Due Diligence: Homework That Can Make You Money
Due Diligence. This is a common phrase heard quite often in real estate. There’s a very good reason for that. It is absolutely critical to a successful transaction. Yet so many people still get burned even though they have done due diligence. For those who truly know how to invest in real estate, due diligence is more than just asking for reports and paperwork from the vendor.
For us, it’s going one step further and actually verifying ALL the information provided. This included confirming rents and expenses or reviewing new by-law changes that will affect our property. With every investment there are risks. However a guaranteed way to help reduce risk is to perform the proper research before jumping into any investment.
Doing your homework could be the determining factor in whether or not the deal you are analyzing is good, bad, or downright ugly. Any undesirable aspects you find during due diligence can easily be justified once you have all the documented proof. This often can result in a price reduction.
We would like to think that every seller is forthright, honest, and would not provide padded numbers to make the property look more appealing. Unfortunately that is not always the case. So the onus rests on the buyer to do the proper analysis and investigate the deal from all angles to make sure it makes sense.
Due Diligence Requirements
Here are just few tasks that every investor should perform prior to any acquisition:
- Getting a detailed and professional inspection and report of the property to ensure there are no hidden problems that could come back to haunt you down the road.
- Obtaining cost estimates of the required repairs. This is helpful for the negotiations stage and could allow for a possible deferred maintenance credit.
- Running a thorough review of all the seller’s documentation such as the income and expenses, rent rolls, tenant lease agreements property taxes and utility bills, and any maintenance contracts for the last few years, etc.
- Engaging the appropriate power team members to ensure you receive a title report, any building code violations, copies of all surviving warranties and guarantees, and a property inventory list, etc.
- Keeping in mind your exit strategy, forecasting the income and expenses for the next 3-5 years, and identifying where you will make your plays on the property to increase your Net Operating Income.
If you are learning how to invest in real estate as a private lender, you also have your share of homework to perform. Researching the opportunity will probably be your only labor intensive portion of the transaction because after the property is acquired. Then you get to sit back and just wait for your scheduled payments to arrive. Until such time though, you need to do your own homework. You need to understand why the market and property were chosen, what the exit strategy is/are, and be comfortable with whom you will be doing business. You need to determine if they are taking the necessary steps to ensure the acquisition is sound and that it will provide positive results for both parties.
Are you curious to know the level of due diligence that Simple Acquisition’s performs on all properties it gets under contract? Get our due diligence checklist to see how serious we take the due diligence process.
Remember, real estate doesn’t have to be complicated.
With Simple Acquisitions it’s smart and simple!