3 Simple Steps to Proper Due Diligence

Congratulations! You have an accepted offer, the seller has signed the contract, and you’re into the inspection period (due diligence).

It’s not uncommon for the new investor to feel an onslaught of panic at this juncture. There’s nothing to worry about, if you happen to find anything during your due diligence that breaks the deal for you, you have an out. So feel free to proceed with confidence and flair!

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The inspection period exists to give you time to learn more about the property so that there are no surprises once you close. It is also an opportunity to discover reasons that warrant asking the seller for concessions (re-negotiate).

Towards the end of your inspection period, you can go back to the seller and ask them to share in the expense of whatever you may find. The money you may or may not need for the deal will be revealed during your inspection period.

So, you have the property under contract, and you’ve opened escrow. If you don’t have a good title company, ask your network for referrals.

You already have your initial opinion of value, that’s how we determined our offer price. Now we’re going to get up close to the property so we can arrive at our actual opinion of value.

STEP ONE

Hire a professional home inspector. If you don’t have one, ask for referrals from your colleagues; otherwise you can search of one at the American Society of Home Inspectors, www.ashi.org.  You will need to make the small investment of $200-400 for your inspection, but trust me it can save you thousands. Don’t skip this step.

STEP TWO

The second step, and most times these things happen concurrently but I’m separating them for you so you don’t miss anything. So second item on your list is to have your title company pull a preliminary title report which will reveal any encumbrances on the property that could affect your ownership, such as a mechanics lien, overdue property taxes, judgments, easements etc. Be sure to have a clause in your contract that states the necessity of free and clear title.

Usually escrow will help you to resolve these issues during escrow, but sometimes they don’t catch everything, it’s happened to me. It’s your deal; you need to know what you’re looking at. If it’s your first or second time reading a title report, ask for help interpreting it.

STEP THREE

Review and refine your property analysis. This time you’re going to be very detailed and picky about the comparables you choose.

Narrow the area radius. Only use comparable bedroom and bathroom configurations. Instead of solds in the last 90 days, look for properties that have closed in the last 60, 45 or even 30 days. I also look at active listings, so you’ll know what your competition will be if it’s your plan to re-sell soon.

Be aware, in an appreciating market, buyers will start looking at properties that lie the middle to the top price range, but in a depressed, declining, or stagnant market, they’ll start with the lowest priced properties first. Knowing where you are in your market cycle is imperative in determining where you’ll want to price your property to sell the fastest.

STEP FOUR

Find a licensed contractor, or 2 or 3, to come in and give you bids and proposals for the repairs found during your property inspection. Get multiple bids because they can vary wildly. I usually go with the middle bid when I’m doing my number projections.

Most of the time you can get all of these steps completed in a week. At this point, you have a VERY accurate picture of what the property is worth, and your potential profit. Now it’s time to go back to the seller and approach them with what you’ve found and ask for a price reduction. I’ll cover how to do that next time.

Now that you know how to proceed after you have properties under contract, go get some deals!

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