The life of a real estate investor is an exciting one. Every day brings with it the chance for a huge score, along with the risk of a financial disaster. To stack the odds in favor of the former, you need to get your due diligence right. When one oversight is the difference between thousands of dollars in profit and thousands of dollars lost, nothing is more important. Below are 4 Due Diligence Items To Monitor All The Way To Closing that will help you make money on a consistent basis.
Tip 1 Conduct A Thorough Inspection
While many real estate transactions prioritize speed, a thorough inspection is still mandatory to the completion of a profitable transaction. To make the inspection process as efficient as possible, it is important to develop a checklist of things to look for. Simply looking at a property blindly is a recipe for disaster.
Your checklist should begin as soon as you approach the exterior of the property. Make note of any issues you see with the property’s landscaping, driveway, roof, or foundation. These issues are mostly cosmetic and are among the easiest to fix, but it is still important to factor in their cost to your final offer. After you enter the building, take a moment to verify the information provided to you on the listing sheet. If the house is marketed as having three bedrooms, ensure that all three rooms are large enough with enough closet space to realistically work as a bedroom.
With the preliminary stuff out of the way, the real work begins. Major items such as electric and plumbing demand careful inspection, as a problem with either can prove very costly to fix. You can also get more information on the foundation of the home by looking at the basement. Once you have collected all of the data you can on the property, you can start attaching a value to it.
Tip 2 Establish A Reasonable Valuation
The foremost thought in the real estate investor’s mind should never be the property’s current value, but its ultimate value after being flipped minus the purchase price. You need to include the price of the repairs you plan to make in the purchase price of the property in order to determine if you will be able to profit from it. That means knowing what the work will cost before you buy the property. While you will need to estimate this, you must overestimate the cost of the work while underestimating the work’s impact on the eventual selling price. By doing it this way, you are giving yourself plenty of room to profit even if something unexpected happens.
Another key component of that equation is how long you will need to sit on a property. If it will take you years to sell it, it may not be a good investment even if you can get it for a good price today. The local real estate market is the best gauge for how long a property will take to sell. Examining it can also reveal what upgrades the community values, and which ones may not recoup their cost for you.
Tip 3 Know The State Of The Property’s Title
Real estate transactions only make you money if they actually close, so you should avoid working on those that will not if at all possible. The best way to do this is to invest in pulling a title before you purchase the property. While some scoff at the expense without the guarantee of a return, it is far more costly to invest time and money in a deal that you cannot close.
Pulling the title will reveal any unsatisfied mortgages or liens that the seller may not have been upfront about. It is also possible that you were correctly informed of a mortgage’s existence, but provided with inaccurate particulars about it. The cost to resolve these issues must be factored into the purchase price above, if you decide to make an offer at all. Alternatively, a clean title means that you can bid more aggressively, secure in the knowledge that the title will not prove to be a costly headache.
Tip 4 Have Your Finances In Order
Finally, you need to be able to pay for the property you plan to purchase. If you use a hard money lender, you need to ensure that the funds will be available when you try to access them. Otherwise you just look silly and unprofessional. If you plan to use a traditional financing arrangement, you must submit all of the relevant paperwork to the lender in a timely manner. That includes your business license, tax returns, bank statements, and a myriad of other things you could be asked to provide. It is best to keep all of the essentials in one ready to go folder, so you are never scrambling for documentation as the clock ticks.
Should something go awry, most buyers agree to one extension but no more. Therefore, it is vital that you can solve any complications in a timely manner. You do not want to miss out on a good deal because of a hiccup with financing.
To conclude, due diligence is absolutely essential to profiting in the real estate market. You need to have your financing in order, trust the property’s title before you buy it, have a realistic sense of the costs and value of the property, and know how to conduct a property inspection. This is not an exhaustive list, but should be enough to get you on the right track.