7 Items Missing From Your Real Estate Investing Due Diligence Checklist
There is a saying when buying real estate "Caveat Emptor". It is Latin and means "let the buyer beware". As investors you always want to beware of all elements that will affect today's costs and value as well as 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 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 create a good pro-forma and identify a good basic structure but there are often those missed pieces of diligence you want to make sure you get identified and 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 are all paramount to knowing you are buying a market poised for sustainable growth.
Undervalued or overvalued market:
My single most important favorite! As an investor you must be buying in undervalued markets to maintain sustainability to your investments. Simple test. Can the median income pay for the median home price home? If so it is balanced. If it takes less than the median income to pay for a median priced home it is an underplayed market and you want to invest here. If it takes more you of course need to find a new market.
Is it currently a seller’s market, buyer’s market or balanced:
This is an often overlooked identifier. Sellers’ market typically suggests values are topping out and sustainability may be a challenge.
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.
Is the house 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 are checked as well and septic but people are not focused on reading preprinted disclosures with checkboxes. They tend to focus on handwritten or typed in comments.
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.
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. They may not mean it becomes a bad investment but you will need to know these things to be able to make a safe and sound investment decision.