Due Diligence Checklist: Final 4 Items to Review
The Final Items on Our Due Diligence Checklist
In our previous article, we discussed gathering 3 years of capital improvements, property taxes, current payroll and copies of all warranties during your diligence process. In this article, we are going to discuss the remaining items on our due diligence list: liens and liabilities, police department activity, code violations, maintenance records for equipment and check to see if any building permits have been issued.
Liens and Liabilities:
When the buyer orders title, a search is done on the property to establish ownership and to search for any liens or liabilities that may encumber the property. As the buyer you want to make sure there are no liens. The title company " insures" good title by asserting there are no liens, or if there is a lien, that it sets money aside to satisfy the lien.
What is a lien? The seller may have performed a repair on the property, but did not pay the contractor. The contractor’s remedy is to place a lien on the property, which in this case is called a mechanic’s lien. Once the property is sold, funds would be taken from the seller to cure the lien. If you purchase any properties with liens attached to them, you will assume the lien and become responsible.This is why all buyers should purchase title insurance when buying a property.
Police Department Activity:
Before purchasing a property, you want to find out if there is any criminal activity on the property or the surrounding neighborhood. We use 2 websites, www.spotcrime.com and www.familywatchdog.us to monitor any crimes occurring in the neighborhood. We also contact the local police department and ask if there has been any activity on our property. In one of our properties, the sellers were renting an apartment to a police officer for a reduced rate. We thought what a good idea that was to deter crime. The police officer had has patrol car parked out in front for everyone to see, and when we have any police related questions, we have someone to go to.
If the property has any violations and you have closed on the property, you will be responsible for addressing them. I’ve learned this lesson the hard way. We bought a 3 family home with an additional apartment that was not registered with the town. After owning the property for 10 years, the town decided to commence fire inspections. When they came to inspect the property, the apartment showed up as an illegal unit. It was now our responsibility to file the appropriate permits to legalize this unit and bring it up to code. Please save yourself this headache by checking for any violations on the property. Check for proper zoning, board of health permits, number of units and up to code for fire and electrical and plumbing. If you reveal any issues during the due diligence process, this would be the time for the seller to cure these violations, not you.
Maintenance Records for Equipment:
Ask the sellers for any maintenance records pertaining to equipment on the property, including boilers, elevators ad roof repairs. If the equipment hasn’t been serviced in a while, then you can ask the seller to perform maintenance before you assume ownership. We own a property with a septic system. We asked for the schedule of pumping to make sure that the owner was maintaining the system. If it has been a while since the last tank pumping, then have the seller pump out the tank at his expense.
Check town records to see if any building permits have been issued
in surrounding area:
It is always a good idea to familiarize yourself with the neighborhood. The goal of any real estate investor is to purchase a property in an emerging area, or in a path of progress. If you see that the neighbors are pulling permits to expand their properties, this is a promising sign. You also want to be careful that you are not purchasing a B property where they are building an A property. This will foster competition for you and your tenants will look to upgrade to the newer property.
This concludes our discussion of due diligence. We would love to hear your biggest obstacle when performing due diligence.
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