Due Diligence. Not familiar? Well you better start NOW!

14 Replies

I have been discovering the true essence of Due Diligence the past two weeks with the hunt for my first multi family property. I have picked up on figuring out all the numbers, researching potential rents, tenant demographics, location, and many other things that can be done behind a computer. As for a newbie, I think im catching on pretty quick but today i learned by first huge lesson. 

I have been hunting for my first multi family property financed though a 203k, and i thought i found a diamond in the rough! Located in Baltimore County, side by side duplex both a 3/1, potential rents of $1200 each, seller owns free and clear, one side rehabbed the other not...sounds good right?

I did all the numbers, reached out to my agent to get be in and to my lender to get the ball rolling on the 203k. I visited the property twice and everything seemed to jive. So, I brought in a contractor and a HUD consultant to walk the property with me. Rehabbed side only needed to be dressed up. We walk over to the unrehabbed side and into the basement. Right then and there, we knew it was time to run for the hills.

A solid 8" of water in the basement from a large crack in the foundation. The basement was bone dry during my last visit but it has been raining a LOT ever since. 

Afterwards, i ran into the net door neighbor who had the inside scoop on the sellers situation. She told me the owner only bought the property less than 6 months ago and was an investor himself. The house has also been listed for sale for several of those months. I WONDER WHY. 

I guess a long story long, DUE YOUR DUE DILIGENCE, get off the computer and get in these properties. Get out and talk to neighbors, make multiple visits to any potential properties, and just be active. Seeing this property has opened my eyes and made me realize how important it is do your due diligence. If you dont, it WILL cost you money in some way or another. 

I agree wholeheartedly!  I get out and look at props, and look at them again. Due diligence is SO important, as is running the numbers to see if it'll work after me or someone does the rehab. Just yesterday I turned down a deal at the last minute because just too much money would have to go into it and only a small profit would be made.  There's always another deal out there that WILL work out. 

Absolutely, @Kyle Gregg .  I was recently looking at a place that looked great from the outside.  I was really excited about it UNTIL I visited the basement and found that there would be a whole lot of "unintended tenants" living there.  That is, if they didn't eat the entire place before closing.  The wood eating insects were leaving a sizable mountain of sawdust under the main supporting beams.  I was SO glad I made the effort to go into the basement with my flashlight.

So how much are you going to offer? 

! Located in Baltimore County, side by side duplex both a 3/1, potential rents of $1200 each, seller owns free and clear, one side rehabbed the other not...sounds good right?

No, why would this sound good? There is absolutely NO reason for me to have the slightest bit of interest based on what you said.

Now reading the next paragraph I am interested. Do you understand why?

Had a similar property visit a month or so ago. I was following up with a guy I'd talked to last summer. I'd walked through the main part of the house at that time and decided to pass on it at that time due to the amount of work it needed and the numbers didn't work. This time through I saw that he had completed a lot more of the work and had gotten a new roof. I then decided to take a look in the basement I hadn't seen on my last visit. The basement, like the one you saw, had several inches of water in it due to a large horizontal crack in the block foundation wall about 2 feet off the floor. On top of that the whole foundation wall was bowed in at the point of the crack. That was the last nail in the coffin. That property is now in my list of "dead" deals.

@Ned Carey  

Are you thinking i should use the caving in foundation and grading issues as my way into this property? Offering an amount that is drastically low?

Yes

When you first mentioned the property you didn't even mention the price. To me - Nothing can possibly sound good without a price, or at least some indication of motivation. At any given time there are thousands of properties for sale. Most would make a lousy RE investment. Why should I have any interest in a property unless there is an indication I may potentially get a bargain

Now to the next point. Severe distress. Now that is an indication that there may be a bargain available. You now have a serious negotiating point. You also have no Competition. No one else is going to be interested

Now it is possible your highest offer might be "Tell me how much you can pay me to take this off your hands?" But I would still make an offer no matter how silly or low it sounds. (assuming that you can figure a cost to repair the problem. Would filling the basement with concrete fix it?)

Is there a problem with an indoor pool?

Get a repair estimate, then decide.

@Ned Carey  

Yeah I understand. For the cost of rehabbing this place, it would make more sense to tear down and rebuild...yeah might work for someone but its not what im looking to get into. 

Have you filled a basement with concrete before? 

When I was buying my first property the first thing I did is I got the property early and talked to the tenants about the property, previous owner and any issues the property had in the past or that are on going.  You will find out more about a property doing this then any inspector could ever find. Inspections are important but getting the inside info from the tenants is priceless! 

@Jeff G.  

I would agree and would definitely have spoken to tenants...but the house has been vacant for awhile now. 

@Kyle Gregg Yes naturally you cant do that when its vacant.  However what you did speaking to the neighbors is the next best thing!

@kyle gregg   I learned a lesson the hard way from one of my first experiences. You got lucky to have found the problem beforehand due to the weather we are having!

In the future on a property that seems to work out for you,  and you put a contract on, put in a 10 day inspection addendum and bring back a contractor and/or pay for a home inspector to get a carefully trained set of eyes in there to make sure you are not buying someone else's headache. Maybe better and less costly for you than paying them for every house that you run to check.

Especially on your 1st few deals. After a while you start to know what to look for and may be able to find the big issues yourself.

I have found that Baltimore-especially the city, has plenty of cheap 100+ year houses with serious structural, foundational, etc. issues that I, like you, would not have the stomach to want to deal with if they gave it to me for free!

@Ned Carey  

Gotcha. Yeah, i wouldn't think filling a basement was a logical solution. 

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