10 Must-Do Diligence Tasks

Know the demographics for the area. Is the area in general decline or it is marked for growth? County offices provide information regarding permits that developers have pulled indicating market expansion for both commercial and residential projects. New permits indicate growth.
Other investors can present a pro-forma indicating annual income and expenses. While this may be close to accurate it’s really only a generalization. You need real numbers and rely on your own estimates as well as reviewing the seller’s detailed reports. If the property is professionally managed, you can obtain the property’s maintenance history by request. Monthly rents are relatively easy to verify and your bank can provide monthly financing costs, taxes and insurance payments.
Have your attorney or title insurance company order a preliminary title report. This will indicate any current liens that may not have been satisfied and will need to be before the property can be transferred. Existing mortgages will have to be settled but there may also be property taxes, delinquent income taxes, mechanic’s liens and past due child support payments.
In addition to liens on title, look for any easements. Easements allow access to your property by third parties. Most easements include the right of the utility company to access your property to make repairs or maintenance issues but can also give the right of adjoining neighbors to traverse your property in order to get to theirs.
Review past utility costs such as electrical, water and sewer. If you’re paying these charges and not your tenant, this can have significant impact on cash flow.
If the property is a foreclosure, you may not be able to physically inspect the unit from the inside until after you’ve bought it at an auction. This isn’t advisable unless you’re experienced real estate investor who regularly buys and sells real estate at foreclosure auctions.
After you’ve received an accepted offer, immediately order a property inspection. The seller is required to provide a Seller’s Disclosure Statement identifying any known issues with the property such as defective equipment, appliances or leaky pipes. The property inspection will identify any and all matters that need attention. Don’t do this yourself unless you’re a licensed inspector.
Review the potential purchase with your team getting input for all major facets of the transaction. Your real estate agent will confirm valuation, your attorney or title agent can provide preliminary legal work and opinion. Your lender can prepare a spreadsheet regarding closing costs, rates and monthly payments.
The appraisal should arrive within 5-10 days after your lender has placed the appraisal order. Pay close attention to the appraiser’s notes regarding the market. Are property values rising? Declining? Also look for any “deferred maintenance” found by the appraiser. Deferred maintenance on an appraisal means something needs to be fixed and will most often delay a closing as well as not being able to obtain financing.
Any potential major issues require closer inspection. For example, if the property shows signs of potential foundation problems, a property inspector isn’t enough. You need to find a structural engineer who will “sight” the house to find out if the home has settled and needs repair.