8 Steps to Successful Due Diligence by Investors When Buying Real Estate...

Due to poor economic conditions in the US, the real estate market is a strong buyers’ market. You or someone you know may be looking to buy real estate property either for primary residence or for investment.

This is the best time to buy real estate but you must exercise caution during this process. If you conduct proper due diligence, then you can save a lot of money and trouble for yourself.

An experienced realtor may help you with such due diligence but if you are an investor purchasing the property directly from the homeowner, then the information provided here will help you conduct a thorough due diligence.

The most important aspect of home buying is not being emotionally attached to a property before purchasing it. Be prepared to walk away from a property if you determine that there are issues that require a lot of time and money to deal with.

Here are eight steps to successful due diligence:

1. Property Condition Report: Ask for a property condition report. If there are irreversible damages due to mold or termites, then it is best to stay away from that property. Depending on where you live, if there are termite damages, it is a good idea to look elsewhere. Termites are not a problem in colder regions but in warmer regions these can cause a lot of damage to the house and the foundation.

Mold and termite damages can be fixed and but it is not worth the risk and effort. Since there are plenty of properties available, it is much easier to find properties that do not have such issues.

2. Property Inspection: Ensure that the property inspection is done from a certified property inspector. Compare rates from various property inspectors and also check for references. It is a good idea to ask family, friends or coworkers if they know a good property inspector.

Remember to enlist services from a certified property inspector only.

3. Homeowners / Flood Insurance: Check on the availability and cost of homeowner’s insurance. Cost is one major factor but there are some situations, where the property may not qualify for insurance! If a property does not qualify for insurance, then avoid this property. Look on the map to determine if flood insurance is required.

If the property is very close to rivers, lakes or an ocean, then it may be a good idea to obtain flood insurance. In addition, ask around in the neighborhood to see if flood insurance is needed or not.

4. Property Code and Zoning Violations: If there are any code violations or non-compliance to the zoning laws, then determine what needs to be done to fix it. Sometimes a small penalty and some remodeling to the property can make the property compliant to the building codes and zoning laws; in other cases these penalties and money required to remodel the property to make it compliant maybe very high.

You can request the seller to make the property compliant before the purchase. This request can be noted in the offer to purchase and/or addendum documents. If the seller does not agree, then it is best to just walk away from this property.

5. Title Issues: Check for complete ownership of the property. You may be dealing with one person while visiting the property and negotiating the price but while reviewing the title you realize that there are multiple owners. Here, you have to name all the owners in the offer to purchase and also get consent (signatures) from all of them to accept your offer.

Check for liens on the title. You can request the seller to pay for the title insurance in the offer. Enlisting services of a reputed title company can save you a lot of trouble from title issues.

6. Home Warranty: Request for a one-year warranty on the home from your seller. Such requests can be made in the offer to purchase. Usually it is $500 to $1000 for one year. Most home warranties do not cover roof damages but it covers plumbing and a few other major issues that can cost a fortune if repaired at your own expenses.

After you obtain the home warranty, check for all these issues in the first year and report it promptly and get them fixed while the warranty is still active.

7. Hazardous Wastes on Premises: If the property used to be a factory whose waste materials were hazardous, then check for that. These wastes can be cleaned from the property.

You can request the seller to remove all such wastes at his/her cost. This request can be mentioned in the offer to purchase and/or the addendum.

8. Property taxes: Determine the yearly property taxes. All the property taxes are prorated. Usually the offer to purchase includes verbiage to prorate the taxes i.e., the seller to pay the taxes for the period he/she owned the property and then onwards the new owner pays the taxes.

If the offer to purchase document does not contain the verbiage to prorate the taxes, then ensure that it is included. If you purchase the property for less than the city assessment, then you can visit the county office with the title and sale price to request a reduction in taxes - this can save you a lot of money in taxes.

Due diligence is a responsibility of the investor.

This is the key to purchasing real estate without running into major issues. Enlisting services from an experienced certified property inspector and title company can reduce your work drastically and you can successfully purchase real estate.