| Due diligence is a crucial part of real estate investing. | | | | diligence checklist (more on that in a moment). It is |
| A seller may claim that all units in his building are | | | | just too easy to forget something without one. |
| rented, but your physical inspection could reveal an | | | | What are you looking for? You can see the property |
| empty one. A look at the books could show that his | | | | when you walk through it, and the seller can tell you |
| reported income included the one-time sale of ten | | | | all the financial details. The problem is that sellers may |
| used washing machines. That $900 of extra income, | | | | exaggerate things, fail to mention things or just lie. |
| if not subtracted out, would artificially inflate the | | | | Your goal is to verify everything the seller says |
| value of the property by $11,250, based on a | | | | about the property, and find any potential problems. |
| capitalization rate of .08. | | | | For example, you will want to look at the property |
| Simply put, due diligence is your investigation of the | | | | closely, and have professional inspections done if you |
| details of a potential investment. The point is to | | | | need them. Often sellers will put off necessary |
| avoid unpleasant surprises. You need to know what | | | | repairs prior to selling. This lowers expenses, which |
| the real numbers are and what you are really getting | | | | increases the net income - which makes the property |
| into. This is especially important with income | | | | appear to be worth more (income properties are |
| properties, because their are so many ways that | | | | valued primarily according to the net income they |
| they can "surprise" you. | | | | produce). |
| When investing in real estate you'll often start the | | | | You will of course make a look at the "books" a part |
| due diligence process before you even make an | | | | of the offer. You need to see how that net income |
| offer. You might do your own walk-through | | | | was arrived at. You also are looking to see if the |
| inspection of a property, for example. In addition, | | | | expenses recorded make sense. You may need the |
| your offer will normally have provisions allowing for | | | | help of your accountant. On the other hand, you can |
| you to review (and approve) certain records, and | | | | certainly see that there is a problem if no |
| have certain inspections done before you close on | | | | expenditures are listed for snow-plowing of an |
| the property. | | | | apartment building parking lot, and you are in |
| There is normally a deadline in the offer, by which | | | | Minnesota. |
| time you need to complete your due diligence and | | | | Bottom line? Play it safe - do your homework. You |
| approve of the results. If this deadline passes without | | | | want to look at the physical property, the service |
| your canceling the offer or notifying the seller of | | | | contracts (landscape companies, cable TV, etc.) that |
| problems you have found, the legal presumption is | | | | you may be obligated to, the rental agreements, the |
| that you are satisfied with what you found, and | | | | legal compliance issues, and the statements of |
| committed to close according to the terms of the | | | | income and expenses. Each of these areas has its |
| offer. | | | | own elements, so use a good checklist when doing |
| Due Diligence - What You Are Looking For | | | | your due diligence. |
| Proper due diligence should start with a good due | | | | |