things to look for, but look carefully at corner lots or anything close, anything that could have been a dry cleaner, gas station or garage. Often you will see monitoring wells that have been drilled in parking lots on commercial properties – if you see that, start asking lots of questions! Discoloured grass/vegetation, pipes sticking out and staining may give you clues also. If you aren’t 100% sure, hire a pro!
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 4 years ago
    Hey Peter, Thanks for the comment! Great point on asking the local town for old Fire Maps. Most environmental companies rely on those very maps to determine the historical uses of properties. I actually didn’t know you could access them so easily so thanks for the tip! I really like your comment on asking the old timers in the area on what used to be in buildings. Not only can they tell you about the prior uses (like a dry cleaner or nail salon, lol) but they can give you an idea of the overall history of the building. I think that knowing the background of a building helps an investor know the “personality” of the building, and in my humble opinion brings a bit of honor to those old uses and owners. Good luck on that townhome deal, sounds exciting. I actually met one investor that specializes in buying properties that are environmentally contaminated, believe it or not. It’s a niche where you can get huge discounts and there are not many others willing to play with those types of assets. They have a stonger stomach than I do!! Take care, Matt