Due diligence is the thorough research, confirmation, and evaluation of the relevant data, projections, and representations about a property. Some real estate investors who are just starting out may not have much money or time. However, they will regret not spending a sufficient amount of both on due diligence before committing to buying particular properties. The following is a guest post by Phoenix area entrepreneur Kyle Uchitel. Kyle Uchitel is a co-founder of Avky Inc.
Kyle Uchitel: Investment Plans, Operating Expenses, and Other Factors
These are some of the pre-contract due diligence measures by investors who want to succeed. Depending on the type of property or financing involved, investors may have to take additional or different steps.
- Create a real estate investment plan that is clear about the investor’s goals, the investment strategies that will be used to reach those goals (for example, build a portfolio of five four-family homes over a 10-year period. Then pay off the mortgages on them within 15 years of purchase, etc.), and the strategies for when and how to sell off the properties in the portfolio.
- Perform demographic research on the various areas where the investor expects to find suitable properties. Look at the research should reveal the types of people, homes, businesses, and medical, social, and community facilities that exist in the target areas. This information – which is available on the Internet, in newspapers, and from municipal authorities – will help the investor understand how much ROI to realistically expect of properties in target areas.
- Verify information about the location, income, features, operating expenses, and physical condition of a prospective property; investors can ask to see the rent rolls of a property, can speak with the tenants on the target property and with other residents of the neighborhood, can have their real estate agent ascertain the amount of real estate taxes paid for the preceding year, and can find out whether the tenants or the owner pays for heat, water, and utilities.
Due Diligence Is Self-Protection
Due diligence is not a nuisance or a chore. It is a series of proactive steps that investors take to protect themselves from preventable surprises. The best way for investors to reduce their chance of failure is by investigating the characteristics, past performance, and future potential of a property as thoroughly as possible.
After investors do their pre-contract due diligence they are ready to look at properties and then narrow down their choices. An investor will find a property that meets the investment plan requirements. After some initial negotiation, a seller will accept the investor’s offer of a purchase price. The seller and the investor then sign a contract and anticipate the closing date. But wait – now the post-contract due diligence obligations kick in.
Kyle Uchitel can be reached via Twitter at @kyleuchitel.