What Is Real Estate Due Diligence and How Does It Work?

Buying and owning real estate is always a high-risk task, regardless of whether you’re purchasing a single family home or a full-size multi-unit apartment complex for income.

Experts often tell you to “do your due diligence” when buying property, but what exactly does this mean?

Unfortunately, there isn’t a simple automated way to perform due diligence. It’s actually a time-consuming process with which people have little idea what to do in many cases. Here are some steps you can take to help make the process easier.

Do Your Research

Due diligence is all about being cautious, carefully reviewing documents, performing accurate calculations, procuring insurance, inspecting the property, and more.

You need to make sure you do your homework before you actually make a purchase.

real estate due diligence

If there are too many problems with the property, including too much potential cost and risk, then you can cancel your buying agreement and search for a better property.

Here are some other steps to take that pertain to both investment properties and private residences, though some may only apply to one or the other.

Shop Around the Marketplace

Before deciding on the property, first make sure you know what all the market has to offer. Too many people only take a look at a few properties before lazily making a purchase, but the process should actually take up to months.

Mortgage Financing

Make sure the mortgage deal you receive is fair and similar to competitors’. Most people only get two bids for financing before making a deal, even if they don’t know if it’s fair.

Do the Math

If you’re purchasing an investment property, you need to pencil out your deal. Once you’ve done all the math and compared it to other opportunities, you can then make a better buying decision.

Inspect the Property

While you may have a professional inspect the property, you should make sure you attend the inspection. Also, review the inspector’s remarks regarding all of the work that needs to be done.

Then you can call your contractor or a home repair store to determine how much it will cost to fix up the property. Renovating properties is an expensive and high-risk task, so make sure you get accurate estimates for all of the work prior to making a final decision.

Insurance

Have you checked to see if an insurance policy can be written for the property? If so, how expensive will it be? Certain spaces, such as hurricane- or fire-prone areas, may not be able to get a policy.

Even if they can, it could be way too expensive. Get some bids before you’re too far in the buying process to turn back.

Homeowners Association

If you don’t know how to review the HOA documents to avoid potentially disastrous communities, or communities without any money or that have construction issues, this is a complicated task, but it should be done.

The last thing you want is a mess of an HOA, as this can cause discomfort down the road.

With these tips in mind, you can practice good due diligence prior to purchasing a property.

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