5 Basic Due Diligence Steps For Any Prospective Investment
Cleverism says, “Due diligence is generally defined as thorough research before signing a contract, especially one involving a purchase or sale.” There are 5 basic due diligence steps for any prospective investment. You do due diligence before buying a car, a stock, or any major purchase. It should include running the proposed purchase by your spouse. Within a real estate context, due diligence usually refers to a stipulated period within a real estate contract for a buyer to investigate the property in question to ensure that they are satisfied with it before the purchase is finalized.
Before getting to due diligence as part of a contract, There is preliminary due diligence, and can involve property visits, and/or discussions with brokers, and with your advisors, such as your attorney or financial advisor. Proper due diligence beforehand will save you considerable headaches afterwards.
The critical reason due diligence for commercial real estate is so important is to ensure that the buyer knows exactly what he/she is purchasing. The stipulated period usually begins after the prospective purchaser has made an offer, the seller has accepted the offer pending the due diligence period, and the buyer has placed a down payment in an escrow account to be applied towards the purchase and lasts anywhere from 30 days to more than nine months.
It should involve physical inspections of the real estate, an assessment of related-environmental conditions, a review of the title, zoning requirements, contracts, leases, and surveys, partially through a review of documents the seller provides. These should include copies of:
- The deed;
- Information on current tenants;
- Existing, actual uses of the property;
- Zoning documents indicating allowable uses of the property;
- Any seller inspections;
- Land and improvement surveys;
- Current title insurance;
- Other insurance;
- Any notice of pending legal and/or government action;
- Environmental assessments;
- Any special assessments or taxes;
- Copies of any property bills;
- Any service contracts;
- All construction plans in the seller’s possession; and
- Warranties for any construction.
Besides the paperwork, you should have looked at the 5 basic due diligence steps for any prospective investment:
- Market comps. Everything in real estate is based on comparable sales. There are times when you will get a deal that on the surface looks too good to be true. Instead of overreacting or getting too excited, you should let the data act as a guide. Look at the sales in the market over the past 90 days. The closer the sales, the more accurate they will be. However, proximity isn’t the only item to look for. You need to account for the size, style, bedroom count, and age of the comparable against the subject.
- Value potential. The goal of any investment is to realize a profit. You are not looking to add properties to your portfolio, but to make money on them. Regardless of the purchase price, or the perceived discount, you need to look for ways to add value. Sometimes you will walk into a property, and this will be a slam dunk. The kitchen is outdated, the quality is poor, and the layout can be improved. Other times you need to think outside the box and be a little creative in your workup. With any improvements you have in mind, you need to attach a correlating cost of repairs. Changing everything on a property sounds great, but if the expenses outweigh the return, the property doesn’t make too much sense. This is generally where new investors run into trouble. They underestimate just how much updates and upgrades cost, or they suppress these items because they want to get the property and try to make it work. By doing this, all you are doing is delaying the inevitable and getting involved in a property that is not worth the time.
- After repair value. All improvements are not created equally. Improving a property in a desolate market will not have the same impact as it would in a thriving area. You won’t realize a profit until you sell the property. This is where your exit strategy comes in. If your estimated value is not in line with the market, your profit margin will shrink, or be eliminated if you miss your mark badly enough.
- Seller motivation. A seller that is motivated by foreclosure or relocation will be more apt to negotiate than one who doesn’t have to move. This must be taken into account when you present your offer, and with every subsequent counter offer. You also need to gauge the competition for the property. If the property is in high demand, you should expect to compete with several offers. If you don’t adjust your offer to the market, you will have no chance of getting the property.
- Sales problems/timeline. Once you think you know the property, the market, and the seller, you need to consider any items you may have missed. Always start with an evaluation of the town. Are there any risks from legislation that would eliminate rental increases. Are there any problems with the seller. Bank owned properties present different concerns than transactions done by a traditional seller. Finally, you need to consider the timeline of the sale. A sale done in 15 days is much different than one done in 60. Markets and economic conditions can change quite a bit over the course of two months.
FREE information on How to sell your house fast
Styl Properties, Inc. is here to help homeowners out of any distressed situation.
As investors, we are in business to make a modest profit on any deal. However, we can help homeowners out of just about any situation, no matter what! There are no fees, upfront costs, commissions, or anything else. We offer the simple truth about your home and how we can help you sell it fast.
Give us a ring. We would love to help you understand the process and to answer all of your questions. You can reach us at 402 999.0577.
Photo by Niels Smeets on Unsplash