Purchasing an investment property requires a lot of steps which can be an arduous process for real estate investors–experienced or new alike. One of the crucial steps is conducting due diligence.
What is due diligence in real estate?
Due diligence involves researching, investigating, and verifying the details of the property and its potential as an investment. This will make sure you as a real estate investor can make informed decisions and reduce risks in making a bad investment.
In short, it is the process by which you do your homework and make sure you get your money’s worth in the purchase.
Due diligence will help you:
Investigate the legitimacy of the deal
Evaluate the risks
Make calculations to estimate profitability of the property
Weigh the pros and cons of your investment
In this article, we will go through the steps you need to take when conducting due diligence in real estate investment. This is by no means a complete list of steps but it should be enough to get you started on the right track.
8 Basic Steps for Real Estate Due Diligence
1. Be aware of the market
Try to look at as many properties first before you consider purchasing in an area. This includes a lot of online research, talking to professionals in the field, or joining real estate events.
It helps to have a feel for the market first and to know what properties are out there instead of just looking at a few properties and getting excited over one or two which could lead you to make emotional and uneducated guesses that you might mistake for “gut-feel”.
2. Research the property and its surroundings
When you have an eye on a particular property, start gathering as much information as possible about the property and its location. Look for data on the local real estate market, including recent sale prices and rental rates for comparable properties. Also consider the property’s proximity to amenities, transportation, and other factors that could impact its value.
You can drive around the neighborhood, assess the other houses in the area, take note of the type of people who live there, check crime rates, talk to residents if you can to help you get a “feel” for the community, and gather insights on property values and trends in the area. This will give you an idea if the property suits your investment purpose.
3. Check the property’s disclosures
Sellers are required to disclose any issues in the property or if there are any works they need to complete prior to closing. A keen review and understanding of the items in the property disclosure statements is needed on the part of the buyer.
4. Consider the property’s potential for appreciation
While it’s difficult to predict exactly how much a property will appreciate over time, it’s important to consider its potential for growth as part of your due diligence. Look for signs of a growing local economy, infrastructure improvements, and other factors that could increase the property’s value.
Try to find out what are the current real estate market conditions that are likely to impact your intended use of the property.
5. Inspect the property
It’s highly important to physically inspect the property to get a better understanding of its condition and any potential issues that may need to be addressed. Consider hiring a professional inspector to assess the property’s structural integrity, as well as its plumbing, electrical, and HVAC systems. The inspection will give you an idea on renovation expenses and if the cost of repairs is something you can afford to cover.
6. Get the property appraised
When planning to get financing for the purchase of an investment property, lenders would need an appraisal to ascertain the value of a property. Property appraisal would be a key item in your due diligence checklist to ensure you are paying for the property’s correct value based on its condition, age, location, features, nearby amenities, and comparable properties nearby.
7. Review the property’s financials
As part of your due diligence, you’ll also want to carefully review the property’s financials, including its income and expenses. You’ll need to review evidence of no debts in taxes, mortgage, or utility bills. This will help you determine its profitability and cash flow as well as avoid any sticky situations with payables that you will need to shoulder out of your own pocket.
If planning to rent the property, be sure to also review the property’s current rent roll (if applicable), as well as its past performance and any potential income or expense trends.
8. Evaluate the property’s legal status
Check the property’s legalities and ensure that the property is in good legal standing. Review the title documents and see if there are any liens or encumbrances on the property, and verify that the seller has the legal right to sell the property.
You also need to check which city or area the property belongs to in jurisdiction and what ordinances will cover its improvements. What entitlements will be required if you proceed with improvements on the property? See also if there is an existing survey of the property and if so, request to review it as soon as possible.
You may want to consult with a lawyer or real estate attorney to help with this process especially if you are a beginner to real estate investing.
Before making a final decision, you need to leave no stone unturned and be as meticulous as possible. But make sure to balance your analysis and computations with action. In today’s market, you need to move quickly because analysis paralysis might make you lose on good deals to other more experienced real estate investors who have acquired a “sixth sense” to investment properties.
But with enough practice, a keen eye for details, and a personal system that you follow for buying sound investment properties, due diligence will soon be a lot simpler for you.
If you need a complete downloadable guide and checklist for real estate due diligence, check it out here.
Conducting due diligence in real estate investment can be a time-consuming process, but it’s essential for minimizing risk and making informed decisions. By carefully researching and verifying the details of a property, investors like you can increase their chances of success and potentially reap the rewards of a successful investment.
If you need a trusted hard money lender for your upcoming investment projects, talk to us at Longleaf Lending or directly submit your request. We work with real estate investors all over the state of Texas since 2018 and have funded over $65M in loan value. With or without an existing property in mind, you can submit a loan request today and we can help you strengthen your next offer.