8 Elements Of Due Diligence You Will Learn With Experience

By on January 10, 2014

It must sound like basic common sense that any investor should conduct proper due diligence before committing to any investment. Although it is a rare occurrence to lose everything when it comes to real estate, it can still happen. A lot of bad investments can be simply avoided with meticulous diligence checks. Which is why it is so surprising to find many who do not do it thoroughly enough.

1) A seller is your opponent, not your friend

Do not expect a seller to provide all relevant and related material information regarding the property. Even the most honest seller in the world can have a bag of material information withheld from you because he has absolutely no idea those were information important to you. The only help you can really expect from a seller is to provide all relevant official documents you require to verify statuses and information.

2) Only hire qualified appraisers and inspectors

Although these people are professionals, they are human too. Some inspectors are bias towards commercial real estate while others might be bullish on residential. Some inspection companies might have connections with banks which can influence their work, while others might have no ties at all with ay third parties.

3) Scrutinize lease contracts

Unless you are an experienced investor who has made a habit out of buying tenanted properties, you should get someone who is well-versed with leases to scrutinize the lease terms for you. And if you are buying a multi-unit property, different tenants might have different terms on their tenancy agreement. When it comes to legal documents, it is always down to terminology. The best person to advise you is a credible real estate lawyer you can trust. Learn what is an estoppel letter and enforce it.

4) Validate the inventory list

Checking for inventory is not something that is done for the sake of it. Make sure you make the inspection yourself or hire someone you can depend on to do it for you. You might think that for multi-unit properties, it is a little extreme to check each room. But you must conduct an inspection for each room to ensure the inventory items are there. Because if each unit has just 1 item missing, it can add up to a big number for you. Consider videotaping your inspection as well accompanied by a representative of the selling party.

5) Review existing contracts

Every regular household will have existing contracts with vendors and suppliers. These can include gardening help, housekeeping, air-conditioner servicing, maintenance services, or even the cable service. If you implicitly become liable for these contracts by buying over the property, you need to find out what they are before you get into trouble for negligence. If you refuse to accept them as they are, you have to find a solution with the seller or the vendors before you close the deal. Because you can expect the seller to wash his hands off everything once closing is settled.

6) Get a certified property survey

This should show the legal address of the property in question and all other details associated with it. This include it’s dimensions, block number, classification, deed restrictions, etc. Point out anything that you find disturbing. Sometimes, weird items can mysteriously appear unexpectedly and even the seller might be unaware or unclear of. When these situations happen, you must absolutely check with a well-versed attorney on what they mean and their implications. If you do not solve a problem at this stage, you might have a problem with an eagle-eyed buyer when you try to sell in future.

7) Title search and liens

Although this is a straight forward action that buyers conduct more of a formality, you will be counting your lucky stars if something funny pops up in the title search. There are many types of skeletons that can potentially appear on this document. And when they do, they are usually more complex than you think.

8) Due diligence timeline

Depending on where you are, you will either have a standard due diligence timeline, or one that is explicitly agreed between the seller and buyer. If you think that the time is not sufficient, don’t be shy to ask for an extension. You are then expected to complete you diligence checks within the timeline in order for closing to proceed.

 



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