Due Diligence: Seven Must Take Steps

Before we dive into this week's section on Due Diligence, let us flash back to 2001 and imagine you are driving from Boston to New York. You will need to plan ahead to print out the directions off of MapQuest. You will then need to ensure you follow all TWENTY-SIX points to the letter and if you get lost, you may be in for quite an adventure.

Fast forward to today, we have phones in our pockets that are smarter than 99% of computers built in 2001. We have a number of applications for GPS ranging from the more traditional Apple Maps and Google Maps to the gamification of Waze. All of which, deliver real time visual and audio instructions to get you from wherever you are at any given moment, to where you want to be in the future.

Until the Real Estate world becomes as streamlined as the GPS applications on our phones, we will likely be working to purchase our next Real Estate Investment in a world that looks more like the MapQuest example above.

Real Estate is such a big financial commitment, it kills me to see people wasting the 30 to 60 days they have to do proper due diligence. In this week's Real Estate Blog, we will talk about the Seven Steps EVERY Investor should consider before buying an investment property.

Before we begin, let's assume you know what kind of property you want and what your budget is for that particular property. If you have not yet settled on a strategy, consider pausing here and going back to last weeks Real Estate Blog - Choosing the Correct Investment Strategy

Here are what I consider the seven most important steps to take advantage of when considering investing in Real Estate -

1. Pre-Offer Research
2. Purchase and Sale Language
3. Inspections
4. Contractor Walk Through and Budgeting
5. Zoning and Land Use
6. Town Hall: Issues and Fines
7. Talk to Neighbors/Visit at Different Times and Days

Step One - Pre-Offer Research

When you find a property that piques your interest, the first step is plopping down on the couch or at your desk and diving into the data. There are a number of sites that help investors dive as deep as they want to go. For today's purposes, I will hit on my three go too sites to use before even going to see a property.

First let's talk about Zillow and Zillow Rentals - Skip the “For Sale” section and dive right into the “Sold” section. I prefer to customize the sales to 6 months and less. If there are less than 10 sales for the type of property you are considering, jump out to sales in the last 12 months.

Our goal here is to find the Price Per Square Foot of the three most relevant properties. This will help us loosely determine the true value of the property of interest.

From here we will jump to Zillow Rentals to see what rentals are currently being listed for. If you click into each listing, you can see how many people have reached out to the landlord and how many people have applied.

Our goal here is to see how long listing are sitting on the market and how many renters are actively looking to make a move.

Lastly when doing market research is to jump onto NeighborhoodScout.com. Here you can find a free overview of the town or city you are considering investing in. You can consider paying to get a more in depth dive into the Real Estate, Economics, Crime, Schools as well as Current Trends and Forecasts however, I have not done so and cannot comment on the level of detail.

If it’s free, it’s for me!

Step Two - Purchase and Sale Language

Let me start this section by saying I am not an Attorney and the following is absolutely not legal advice. If you have read any of my past blogs, you will know how strongly I believe in building a team, of which includes a Real Estate Attorney. Please have them help you finalize the following, these are just contingencies my wife and I include in every offer we make.

Financing Contingency - If you can’t afford to buy the property, DON’T! This clause can give you an out before a certain date.

Inspection Contingency - An inspector should be a crucial part of your team! DO NOT overlook the importance of a great inspector. We pay ours to travel any distance needed to inspect every property we consider buying.

Title Contingency - Keeps a buyer safe from fraudulent sellers or title issues that have not been addressed by the seller to date. If an issue pops up, it would need to be addressed prior to closing or you may be able to walk away.

There are many more worth exploring, these are the three just the three we include every time. If a seller wants us to reconsider a contingency, 99% of the time, we will say no or pass on the deal all together.

                                 Sometimes the best deal, is no deal at all.

Step Three - Inspections

We started to touch upon inspections above but because they are so important, they deserve their own category. There are a number of different inspections that can be done when evaluating a property but a standard home inspection should never be skipped.

Personal Reflection - There have been times where we do not include this as a contingency but will still have one done prior to closing for educational purposes. For us, it's a must.

Our inspector likes to work from Outside to Inside, Upstairs to Downstairs. Here are the main focal points on our walk through -

Outside - Chimney, Roof, Siding, Trim, Foundation, Decks, Landscaping,

Inside (Top Floor Down) - Attic, Ceiling Damage, Windows, Bathrooms, Appliances, Foundation

Services - HVAC, Plumbing, Electrical, Security, Water and Sewer

Add Ons to Consider - Radon, Mold, Asbestos, Lead and Pest

If you’re buying Raw Land, consider doing an Environmental Assessment and a Survey at a minimum. If you are considering a Condo/Townhome, consider including a contingency that allows you to review the Condo Associations Financial Documents and Policies.

Step Four - Contractor Walk Through and Budgeting

In a perfect world, this step should happen at the same time as the inspection. Our goal here is to envision what we want the final product to look like and work backwards. What are the biggest renovations that need to happen and who will be involved?

If you are running the project, all you need is a clipboard!

If you have a General Contractor, they will have the clipboard.

If you need specialty trades, consider bringing them along - Plumber, HVAC, Electrician

This is your chance to get detailed. Plan for every project you would ever want to do! It doesn't mean you have to tackle each item on the list in one day but it does help you start to prioritize your renovations based on your cash position and goal for your investment.

Step Five - Zoning and Land Use

This will be short, very short. Guarantee before you buy any investment that the property is zoned appropriately for how the property is being currently used and for how you intend to use it in the future.

This is also a great opportunity to see what the town or city allows for ADU’s, caretakers units and conversions.

Step Six - Town Hall: Issues and Fines

This is likely the most skipped step but shouldn’t be. After many projects, I have found it is worth just popping into Town Hall to see what information they have on the property.

Any outstanding permits or permits that failed to be closed out appropriately?

Any outstanding fines or penalties for trash, noise, etc?

Any gossip that the front desk people have is welcome.

If you want to go to the next step, swing into your local Fire Station and Police Station and see what information they have (if any) on the property.

Step Seven - Talk to Neighbors/Visit at Different Times and Days

Meet the neighbors! Sounds exhausting to an introvert but can be well worth it. At the very least, swing by the property of interest a few times throughout the due diligence period. You should try to see the property and area a minimum of five times -

Weekday Morning Visit / Weekday Lunch / Weekday Evening Visit

Weekend Morning Visit / Weekend Evening Visit

What if it was quiet in the morning but there was that one rowdy neighbor at night?

What if it was quiet on the weekend but during the week turned into an industrial park?

What if your neighbor left their dog out 9am to 5pm and it barked non stop?

What if in the afternoon, it's where all the high school kids hang out?

All of which may or may not be a deal breaker for some investors but none of which would be known without a simple drive around town a few times over the course of a few weeks.

You are welcome to skip a step if you feel confident in doing so, but you should never skip one due to lack of education. Now go get invested!