Once you have a property under the agreement, you start the process of conducting due diligence on the property you’re purchasing. That might involve examining the documentation of the property, finding security, and conducting inspections to make sure the property is up to your criteria.
Although real estate laws vary by state, you are typically able to barter a period of 3-4 weeks to examine the property in exchange for an original “due diligence” deposit.
If a primary issue comes up when the inspection and you’re still in your due diligence period, you can reverse out of the deal and just forget the due diligence security rather than being taken to buy the house with these major issues. Many states are considered “caveat emptor” states which means “buyer beware.” Essentially, the responsibility to thoroughly examine the property rest on the buyer. With that, the due diligence phase is crucial.
The due diligence process as an investor
As an investor, the due diligence inspection method looks somewhat different than it would for someone buying a basic residence. You’ll have to go ahead with the regular inspections to guarantee that buying the property is a good economic decision.
Examining the financials
The main goal of buying an investment property is to create income. With that, one of the various important things for an investor to do during the due diligence phase is to check the financials of the property. This means evaluating living leases, checking rent rolls, and if possible, talking to other owners/investors in the area and seeing what they charge
Most property management companies have software that can produce printed verification of rental income pretty soon. But if the property is maintained by the owner, you may have to ask for bank statements or some other proof that the property is making the income that they claim it is.
If the property is governed by a homeowners association (HOA), they will have their set of financials that you need to study. Make sure you go over the stability sheet, budget(s), and description of reserves on a line-by-line basis.
Estimating the condition of the property
Besides the economic health of the property, it is also essential to inspect the main systems. Take a close look for anything in bad shape that could change your bottom line down the road. Everything has a life cycle, so checking the age of the water heater, HVAC system, and roof and connecting it to its average life span will give you a rough idea of how much more use you can get out of it before a full replacement is needed.
This is a step that both investors and primary home buyers should consider because the replacement of the aforementioned big-ticket items can be costly. You want to know ahead of time if a repair that could cost you thousands is imminently approaching. When it is an expected expense that you can save for, it is much easier to deal with rather than being hit with a large, unexpected expense down the road
The bottom line
Throughout the method, keep in mind that everything in real estate is negotiable. If you find something that doesn’t sit well with you, then consider backing out or asking for a reduced purchase price.
