Due diligence is something every investor has heard of, but very few investors really understand.

It is one of the most important things to do before closing on a property. During the due diligence period, it is imperative that the buyer identify and evaluate any and all potential issues. He must thoroughly investigate, evaluate and confirm all information and representations made about a property. If you do your job right, you’ll shop right and make lots of money by avoiding costly mistakes.

As a new investor, I was afraid of making mistakes, so I did my due diligence to make sure I was completely comfortable with the transaction BEFORE I made an offer. Three times another buyer came along and put the property under contract while I was doing my research. That is very frustrating, especially after researching everything and knowing that you had found a gem.

If you find a property that looks good at first glance, get it under contract. Just be sure to set contingencies that allow you to terminate the contract if you find anything unacceptable during your due diligence period. In this way, you will have the opportunity to ask the seller to solve the problem, reduce the price, obtain other concessions or, if necessary, cancel the contract.

Many times you have much more negotiating power when the property is under contract than when you negotiate to put it under contract. Once under contract, the seller mentally thinks the deal is done. The seller usually doesn’t want to lose you as a buyer and is often much more flexible than they would be, especially when it comes to legitimate issues that need to be resolved.

Unfortunately, nowadays you can’t trust what people tell you. One of the most important things I tell other investors is “don’t trust anyone. This is your business and you need to be responsible for it.” People misrepresent the facts and sometimes lie correctly. It doesn’t matter who you are, including nationally respected real estate gurus. You must check everything! Never just take their word for it.

There are people looking to take advantage of out-of-state uniformed investors. Don’t let that stop you, just make sure you implement your due diligence. Keep looking for new information until the day it closes. There have been times when I have found something that killed the deal the day before it was supposed to close.

Know your exit strategy in advance. Are you planning to buy and keep the property by turning it into a rental? Or do you plan to fix it up and sell it right away through lease/option or seller financing? If you plan to sell it right away, make sure there will be no seasoning issues with the buyer’s lender. Always have backup exit strategies because things don’t always go as planned. I always look at the best case and the worst case. If I can live with the worst case scenario, I’ll move on.

I have bought many properties on sight, however when possible it is always best to do everything mentioned in this article yourself. If you are not in the area, you should have someone you trust look at the property inside and out. If you are represented by a real estate agent, then you should not only view the property, but also take pictures of everything, including the neighborhood. You want to see and evaluate as much as possible. It is also important to drive through the neighborhood at night because it often becomes very different when the sun goes down.

There was a property in South Carolina that he had under contract. I was in California and didn’t use an agent, so I contacted a local investment club and asked investors to help me. I also called a couple of local realtors and property managers. I would need both an agent and a property manager in the future, so it was mutually beneficial for them to help me. I had everyone come by and give me their opinion of the property and the area it was located in. It was very informative to hear what everyone had to say. They not only sent me photos but also gave me an idea of ​​what was damaged and what needed to be fixed.

Another great tool is Google Earth. This allows you to see an aerial view of the property. This can be very useful to see what is around the property. I had a property that I was buying in San Antonio, Texas and using Google Earth I saw train tracks not only near the property but right next to it. He could practically have reached out the window of the property and touched the train as it passed. Then there were other times when I found a dump nearby, an airport, or a treatment plant. You never know what you will find and having this aerial tool is very beneficial.

After someone you trust has seen the inside and outside of the property and everything looks reasonably good, then you’ll need to hire a home inspector. Make sure the home inspector is licensed and insured. If possible, be present when the inspection takes place; if not, be sure to discuss with them that you want them to be very detailed. He wants them to write down anything and everything they see, and the more images the better. Once you get the report, go through it and make a list of questions, then call the home inspector to clarify anything that needs to be cleared up. Many times what I thought was a big problem turned out to be a minor one after discussing it with the inspector.

Don’t be alarmed when the inspector finds problems, they can be fixed. I’d be more nervous if they didn’t find problems because that means they probably didn’t do their job right. Even new houses need to be inspected.

Many times something serious appears that may need additional reviews by a specialist. If there are potential problems with the foundation, call a foundation specialist. Perhaps the inspector found evidence of environmental contamination and would call in a contamination specialist.

Remember, with the right contingencies, you can cancel the contract if something comes up that’s too big or too costly a problem to investigate further. Before you call the specialist, see if the landlord will pay for that extra inspection or at least split the cost with you. If not, you will have to decide if you want to go ahead or not.

Once the inspection has been done and repairs are needed, have a contractor come out and give you an estimate of the cost involved to fix everything. Then take it to the seller and negotiate again. You have many options, the seller can pay to solve the problem, reduce the price or give you other concessions. If you cannot reach an agreement with the seller, you always have the option to cancel the contract.

I bought a 4-plex in Arkansas one spring. One of the units had a very old AC unit. The last thing he wanted was to close escrow and go out of business next summer. The seller assured me that he had never had any problems with that unit. To be sure, I asked the seller to put the money in escrow for a year. If there were any problems, that money would be used to fix or replace the unit.

Get compensation that verifies the property is worth what you’re paying for it. The comps must be for equivalent properties (rooms, square footage, lot size, etc.), and you must handle the comps to verify that they are truly comparable to your property. See the most recent sale dates, the closest properties to yours, and how many days on the market.

Be sure to get a copy of the appraisal to review. I had a property that I almost bought from a builder and the only offsets in the appraisal were the same properties that the builder had sold to others. There were no other compensation anywhere near what he was paying. It turned out that I was overpaying, but I was smart enough to figure it out and get out of the deal. Other out-of-state investors weren’t so lucky!

Read the headline report, this is something many investors don’t do. If you need help understanding it, contact the title company and, if necessary, an attorney. Verify that the person you are dealing with is the owner. Twice I entered into a contract and found out that the seller was not the owner. You should also check the links against the property. Once, the owner unknowingly sold me a property for less than what he owed. Instead of closing in 30 days as planned, we needed to do a short sale with the bank, which can be a lengthy process.

Ask the seller in writing if any room additions were made and if they were allowed. If the permissions were not obtained, this will be your problem later. Before closing, it would require all work previously done to be approved by the city at seller’s expense.

Check if the city is growing and has a high level of employment. Go to the city website and look at the following: demographics, growth, crime, is there a revitalization in the area, are there major stores/chains coming to the area, are there cultural centers near or coming soon, what is the nearest airport and big city etc Another place to get information would be local online newspapers. There are plenty of resources online to take advantage of, so Google anything you can think of that is appropriate.

A lot of times with smaller communities I can get someone on the phone who will give me a lot of unknown facts/gossip about the area that can be very informative. After talking to the locals, including property managers, agents, other investors, even the police, I found out that I was buying two duplexes on the worst street in the worst neighborhood in that South Carolina city. I’m glad I asked.

Another important part of due diligence is verifying the rents you expect to collect. Talk to local property managers to see if there is a need for rentals and what rentals you should receive. Don’t just take their word for it, ask them to prove it with rental compensation. Check all expenses, including what your mortgage will cost each month, insurance by calling an insurance agent, taxes by calling the county, who will be managing the property, is there an HOA, etc. Once you’ve verified your income and expenses, you’ll have a better idea of ​​where your cash flow will be.

If the property comes with tenants, you will need to check everything related to the tenant. Make sure you get a copy of the lease as soon as possible and read it over. If legal in your area, get a copy of your credit report, background check if done, tenant application, and any other agreements. Verify that a deposit was paid, the amount, and where it is being held. Twice I had to back out of deals because the tenant lived in the property he was about to buy.

I can’t stress enough how important your due diligence is, but have fun with it. Turn it into a game. Become a detective looking to find out as much as you can. By making this an important part of his business, he will create wealth through real estate.

Copyright 2010 / Michael Gier and MHVProperties.com