The period of time between a real estate offer being accepted and the closing of the sale is known as the due diligence time. But what exactly does that mean? This simply means investigating the investment from all angles to see if it makes sense. You might find a property that looks promising and want to tie it up before someone else gets it in order to have time to investigate it.
Due diligence starts pre-contract.
Know the contract. Read the contract. Be one with the contract. The contract should allow you time, from one week to a couple of months, depending on the nature of the investment property, to perform due diligence and be able to walk away for any reason and have your earnest money returned in full. If you think you need help on a contract, contact a local real estate agent or an attorney that is familiar with this type of transaction. And always be careful If a seller pushes you vigorously to shorten your time-frame, it might be a sign for red flag.
Make sure you get a certified inspector to inspect the property. Get an inspector who comes with references and develop a close relationship. Let the inspector know what you expect and find out what they don’t inspect. A good inspector might not know everything, but they should know enough to recommend more in depth inspections of what they notice – for example, a good inspector who notices structural warning signs is not a structural engineer, but they can detect signs and recommend getting a structural letter from a structural engineer. And even better, before you bring the inspector out to the property, start looking around yourself and see in your opinion what you will have to change, replace, fix…etc. Once the inspector gives you the list, you will be able to compare so you can learn yourself so that next time you go to a property you will have a better idea of most of the repairs and how much that will cost YOU.
You will always need to have a pretty good idea on what exactly you plan on doing with the property. Do you plan to fix and sell, or just rent out expecting appreciation? These different decisions will give you different outcomes on your financial numbers, so know your strategy before you start the math. For example, Let’s say you’re investing in a quadplex. You’ll want to get a rental history, vacancy rates, maintenance fees, property management fees, taxes, insurance, leases and know who pays what and who’s responsible for what? You’ll want to investigate your financing options, determine your fixed and variable costs, in order to see if your return on investment is in line with what you had in mind. Commonly, fix and flips will have easier numbers because you are mainly remodeling and accounting for those costs and after repair value, then selling it. With that you don’t have to account for the long-term calculations because you will be getting rid of it pretty quickly, hopefully.
As you can see, there are many aspects to investing, but with a focused, planned approach you can break it all down and investigate to help make an informed decision. This is just the beginning steps of due diligence, we will be doing deeper in the process in later post, so stay up to date with us.