REI Classroom host, David Pelligrinelli explains the due diligence that needs to happen for each deal.
Learn more about due diligence regarding the seller, the property, and the neighborhood and how it can save you money and earn a higher profit.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Dave: Hi. This is Dave Pelligrinelli from AFX Research. Welcome to another edition of the REI Classroom at FlipNerd. We’ll get started very quickly right after this quick message.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.
Dave: Okay, we’re back. This is Dave again, from AFX. Today, we’re going to talk about due diligence on your real estate deals. Obviously, if you’re looking at a property, you’re looking at a transaction, you’re going to look at the numbers, what the potential upside is, what the risks are, what the profit might be for you as an investor. But there are some details behind the scenes that you also may want to look at, and that’s where due diligence comes in.
Some of it may help you get the best price on the property, some of it may help you reduce risk and mitigate the risk, and some of it might help you get a higher price when you sell it. Here are a few examples. Performing some due diligence on your seller might help you discover why they’re wanting to sell. Is there a financial distress? Is there a legal issue coming up? Are they involved in a lawsuit? Is there a divorce? Is there a relocation?
Doing some basic due diligence is something that can help you find why that seller is a don’t-wanter, why they’re somebody who wants to get off that property. It may help you structure the deal. Maybe it’s something where they don’t need the money up front, so you can maybe get some seller financing. Maybe it’s something where they need money just to relocate, and that might be something you can structure into your deal.
Doing that due diligence is something you can do a majority of yourself. There are a lot of online resources for courthouse records, are there legal problems, finding out if they have other addresses. Maybe they own another property already. Maybe they’ve purchased their other home already. Maybe they’re involved with a cosign on another mortgage that’s in distress. Those are areas of due diligence you might be able to do yourself.
If it’s a larger deal, maybe on a commercial property, you may want to have a private investigator do some due diligence on that person. So that can help you structure the purchase for a lower price. Structuring the sale for the highest return, you might want to look at things like comps, look at things like neighborhood trends. Are there companies moving into the area?
They’re probably mostly things you know about, in terms of why you want that property in the first place and why you’re in that neighborhood. But there may be some underlying areas, maybe finding out the properties that sold quickly in that neighborhood. What was the floor plan of those properties? Was it different from yours? Did it have an extra bedroom? Is there anything in the zoning records for permits?
Maybe you’re finding that a lot of the properties in that area are getting new roofs in the last 12 to 18 months. That might indicate that it’s time for new roofs in that area. The most important area of due diligence is the title research, making sure that the title doesn’t have any clouds, which are going to come back later and haunt you.
They could be from prior owners. They could be from 50 years ago. If there are liens, if there are judgments, if there are encumbrances, even things like easements on a property you might want to know about to know if there’s a right of way for a driveway going through or for a utility company. Things like mineral rights and oil rights on a property can accrue to future owners. Or they may have been removed from that property in the past and you probably want to know about that as an investor.
So performing that due diligence or having a qualified professional do that for you might take some time, might take some expense. But just remember, it can help you get a lower price to begin with. It can get you a higher price when you sell and eliminate much of the risk during the time that you’re doing that deal.
We’re glad you’re able to watch this edition of the REI Classroom. This is Dave at AFX Research. Our website is titlesearch.com. We’ll see you on the next episode.
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