The Investing Series (Part 2)
You’ve made the decision to invest in rental property, set some financial goals and and found possible investment opportunities. You know you need to do your homework to lower your risk before you buy, but what and how much do you need to do? How do you perform due diligence on real estate investments?
Due diligence is like detective work for your investment. The key is to uncover any surprises or major problems before you own them. What you need to check into will vary somewhat depending on the type of property, location and how you’ll finance your purchase.
For example, if you’re planning to purchase an existing residential income property, you’ll want to examine the rental and payment history, expense history and current tenants. You need a thorough inspection of the interior and exterior of the property. And you’ll want to make sure that laws or covenants will stand in the way of plans you have for the property, including planned renovations and uses. But the list doesn’t end there.
Below is an example of a checklist for finished lots, though many of the items apply to other types of property as well.
Due Diligence Checklist – Finished Lots
- Investigate the Title/Escrow for the Property
- Review the seller for prior judgments.
- Review the title for liens.
- Investigate escrow accounts for unpaid property taxes.
- Research escrow process for reconveyance of lien holder.
- Research the Plat Map, the CC&Rs, and Property Easements
- Review the original recorded plat map for the property.
- Review any CC & Rs that apply to the property.
- Are there any specific building requirements for the property?
- Review any recorded easements that can affect the property.
- Research setback regulations from the property’s front, side, and rear.
- Plan the positioning (fit) of the building on the property.
- Existing Improvements
- Are there any issues that could impact the property’s eligibility for building permits?
- Speak with city officials, planners, and inspectors about any improvements to the site.
- Do you have construction plans for the lot ready? Is the lot compliant with your jurisdiction’s lot grading standards?
- Does the property have authorized connections to water and sewer infrastructure?
- Are power, gas, cable, and phone infrastructure connections available near the property you are investigating?
- Estimate what your total costs to build on the lot will be.
- Budget for additional costs on the property.
- Calculate budget for site improvements and amenities.
- Estimate overall final costs to calculate price you are willing to pay for the property.
For additional items to investigate for other types of property, try this due diligence checklist from REIbrain.com. You can find other due diligence tips, such as having sewer pipes checked with a camera to uncover hidden and costly plumbing issues, at the website of Williams Kastner.
No matter what type of property you plan to purchase, don’t cut corners on due diligence. While the process may be tedious and somewhat time consuming, it will give you peace of mind and increase your chances of real estate investment success.
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