How to Perform Due Diligence on A Property
When you are deciding whether to buy an investment property or not, practicing thorough due diligence can help you avoid unpleasant surprises and minimize your investment risk. Due diligence is the process of "doing your homework" on the property that you are thinking about buying as an investment. It is the process of checking, double-checking, and confirming any important information that was used to determine whether the property is a good, average, or bad deal.
Due diligence in real estate refers to the buyer's responsibility of researching the property and being thorough in making the decision to complete the purchase. This includes taking the time to learn about the local real estate market, hiring a professional to inspect the property and examining documents that pertain to the building.
Before making the commitment of becoming the legal owner of a property, go through the steps on this due diligence checklist so you can complete your purchase in total confidence.
1. Study the Marketplace
Your very first step in any business deal is to gain a firm understanding of your intended market. For real estate, that means learning all there is to know about your desired location. You can do this by calling a local real estate agent, doing online research or discussing the property with an appraiser. Working with a local real estate agent is probably your best resource for finding out about an area since the agent will have done the proper research and will know the appropriate price of the home. Sites such as Trulia and Zillow can also give you an idea of the property values in any given area.
2. Visit the Property with a Building Inspector
Before buying a property, you will want to personally inspect the property if possible. In addition, it is a good idea to enlist the services of a professional inspector who can identify red flags that could influence your final decision. A licensed inspector will make sure that the electrical wiring is up to code, check for the safety and strength of structural components like the foundation, walls, roof, and appliances of the home.
3. Property Records Review
Do not underestimate the importance of researching the records of a property before purchasing. Examine the documents that relate to the property such as the title policy, Certificate of Occupancy, Americans with Disabilities Act (ADA) compliance, current leases, and any other public records. The title will include the legal owner of the property, the property's legal description and boundary lines, real property, liens, encumbrances, usage rights, and more. The insurance policy and claims history can yield a great deal of information and the latest risk assessment can give you an overview of any risks associated with the property.
4. Get an Appraisal
Hire an appraiser to give you an unbiased, third-party estimate of the true value of the property so that you do not pay too much. If you are planning to finance the property or purchase it with a mortgage loan, you will typically need to hire an appraiser but getting an appraisal is smart even if you are paying cash.
5. Figure Out Financing
Unless you have the means to purchase a home in cash, you will want to look into a home loan or mortgage. Oftentimes, the bank or lender will conduct its own investigation of the property's title and land surveys. Research multiple lenders and mortgage options to make sure you receive fair terms and interest rates.
Different types of mortgage agreements are appropriate for different people. First-time buyers, for example, may prefer mortgages with adjustable interest rates for lower monthly payments. Veterans and military members may qualify for special VA loans with better terms, as may low-income families with loans from the Federal Housing Administration. Choosing your home loan agreement will take a bit of research. Do the math on all your options and compare them for the best choice for you.
The end result of a thorough due diligence process is that when the time comes to present your deal to either partners, investors, lenders, or another buyer, you will have the level of information and knowledge surrounding the property that very clearly states that you are a professional at what you do.
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