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10 Must-Do Diligence Tasks

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  1. to-do-listKnow 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

Want a copy of our 100-point due diligence checklist?

Our checklist covers local market, ROI data, property condition, tenants and management. Click here IT’S FREE.

10 Cheap Ways to Boost Value

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  1. Start scrubbing. A clean house will appeal both to potential buyers as well as impress the appraiser. A professional cleaning company will give your property a thorough cleaning, leaving the home free of dust and stains. You want your kitchen and baths to absolutely sparkle.
  2. Power wash the exterior. Just as you want a clean interior, you want a nice exterior, too. Rent a power washer and clean the exterior walls, sidewalk and drive way as well as porches, decks and wooden fence.
  3. Paint is perhaps the most cost effective thing you can do to boost value. New paint covers marks on the walls and gives the entire house a brand new aroma. Does the outside need painting? Put on a new coat of paint on the outside as well.
  4. Take care of curb appeal. Painting the exterior will brighten up your property but you need to take care of the rest of the outside as well. When a potential buyer first pulls up to the home, they want to see a well-cared for home. Mow the lawn, get rid of debris, leaves and sticks. Don’t go overboard with shrubs and rows of flowers. What might seem pretty to you might translate into outdoor maintenance to a buyer.
  5. Switch out the hardware in the kitchen. Installing new knobs and pulls that shine give new life to older cabinetry. Take a look at your faucets in the kitchen and baths as well.
  6. If there are spots on the carpet, you can try and have them professionally removed but for a bit more you can replace the carpet entirely. You know how fresh a house feels with new carpet and new paint, right?
  7. As you make upgrades, repairs and renovations, keep a list of what you’ve done. Real estate agents will tell their buyers what you paid for the property. If you bought it way under market due to its condition, you’ll need to document why you’re selling for more than what you paid.
  8. Pay for your own property inspection before listing. That way you’ll know what the buyer will see. If there are minor repairs that need to be made, make them. Don’t be surprised when the buyer counters with a new, lower offer because something was discovered you didn’t know about.
  9. Get rid of clutter and make for extra space. A property divided up with cabinets, furniture and other décor will make the home appear smaller.
  10. Change out all the light bulbs with brighter ones. New energy-efficient LED bulbs cost a little more but they reduce heat, the light is more appealing and brightens up the home. For larger rooms and entryways, consider a 100-150 watt equivalent.

3 Steps to Your First Property

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3 steps cropIt’s time to lay out the basic steps to buy your first property. Granted, we’re leaving out the fine print here but this article will explain, simply, the process you can expect when you buy your first property and they are:

Get Educated Prepare yourself and rehearse your strategy over and over again. Where are you going to buy and what type of transaction will it be? Is this for a long term hold? If so, what is the current market rent for the area and will the rent be more than enough to cover the mortgage, taxes, insurance and related expenses. Does the property need some work? If so, how much and will the costs to repair be more than the net profit you expect? Are you buying in an area that is on its way down or are property values at minimum holding steady? Good schools in the area? Knowing as much as you can about your first deal before going in will steady your nerves and mentally prepare for success.

Get Financing In Order Can you afford the purchase? For a long term acquisition you’ll need to obtain conventional financing from a bank or mortgage company. These loans require at least 20 percent down plus an allotment for closing costs. For your first property, lending guidelines won’t allow the rental income from the unit to offset the new mortgage. Once you’ve been a landlord and can document your income and expenses with your federal income tax returns, a lender can then allow rental income to be used on your second investment, but not your first. Speak to a mortgage lender and obtain your preapproval letter knowing how much you can qualify for and much cash you’ll need.
Is this a fix and flip? You may need the services of a private lender as conventional loans typically can’t finance a property in poor condition. A private lender can provide the funds needed to acquire and rehab the unit.

Get Your Team Involved Part of your business plan should include the formation of your team. Your team will be made up of a professional, full time real estate agent, a contractor and a property inspector. Have contacts that can provide you with a title insurance report and to schedule your closings. When you buy your first rental property, working with a team allows you to leverage the talents of others that have spent years perfecting their trade.
Once you’ve identified your first investment property, your agent will write up an offer on a sales contract and present to the seller. That’s your 1-2-3 way to buy your very first property.

Defining Your Goals

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Gal deskGoals keep you on the road. Sure, life allows for a few detours but without clear-cut, attainable goals, both short and long term, you’re simply meandering through life. If you want to secure your financial future and be your own boss investing in real estate is the ideal path. But being your own boss is a double-edged sword. You have the freedom to do what you want to do when you want to do it but that also means you don’t have to do what you don’t feel like doing at the moment.

When you work for someone else you typically have a time to show up for work, take a lunch and a quitting time which allows you to join the rush hour traffic on the way home. You’re in a routine and if you don’t follow that routine you may be gently reminded of your missives. When you work for yourself you establish your own routine and follow it. Get up at the same time of day. Schedule your phone calls. Answer your emails, take someone to lunch. If you sit idly in front of your computer “working” by looking at a list of foreclosed homes for the hundredth time, you’re headed for a lousy ending. By spelling out your goals and tracking them, you’ll find that you’ve not just established a routine but one that will help reach what you want to reach.

Goals must be attainable. They must be real. You can have a goal of flapping your arms and flying over your neighborhood but that’s not going to happen. Your initial goals should be simple and easily tracked. It’s sort of human nature that once a goal is reached it gives you confidence to take on the next, more challenging goal. For example, here are some early goals you should take on:

  • Select an Investment Strategy
  • Form a Team
  • Buy Your First Property
  • Build a Buyers List

Your goals need to be written down and have milestones along the way. Do you need help forming your investment strategy? Well there are four common investment strategies; Flipping, Wholesaling, Owning the Note and Buying and Holding. To learn more about these you can try to create your own Real Estate Investor Strategy Roadmap.  Give yourself a timeframe to pick a strategy and then execute go execute. These are brief descriptions of your strategies to set goals against

  • Flipping: a great investment with high and quick returns
  • Wholesaling: quick way to make profits without fixing or managing tenants
  • Owning the Note: be the bank, not the owner and earn the interest
  • Buying and Holding: long-term growth with appreciation and cash flow

Now you’ve picked a strategy, you’ll need to form your team. When forming a team, list the team members you need and a date you will have them on board. When you build your database of potential buyers/investors, when will you have your first one? Your first five? Don’t worry if you miss a date, no one can see the future but you can channel your activities increasing the likelihood of success.

Some may disagree with hand writing your goals in today’s techno-environment, but there is a cognitive connection when writing your goals down with pen and paper instead of composing your goals in Microsoft Word. Certainly you can lay out your short and long term goals with Word but you should also write them down. There is a connection that reinforces the goal and places your mind in a state that accepts the goal as a simple fact and the only thing missing is your arrival. In fact, each morning as you have your first cup of coffee, open up the list of your handwritten goals. Read them and take them to heart. Put your mind in a state that will remind you where you need to go and how you’re going to get there.

Long term goals should be ones at one year, five and 10 years. Do you want to quit your current job? When? In five years? When do you want to retire? Or do you ever want to retire? How many properties do you want to own and when? If your long term goals are to own real estate and live off the cash flow then it’s a great time to understand about the the rental evolution going on right now. Rental appeal for property is driven largely by affordability and there is a dramatic shift in attitude away from owning almost everything combine this with with very strong rental indicators like falling vacancy rates and thats investor fuel!. Read about the rental evolution it may influence your short and long term goals.

All goals should also be reviewed regularly but without attaining your short term goals you’ll never reach the long ones. Take care of the shorter term goals with an eye to the future. You’ll get there!