Fundamentals of Due Diligence for Houses

Due diligence is the most boring part of real estate investment that is often overlooked. Unfortunately, that is when it comes back to bite you. Proper due diligence is absolutely vital to avoid making huge mistakes. Unfortunately, almost every investor I know (including myself) has learned this the hard way.

Once you get a property under contract, you will generally have 30 days to close and 10 to 15 days to inspect, at which time if you back out, you should be able to get your earnest money. This is negotiable and varies, so make sure you are aware of what your time table is up front.

Also, remember there can always be too much of a good thing. If you are in a volume business and buy some 10 houses a month, missing something during due diligence from time to time is the cost of doing business. Of course, you should still do due diligence, but if thorough due diligence bogs down acquisition, it becomes counterproductive.

On the other side of things, if you buy one a month or so, there is no messing around. That one has to be good, so very thorough due diligence becomes nonnegotiable.

For thorough due diligence, you will need to get the water, electricity and gas turned on if they are off. You want to make sure the HVAC system and electrical work and that there are no plumbing leaks. Key things to look for:

- Dry rot or signs of pest damage

- Plumbing leaks or galvanized plumbing (it often rusts)

- Fuse boxes (you will probably want to replace with an electrical pnel)

- Large cracks in the foundation wall or movement. If it is more than three inches that is concerning and you should get an expert out there to inspect it. There should be piers in the basement if the foundation is moving at all.

- Roof leaks or substantial roof damage (this often requires getting on the roof to verify)

- Old HVAC (it is probably near the end of its useful life, even if it is still working)

Especially for newer investors, it is a very good idea to get an inspector and review the inspection report thoroughly. You should have them do a pest and dry rot inspection too. This will also help if you find problems and want to renegotiate the price. Never be afraid to walk away if the deal doesn’t work.

Also, I highly recommend scoping the sewer line on any property that is more than 30 years old. I have bought several properties with broken sewer lines, and they generally cost $3000 to $5000 to replace. You should be able to find a plumber to scope them for around $100 or so.

Most investors and almost all new investors think things cost less to rehab than they really do. Get some bids or quotes on the major work and add a contingency to your budget for unforeseen issues (around 25%). Make sure this is still in line with your initial expectations when you got the property under contract. Always be willing to walk away.

Finally, always close at a title company or with an attorney (it will depend on whether you are in a judicial or non-judicial state). If you don’t, you may find yourself with a property that has massive tax lien attached to it or something like that.

Any problem you find before you close, you can use to renegotiate or back out. If you find it after you close, there’s no way you will get the seller to pay for it. So make sure not to skimp on due diligence.

Photo Credit: