The lure of profit can be quite seductive for real estate investors, and it’s all too easy to look at a low-priced property and become emotionally invested in it. Many beginner investors become so focused on the idea that they might miss out on something that could be a brilliant investment opportunity that they will overlook some serious flaws in the property.
Every real estate investor should have a due diligence checklist that they work through before they make a purchase. If anything isn’t right, then they should be disciplined enough to walk away—or, at the very least, seek a second opinion and significantly lower their offer.
The checklist should include:
- The value of the market in that area. Can the median income in the area pay for the median valued home? If yes, that’s not a bad thing. If the median income can afford a very good home for the area, then the market is under-valued and it’s a great opportunity. If housing is expensive, walk away.
- The health of the market. Are there lots of job opportunities? Is the population growing? These things will give you an idea of the area’s growth potential.
- Planning and zoning applications. Look at current zoning changes, and think about how they are going to affect the area. If someone is selling a property at a really low price, they could be hiding something—such as the knowledge that the local authority will be demolishing the block across the street, so for the next several months, the master bedroom will look out over a construction site.
- Condo budgets. If the property is part of a condo or home owners association, be sure to check their financial stability. If their own budgets are poorly managed, or if the organizations are planning improvements, then there could be some bills coming the way of current residents.
- A full survey. Make sure your surveyor checks the property fully, looking not just for things like rising damp, but also subsidence and termite damage. These things are often overlooked, and they can be incredibly expensive to repair.
- A good pro-forma. Your pro-forma should include far more than just the price and interest rates in the financing section. Ideally, it should spell out the down payment, the loan fees and closing costs, and the total cash invested. If you’re working out the operating expenses and income, make sure that you take into account every fee you can think of—including those small ones like snow removal/landscape maintenance. There’s a lot more that goes into maintaining a property than you might think.
- Clean title report. This is mandatory, and if missed, can really cause some headaches for you. Make sure that the title report comes back free of liens or any other issues.
- Property Inspection. Before pulling the trigger on anything, as a last step, I have my inspector go out and perform a “quick run-through” of the property, looking for anything that would be an issue. He knows not to worry about little things, like he would on a typical inspection. This may take him as little as an hour, and because of our agreement, it’s usually very inexpensive ($100-$200 depending on house size). Cheap insurance….
A bad property can become a noose around your neck. If prices fall, and you end up stuck with an undesirable property that is over-priced for the neighborhood, then you could be faced with the choice of selling at a loss or eating expensive mortgage fees for many years. Some careful due diligence, and a ruthless attitude and willingness to say “no” will protect your financial future