Due Diligence is the key to success in Real Estate investing because it’s what’s going to mean the difference between you purchasing a great property that produces a fantastic Return on Investment, or a property that ends up becoming a major headache for you.
If you’re unfamiliar with the term “due diligence”, this refers to taking action, reviewing documents, walking the property, performing calculations and learning everything that you can about a property before you purchase it.
Sadly, many investors make the mistake of trying to undertake du diligence themselves and end up losing money because of their lack of experience when it comes to this part of the process.
The good news is that investors can confidently move forward with due diligence if they take the time to assemble a team of trusted advisors who can assist them with the due diligence process.
Assemble Your Due Diligence Team Members
Following the success of the Avenger’s movies, most people are familiar with the concept of assembling a team in this day and age. The big question is who should be a part of your team?
Property Inspector – This is by far the most important part of every due diligence team because a qualified inspector is going to be the individual who is going to provide you with the proof for what’s really going on with the property and if you should purchase it or not.
Thankfully, in today’s world, it’s easy to find a property inspector, you can easily go online and find about 30 inspectors in your local area. Before choosing just anyone though, make sure that you review their qualifications online and look for feedback from their customers.
If you didn’t want to search for a property inspector locally, you should consider asking for a referral from your network of business associates. You should also contact people in your local area who may be able to refer you to an inspector, some of the people to consider calling include Real Estate Brokers because just about every broker knows at least one inspector that they can refer you to.
Accountant – Besides hiring a property inspector to investigate the property, you should also hire an accountant to be your “financial inspector”. This is important because you want to have someone to assist you with reviewing the financial aspect of the property to determine if it will make a sound investment or not
When hiring an accountant to make sure that they have real estate investment experience, especially with large multifamily properties. This is very important because not every accountant will have the real estate investment experience that you need so it’s best to review skills and qualifications carefully before choosing an accountant.
Lawyer – Once you’ve found a property inspector and lawyer to be a part of your team, the next step is to hire a lawyer. Every good due diligence team should have a lawyer because there’s going to be a multitude of documents to review and legal questions to be answered so it’s going to pay off to have a lawyer on your side to assist you with this often-complicated part of buying an investment property.
Some of the many ways that a lawyer will assist you to include:
- Reviewing the title and survey for possible defects
- Improper or proper special uses or encroachments that could affect the property
- Auditing tenant leases
- Contracts imposed on the property
- And more!
As with hiring an accountant, always remember to search for a lawyer who has real estate investing experience, especially “multifamily” real estate investing. This is an important point; you don’t want to hire a lawyer who has the “Family Law” experience because they won’t have the experience that you need to assist you with your multifamily investment.
Contractor – Let’s say that the property is going to need renovations to make it ready to start renting. In this case, you’re going to need to hire a contractor that you can trust to make those renovations or improvements and get the job done on a budget.
Thanks to the Internet, hiring a contractor is easy in today’s world. You can literally research dozens of contractors in a matter of minutes. Just be sure to thoroughly research a contractor’s background to make sure that they have the skills and qualifications that you need to get the job done quickly and professionally.
Title / Escrow Company – Last of all, you’re going to need to hire a title/escrow company for the city where the investment property is located. There are a wide variety of companies to choose from in 2020, just make sure that they have plenty of experience and are familiar with the closing practices for the city and state for where the investment property is located.
Things to Know About Due Diligence
Yes, hiring a due diligence team is important but there are also a variety of things that you should be aware of before moving forward with conducting due diligence on your first investment property:
- You have to be driven – Since due diligence can take time, the people who will be truly successful during this process are those who are driven and willing to look at all of the details of a property before purchasing it.
- It’s going to cost money – You should be aware that due diligence is never cheap. It’s going to cost you at the very minimum a few thousand dollars before you can have confidence in moving forward with buying a property or not.
- Due diligence isn’t glamorous – We all like the thought of closing deals because wrapping up a new deal is awesome but it’s also important to remember that due diligence is the “legwork” that’s going to give you the confidence to close on a property.
- The seller should be considered ‘guilty” until you prove them innocent – This is an important concept to take to heart. You shouldn’t take the sellers word for it regarding their property until you’ve had time to fully investigate the property yourself.
- Stay focused – Last of all, always remember that you must be “present” while you’re in the due diligence phase of buying a property. This is super important because it’s easy to get distracted and one distraction can cost you thousands of dollars so always remember to stay focused while you’re conducting due diligence because it’s going to ensure your success.
I’ve offered you plenty of excellent tips on due diligence in this article, if you take what I’ve written to heart and implement what you’ve learned here, you will be 100% successful with due diligence.
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