The professional real estate investor determines their profit on a deal at the moment the property is purchased. This is the only time that the investor has control over the events that will play out over the process of processing the deal for return on investment.
There are 4 key areas of due diligence which when researched and analyzed, will guide the investor to taking the correct actions to maximize ROI.
1. Market. The records available for determining market value are available to any interested party. MLS comps, tax assessors data, prior listings, and square footage information is raw data which can be analyzed into valuable intel. However, the investor can take this deeper by projecting different scenarios for their deal. What if a third bathroom is added? How would a property with a finished basement fit into the market place? Also, compare your hypothetical property with the current inventory. If the existing market all has homes missing a feature desire by buyers, adding this feature could add a premium even if it would be an outlier for historical comps.
2. Title. Prior to calculating an offer or purchase price, the liabilities for title defects and closing costs need to be factored in. Mortgages and liens need to be identified of course. However, judgments against the seller, and even prior owners in the chain of title can accrue to the current property owner. The county clerk land records will not contain all of the records which could become a liability for the buyer. Civil court records, probate docket, Secretary of State, and even Federal environment liens from PACER have the potential to be unwelcome surprises to the deal P&L. A DIY title search is possible, but a professional abstract for $100 – $200 is an option worth considering.
3. Condition. Costly surprises are not rare in repairing or rehabbing. There are two types of expenses, required repairs such as broken AC compressor, or value upgrades such as removing a dysfunctional wall. Being aware of all of this is a balance of spending money of a complete inspection, or a vigilant walk through. On properties where access is not available, such as foreclosure and default auctions, the process is trickier. There are due diligence companies which specialize in obtaining information on the major risks such as water damage, mechanicals, mold and hostile occupant, even when a property has no physical access.
4. Seller. The “condition”, needs, and motivation of the seller are immensely valuable to creating a purchase arrangement. An intelligent offer will consider the urgency of the owners need to sell, the reason for marketing the property, the sellers perception of value, and use of funds from the sale. Information which can go into this understanding can include the original purchase price, mortgage amounts, duration of ownership, whether the seller has purchased another property, their employment, changes in family structure, existence of distant connections (out of state job, relatives, background). Other factors would be the demeanor and personality of the owner, and involvement in the community. Some sellers are easier to deal with if you can create some common ground such as a civic organization or mutual acquaintance. In some cases the sellers interests in moving are embarrassing or personal, and it is best to remain an arms length. Either way being aware of the sellers posture will help guide the conversation to the best result for the investor.
A methodical approach to gathering and analyzing this information takes slightly more patience and time. Good pre-purchase intel can make the difference of many thousands of dollars on profit, which can often double the effective net ROI on your deals.
Written by: Dave Pelligrinelli