For new real estate investors and seasoned pros alike, due diligence is a crucial skill for success. The due diligence process confirms the facts about the property. Thus, real estate due diligence can prevent unwanted surprises down the road. Of course, due diligence should be done pre-offer and post-acceptance.
Real Estate Due Diligence: Pre-Offer
The pre-offer work consists of 3 steps: area analysis, financial estimate and value, and rehab estimate. Before purchase, you need to analyze the area of investment for things like crime rates, school rankings, occupancy rates, and median income. Then, determine the after-repair value of the property by creating your own pro-forma to determine the property’s future performance. Look at the repairs that the property needs, and be realistic about the condition of the property.
Real Estate Due Diligence: Post-Acceptance
Once your offer has been accepted, you will need to do four steps in due diligence before the closing: physical, financial, legal, and inspections. Conduct a walk of the property and make a detailed scope of all needed repairs, and create a budget. Gather all of the financials for the property from the seller. Then, look for capital expenses and bad debts. Check the legal status of all past renovations and property modifications, as well as any HOA regulations, and consult a lawyer. Finally, always get a property inspection. You might also want to consider other inspections for the roof, termites, and/or asbestos. If there are any huge surprises, you might want to renegotiate the terms of the contract or to walk away.
Due diligence in real estate requires attention to detail, time, and effort. However, in the end, it saves you from poor investments. The process forces you to assess all concerns and issues before you go through with the deal. Above all, always be willing to walk away.