Top 10 Due Diligence Tips for
Buying Real Estate Investment Property
During an Interview with Henry Ford the reporter asked Mr. Ford, “How is it that you have become so successful?” to which Mr. Ford replied. “By making good decisions”. After thinking about his answer for a moment the reporter then asked, “How do you make good decisions?” to which Mr. Ford answered, “By having experience”. Again after some thought the reporter asked, “How did you get experience?” Mr. Henry Ford looked directly at the reporter and responded, “By making bad decisions.”
At Belaire Property Management we have been property managers since 2001 and have seen a lot over the years from properties we have bought, and from properties our clients have bought. One thing for sure is that each property, each deal, and each transaction is completely different and that no two properties are the same. We have made some huge mistakes, which have taught us a lot, hence the bad decisions. Probably the biggest mistake we ever made was buying a vacant bank-owned property four-plex with the utilities off and we were never able to check the furnaces. You guessed it. The heating system was shot and cost us in the neighborhood of $24k to resolve the issue, hence the experience.
We have also have had some pleasant surprises in our property adventures. One property we purchased had gross ugly carpeting that all had to be torn out. Low and behold, for some reason the previous owner thought it would be a good idea to cover up gorgeous hardwood floors with rugs. That saved us a boatload of cash and in the end gave us an even better product in our inventory to glean a higher rent. Good decision!
So if you have never bought a property before, or even if you have accumulated a healthy portfolio to provide you wealth for you and your family what should you be looking for when purchasing a property? Well, there is no one-size-fits-all to always get a deal with a positive outcome. If I had to sum it up, for every 100 properties you look at, you may see 10 that fit your criteria, and from those maybe three might be in the wheelhouse of being a good deal. From those three that you would place offers on, one or two may never make it to the closing table at all. So the rule of thumb may be closer to 1 out of 100 properties you look at may be a diamond in the rough. So you have to kiss a lot of frogs to find that prince.
I do not write all this to discourage you. On the contrary, this is to encourage you! Finding a deal is a numbers game. The more frogs you kiss, the closer you are to finding a prince. So get out there and get busy. You will find your deal that ticks all of the boxes on your criteria. But you need to be looking for it to find it. “Let me give you this perfect deal that will make you a boat load of cash”, said no one ever!
So are there guidelines to help you get through the jungle of deals out there? What are some of the keys factors we look at to avoid wasting our precious time when we are on the hunt for deals? I’m sure there are all kinds of ways to answer these questions that will far exceed what we will be sharing with you shortly for due diligence. You may never find out “everything” you need to know about a property, but the following list will definitely help to save you time and money to make “better decisions”.
So lets review the top 10 due diligence tips and tactics to get you into your first property, or help you continue to grow your real estate inventory empire. The following are some good places to start your Easter Egg Hunt and I would suggest that you visit each one of these BEFORE actually showing up and looking at the property. The reason I suggest this is because it will give you a clearer complexion of the property before you become enamored with the paint colors, or details and finishes of the property. I have seen this happen way too many times. A prospective buyer visits the property, does a quick balance sheet then “falls in love” with the deal because they love the hardwood floors, or the Victorian millwork, or this or that. Then tunnel vision sets in and they start to manipulate that spreadsheet to “make” the deal work and leave some pretty important factors off the table while considering if this is a deal, or not a deal. Let’s get started.
Top 10 Due Diligence for Buying Real Estate Investment Property
- Building Department
- Municipalities (Water, Sewerage, Utilities)
- Board of Health
- Assessor’s Office/Land Records
- City Surveyor Office
- Fire Department
- Police Department
- Google Maps
- Realtor.com
- The Neighbors
Let’s take these one at a time to see what factors may influence your buying decisions. Again, I cannot stress this enough. It would be a better idea to visit city hall and consider these factors BEFORE seeing the property. This will give you a better idea of what type of deal you are looking at before you actually see the physical property. Then the whole process of seeing the property becomes more like connecting the dots from what you have found at city hall to the physical address.
#1. Building Department
So many times I have started my journey of buying a property here. Usually I do this after a drive by but before I even seeing the inside of the building for the first time. Here is where you can see the whole complexion of the property, warts and all. You would be surprised at how helpful the Building Inspector will be if you walk into their office seeking their assistance. They are public servants after all and have the best interest of the general public at heart. Their job is to keep the people in the buildings safe.
So what is the purpose of this social visit with the Building Inspector? Well it may be a little known fact that each property in the city has a folder open to the public where you may view all reports, inspections, letters to the owners and most important; a record of all permits ever pulled for the property. This is a jackpot of data where you can find out everything that was ever done where a permit was pulled, or, where one was not! Now, when you go back to visit the property and see that brand new kitchen remodel with new lighting fixtures, plugs, and new appliances like a built-in microwave or dishwasher, you will be able to verify that all of the work was done with a permit and signed off by the building inspector.
The same goes for that new bathroom, plumbing, electrical plugs, windows, and all types of other renovation projects that will make you get emotionally involved with the property and possibly overlook the obvious; no pulled permits. Also, you could end up holding the bag should there be an insurance claim at the property for shoddy workmanship. Let’s say, “Chuck in a truck did some electrical work in the kitchen”. Now later down the road, that plug he installed may have caught fire because Chuck never tested the circuit load. Your insurance company’s first stop will be to the building department to make sure that work was performed by a licensed, insured electrician; which Chuck, was not. Your property may have some substantial property damages, but one thing it will not have is an insurance claim check to cover the repairs, because you guessed it, no pulled permit.
This is a really great idea to check the building department first. You may find that everything in the folder is in order; permits match the work that was performed. Heck, you may even find the work is under some sort of warranty that makes the deal even better. Either way, your job is to connect the dots from what is in property folder to what you will see at the property.
#2. Municipalities (Water, Sewerage, Utilities)
The same goes here for the municipalities. Are the water bills paid up current? Are there any outstanding work orders or issues the city has with the property? When was the last time the water meter was changed? This is another great opportunity to find out more about the property then you are going to see on the listing sheet.
You can also find out if there is any other abnormal water usage at the property. This might be an indication of having to change out some toilets or other fixtures that are wasting water and energy. These can be good leverage points to possibly renegotiate the terms or get an allowance at the closing table to correct the issues. The time you will spend here for the savings you will receive is just a drop in the bucket.
#3. Board of Health
I cannot state enough how important this step is. Just like at the building department, there is a public file on the property that the Board of Health Commissioner will be happy to share with you. They know that you as a property buyer are going to come into their town and make things better, making their job easier. Right? Reviewing the folder is valuable enough but actually hearing from the inspector what the problem was and how it was resolved can be enlightening. I have had the opportunity to find out so much more about the property by listening to the stories about the property directly from the inspector with first hand knowledge of the property conditions. Either way, you cannot lose. You do not want the first time you meet the Commissioner when they are on your property writing up code violations from a complaint. Even worse. What if you do find violations? You are going to be responsible to bring the property into compliance once it is your name on the deed. These problems do not go away on the transfer of ownership. They follow the sale with all of the deadlines and compliance issues to the new owner.
I have seen property folders that go back for decades that have revealed all kinds of violations including mold, water damages, unsafe exterior staircases, and like types of property issues. Now that you are armed with the history of the property, you can connect the dots to the Building Inspection folder. Did that shaky staircase you saw in the Board of Health folder get replaced with the new one you saw at the property by a licensed insured contractor, and did they pull a permit? Did all of those other violations get taken care of with permits and licensed contractors too? I think you are starting to see the bigger picture.
#4. Assessor’s Office/Land Records
As you would imagine, the Assessor’s office also will be a wealth of knowledge for you before you make an offer to purchase. This will be an opportunity to verify the tax information you saw on the MLS Property Proforma supplied to you by the Realtor. You also need to see the last sale or purchase price that tax value was assessed at. The price and taxes the current owner is paying may be based on a lower sales price than you are going to be paying. So, even though you were able to verify the previous sales price and the tax rate the previous owner paid; you should be able to figure out what your new taxes will be based on the new sales price. The Assessor Office can help you with the mill rate to determine your new tax bill to use in your profit and loss spreadsheet for the building. This will give you a better idea of where you stand on your bottom line.
You will also be able to find out if the taxes are current. Sure, this will usually be addressed at the closing table from the proceeds of the sale. But what if the seller is upside down, meaning they owe more than the proceeds of the sale. Well, just like the other sections preceding this one regarding responsibility and compliance, you will be on the hook to bring the taxes up to date.
Land records web sites are an invaluable resource in your property search investigation. We once uncovered a property in pre-foreclosure that had almost $135K in mechanics liens, municipality liens, credit card debit liens, all on the property we were going to buy. We were not going to be able to close the deal without settling the debt. We did end up buying that property and because we knew about the liens, we were able to negotiate some of them down to be paid at the closing table and were also able to further renegotiate the purchase price offer. In the end, we helped the town, the contractors, the credit card companies, and the seller by getting them out from under a mountain of debt and repairing their credit.
#5. City Surveyor Office
The Surveyor’s Office will also be helpful in establishing the boundaries of the property. Boundaries not just on the map, but from neighbors, possible easements, fences over the property line, swimming pools, or deck add-ons that encroach on your property. This can work both ways for you. You may find that the property has additional acreage that may allow you to split the lot or in some other way repurpose the property as a hidden gem adding value to the deal. Or, you may find that that new addition off the back of the property was built with a permit by a licensed contractor, but no one ever checked with a survey and it has to come down. Talk about coloring outside of the lines with some pretty expensive crayons.
This is also the fastest way to find out who owns the properties next to you. Most cities and towns have upgraded to online systems so you can do some of the work without leaving the comfort of your chair. You can also use the satellite view, which might give you a better idea of where the property lines are in accord with the visual boundaries of the property. All of this information should give you some ideas as to what you might try to do with the property. If it is all straightforward information, it doesn’t hurt to double check the property before writing a check for the property. If you do see something that raises a question, then there should be enough time in your due diligence window to hire a professional surveyor to mark off the property. However, if your investigation discovers some unknown fact that may influence your decision to buy the property, then this was time well spent.
Right here on our own street where we live we had an entertaining event unfold before us. We have two neighbors across the street that own dogs. Well as you can imagine as the dogs did their business, one of the homeowners made it their business to get in the other owner’s face about it because they did not like the dog. They began to antagonize them with taunts and complaints. Finally, the situation reached a head and the neighbor being attacked decided to put up a fence to end the issue once and for all. When the surveyor came out and tagged the property boundaries for the fence things got really interesting. Apparently when the builder landscaped the lots prior to the sale with retaining walls, bark mulch, trees, and other shrubs and rocks that suggested where one property ended and the other began.
What the survey uncovered was that the actual property line shifted almost 15 feet into the complaining neighbor’s yard all the way up to the edge of their driveway. Not only was it verified that all this time the accused dog was actually staying in his own yard, but the property line had shifted so severely that the complaining neighbor had to remove a small playground and wood pile that was on the other property owner’s land. The new boundary also determined that much of the landscaping that the complaining neighbor assumed was theirs had just become the property of their neighbor. Armed with this information from a professional survey, the accused neighbor decided not to build a fence, just enforce the boundary.
#6. Fire Department
In some parts of the country, especially New England, it was a common practice to bury oil supply tanks under ground. After decades of time, renovations and service upgrades, there may be no remaining evidence on site that there ever was an oil tank hidden underground. This is where your local Fire Department comes in handy. It is a little known fact that Fire Departments actually do keep records on underground oil tanks within their jurisdiction. Knowing the tank is there is only half the issue. If the tank ever failed down the road and began to leak, you could be looking at tens of thousands of dollars to clean up a Hazmat spill. All of this the Fire Department could have told you up front if you had only asked.
On the lighter side of the Fire Department, it would not be a bad idea to talk to the Lieutenant or Chief about the property. Are there any violations to Fire Code that they know about that you should be made aware of? Building Code, Health Code, Energy Code, and even Fire Code changes from time to time.
I have seen multi-family properties that pass the inspection for fire, smoke, and CO detector compliance certificates to meet the minimum standards to close the purchase and sale, only to be tagged a few months later for a 110 Building Code Inspection that did not pass muster. The result was the new owner was broadsided with a compliance price tag that was in the $13K price range. All of this was for a property that had passed compliance for the closing, but not for occupancy to let anyone live there.
#7. Police Department
You have heard it said a thousand times in real estate. The three most important factors to buying the right property are “Location, Location, Location.” You can change the property, but you can’t change the neighborhood. Over the years I have seen so many would be buyers overlook the neighborhood because they fall in love with the features of the property, or even worse, the spreadsheet. Let the truth be told. You cannot change the location of the property. If your hidden gem is nestled in a high crime ridden area, there is no bucket of paint or flower boxes that is going to change where the property is. We made this mistake early on in our acquisition history. We bought a three family property in what seemed to be a quiet neighborhood (by day at least). The property showed nicely, and had some quality features from a recent renovation that enticed us to make an offer. Heck, we even bought it for a discounted price and I remember how happy we were after the closing thinking we had negotiated such a great purchase price. How little did we know?
Soon after that, we started to realize we might have made a mistake. For some reason, when we started to rent out the vacant unit, we were having a lot of “no shows” for viewings. We shrugged it off in the beginning. Not too long after that we were working late at the property getting the unit ready for showings and we started to notice the neighborhood was, well to put it nicely, not so nice at night. We slowly became aware that the adjacent properties had a lot of drug traffic and frequent stops visiting the apartments next door. It wasn’t long before we figured out we bought a property that was in the middle of a drug-infested war zone. It took us about two years to unload that property, at a discount, to the next buyer.
We learned out lesson. Years after this purchase we were considering an out-of-state apartment complex of some 100+ units. This time we got smart. We called the local police department with the address and told the dispatcher we were considering moving into the complex with our two younger boys. We asked the $100k dollar question, “Do you have many calls at that property address?” We then listened to a myriad of stories of crime, thefts, robberies, break-ins and other incidents that centered on this address. The dispatcher divulged to us that there were 351 calls to the police from this address. I guess they got 2 weeks off of good behavior for the Holidays.
The final story they shared with us was that when the Fire Commissioner’s SUV was stolen, this is the address where they found the abandoned vehicle. The police department was very helpful in helping us avoid a major mistake. These are things you will not be told from the person trying to sell the property. Why would they? They are looking for the bigger fool to get them out from under the mistake they made by not checking out the property before they bought it.
You can also do a quick search on line for crime reports in the city you are looking into. There are also city-data web sites where you can find out about crime activity, the types of crimes, and how this area compares to the national, state, or local averages. Again, this is a free phone call that can save you a fortune from buying the wrong property.
#8. Google Maps
This resource is a bit more fun to delve into. If you launch Google Maps on your smart device, laptop, or desktop, you can quickly see the surrounding area without leaving the comfort of your office chair. If you are looking through the satellite view you can quickly locate critical amenities that may make your potential property more appealing to future renters or buyers. You are looking for what the surrounding neighborhoods look like. Is the property near commuter highways, public transportation, shopping centers, restaurants, or other types of service centers your average renter or buyer would want in their neighborhood. It is nice to have privacy, but do you really want to drive an hour round trip at night to pick up a gallon of milk?
There are tons of other features and filters in Google Maps too. You can get right down to the street view in most cases and do a virtual drive around the block. You can see what the houses look like in the surrounding area to ensure you are not buying in a war zone. There are also buttons and filters to locate schools, shopping, business centers, and all kinds of other local facilities that may be attractive to folks moving into the area.
#9. Realtor.com
If you are a serious Real Estate Professional then you probably have a Realtor on your team feeding you deals that meet your criteria. This is an absolutely great strategy to get a leg up on your completion to find the deals first and get your offer in fast. But do not overlook the free web site at Realtor.com. Your can use this free site to speculate on neighborhoods, do your own market research and later when you do find a likely prospect you want to buy, find out even more about your target property.
Most Realtors have a specific MLS portal they use through the brokerage office they work from. The information is not entirely the same here. We have one Realtor whose listings only give us basic information. So we need to be more hands on with them to engage in asking more questions about the property. This is ok. But sometimes we need answers quicker than a busy broker can call us back.
On the web site Realtor.Com we can quickly look at comparable property in like neighborhoods, save listings we like that we can later give to our Realtor to set up showings, and find out a lot more about the property than might be in the limited MLS portal. One of the details I like to know is the buying and selling history of the property. Realtor.com will list at the bottom of the page how many days this property has been on the market and what the previous asking prices were. This can reveal some of the underlying story to the listing that may not be so obvious if you do not know what to look for.
Recently, our son and future wife were looking for a property in a nice suburban part of the town where they both work. We found online a reasonably priced property that had an enormous back yard, a great front yard, and was newly renovated with lots of upgrades and features. We could not figure out why it had been on the market so long or had so many price reductions over the past nine months it was on the market. We were so close to putting in an offer then decided to dig a little deeper on Realtor.com. We found the property had been on the market for much longer than its comps and saw the price kept dropping. The listing said it was a three-bedroom house so something just was not adding up. After closer inspection on the web page and the photos we found the problem.
Although the property was listed as a three-bedroom, the photos revealed that it was actually only a two-bedroom home where you had to walk through the second bedroom to get to the third. Digging deeper we found that the configuration of the layout did not lend it self to a simple workaround fix and it would actually cost a lot of money to try to turn the property into a true three-bedroom. If we had we not seen the days on market or the declining price reductions on Realtor.com, we probably would have wasted considerable time and resources to drive 6 hours round trip to see the home. I am happy to say that the kids ended up buying new construction from a reputable builder.
#10. The Neighbors
Even harder than changing the neighborhood, is changing the neighbors. Make it a point on your due diligence list to knock on a few doors while you are considering the purchase of the property. The neighbors would probably like to know who is moving in next door too as they have a vested interest in having nice neighbors. Or so one would think.
It would be a nice gesture for you to introduce yourself to the neighbor as a potential buyer and try to engage in a conversation to find out more about the property, the neighborhood, and the sellers. It is always nice to know the little things that you might not think to ask. Such as when is trash day? Are there parking restrictions you should know about? Who are the nice people on the street, and who is not so much. You can also find out about things like frequent traffic to buildings, screaming neighbors, if some one has a barking dog all night, or frequent parties from a college town population.
If you are considering buying a rental property it is always a great idea to leave your contact info with the neighbors to keep an eye on the property while you are not there. If it works out nicely with a neighbor you can trust, it would also be a great idea to offer some type of referral bonus of say $100 if they help you fill the vacancies as they arise. This could help you to build a waiting list of pre-qualified renters as nice families and also help to build a rental community where the neighbors actually get along with one another too. In essence your neighbor will be getting paid to pick who they want living next door. They probably won’t refer someone to you who is going to be a problem for them. $100 referral bonus for them, for a rental community for you were everyone gets along and has barbecues together on weekends = priceless.
A Great Start
So there are my tips on starting due diligence for the purchase of a property whether it be your first home, a flip, or even a buy and hold rental community. As we mentioned back in the beginning, being able to make “good decisions” takes experience. We hope you will find these tips useful in your search for the right property to suit your buying criteria. I am sure you will be able to add to this list over time and make it your own as you add more “experience” to your journey as a real estate investor.
Do you have any other ideas on this topic you could share to help our online community? Please chime in to share a comment or review. All feedback is welcomed!
Warmest regards,
Brian Lucier
Belaire Property Management
Regional Property Manager
(978) 448-0669 office
info@belaire.co
www.belaire.co
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