7 Teeny little details that might wreck your real estate investment

There is a term that is paramount for all buyers to take heed to when acquiring real estate "Caveat Emptor". It is Latin word which means "let the buyer beware".

As investors you of course always want to beware of all elements that will affect today's costs. However, a very important overlooked aspect of due diligence is also considering how a property is positioned within the market that will affect its future costs and values. Sellers will always tell you what they think you want to know; salespeople will tell you what they want you to know. Everything you are being told is geared toward their best interest of selling you. However often it is what they are not revealing that tells the story.  It is up to you the consumer to know what great questions to ask (caveat emptor).

Most all investors at one time or another have been excited about a property. Often when a property sounds great you will be quick to move forward with excitement before the property gets snatched up by the next investor. Your fear of losing out may prompt you to miss some key important diligence steps.

To be a savvy investor you want to have your due diligence criteria on a checklist, so you do not miss anything when making quick decisions. Yes, the best deals do sell quickly so making sure they indeed are great deals you want to be able to quickly and concisely perform your diligence. Most people automatically know to ask questions to clarify a good pro-forma and identify a good basic structure. There are often many overlooked items from your due diligence that you will want to incorporate to make sure you are getting a sustainable investment. A checklist is a great way to do so.

ITEMS TO ADD TO YOUR DUE DILIGENCE CHECKLIST

What is the local real estate market like?

Location is perhaps more important to real estate investments than any other real estate purchases. Population growth, job growth, job diversity is all paramount to knowing you are buying a market poised for more sustainable growth. You can buy a property in any city U.S.A. but if the rental income and continued appreciation does not happen you do not have sustainable investments. So location due diligence should be your very first piece of diligence.

Undervalued or overvalued market:

Perhaps your single most important understanding should be affordability to a market! As an investor you must be buying in undervalued markets to maintain sustainability to your investments. Simple test. Can the median income pay for a home priced at the markets median home value? If so, it is a balanced market. If it takes less than the median income to pay for a median priced home it is an undervalued market and this makes for great investment opportunities. If it takes more, you may want to find a new market.

Is it currently a seller’s market, buyer’s market or balanced market?

This is an often-overlooked identifier. Sellers’ market typically suggests values are topping out and sustainability will be a challenge. I never recommend buying in a seller’s market so knowing the market position is paramount before considering investing. I have seen too many people invest in property that appeared to be a great property only to learn that the market was a seller’s market and within a very short time the market started its devaluation. Over supply of homes meant declining home prices, declining rental rates and the investments go sour very quickly. So please avoid sellers markets.

Zoning changes:

Investing in the path of progress is a strategy that many seasoned investors has been very successful with. Checking zoning changes and things like widening roads is important to know. I know people who have bought homes to learn that a few months later the road in their backyard is becoming an evacuation route and turning into a 4-lane busy road and they conveniently failed to mention this in the disclosure. Perhaps this is why the property was for sale and represented a great buy.

The flip side can also happen. I also know people who have purchased property (by being purposeful) they bought in the path of progress. In a part of town that was expected to expand and grow. This is where everyone wants to live. When you see Home Depots and Targets’ etc. being proposed you want to dig deeper. These companies spend a fortunate researching where the path of progress is. When investing in the path of progress you can grow a portfolio much quicker. 

Is the property on public water and sewer or well and septic system?

This is a very common missed piece of diligence. Often it may even be disclosed on a templated disclosure where they have disclosed that the property is on well and septic. People often are not focused on reading preprinted disclosures with checkboxes, they usually just scan written material and therefore mis these important facts.

I know a number of investors who bought newer homes in newly planned subdivisions. The homes were all on well and septic. To their surprise within a year the city came in to bring in public utilities and the cost to now hook up to city water and sewer costs them thousands of dollars often 10’s of thousands of dollars (Caveat Emptor)

HOA or Condo budgets:

When buying in a condo or HOA (Homeowners Association) you have the right to review the financial stability of the budget. When these budgets are not properly managed or if improvements are slated to happen, there may be assessments coming your way. You always want to make sure you look at the budget and see if the Budget has a reserves account. If you ware buying an investment for a long term hold you want to makes sure you have a financially stable HOA and Condo Association.

Hidden Termite damage:

A simple one but yet often overlooked. A good eye can easily identify current termite activity, but hidden damage requires a trained and experienced eye. Always perform those inspections.

As you can see there are a number of items that you want to include in your everyday due diligence, and these are often overlooked. This may not mean it becomes a bad investment but you will want to know these things to be able to make a safe and sound investment decision.

Happy investing!