If there's one unbreakable law in real estate investment,
it's always perform due diligence on any property you're
considering. "Due diligence" is a common term for the
evaluation of a property and its surrounding environment.
This process has two purposes.
One, you want to reduce or eliminate investment risk; in
other words, you want to know exactly what's wrong (or
right!) with a property before you sink any money into it.
Two, you want to find "diamonds in the rough." These are
houses that look like lumps of worthless coal on the
surface, but once you get below that surface you find they
shine like financial diamonds because they're structurally
sound and a great investment bargain. Two Areas of Due
Diligence Generally speaking, due diligence breaks into two
areas—physical inspection of the property and
inspection of all documents and records concerning that
specific property. In this article, I'll consider only
physical inspections. I'll cover inspection of documents
and records in a separate article. Physical Inspection of
Properties You or a selected inspector will always want
visit any property you're considering for investment.
Often, the signs of decay or lack of maintenance will be
obvious—a leaky roof, foundation cracks, cracks in
the walls, plumbing leaks, etc.—and your visit will
prevent you from wasting further time and money on that
house.
Of course, the opposite can also be true; that is, you find
the "diamond in the rough" I mentioned earlier. In that
case, you'll want to jump on the property quickly before it
becomes known to other investors.
When problems are found in a property, you can require that
the seller correct those problems or reduce the price
before you sign any contract. Generally speaking, there are
two general categories of defects:
The obvious defects I mentioned earlier--peeling paint,
broken windows, leaking plumbing, warped floors, etc.
Hidden defects--corroded pipes in the walls, roof or window
leaks that don't show up until it rains or snows, etc.
These are the dangerous and expensive defects because they
can be hazardous and cost a lot to repair. Without due
diligence, you could end up reducing your profit or even
suffering a loss.
Let's get more specific now. Here's what professional
inspectors look at when they examine a property:
Overall structural integrity Property drainage/landscaping
Walks and drives Foundation, footings, crawl space,
basements, sub-flooring, decks Exterior walls, siding, trim
Windows, doors, cabinets, counters Gutters, downspouts
Roof, roof shingles, roof structures. chimneys, attic
Floors, walls, ceilings, etc. HVAC systems Plumbing
systems, (fixtures, supply lines, drains, water heating
devices, etc.) Electrical system (wiring, service panel,
devices, and service capacity Energy conservation/safety
Items Insulation & ventilation Moisture intrusion/mold Pest
Control Inspection Depending on the area of the country in
which you live, insects can cause considerable damage to a
property. These include such critters as termites,
carpenter ants, powder post beetles, and any other bug that
likes to munch on wood. Fungus, in the form of "dry rot,"
can also cause a lot of destruction. You'll need to hire a
specialist (pest control inspector) to examine the property
for any of these problems. If any problems are identified,
the pest control inspector should provide you with a
diagram that indicates the location of any infestations.
Serious problems need to be dealt with right away and are
usually paid for by the seller.
To protect yourself against any of the problems mentioned
above, make sure the purchase contract provides for
cancellation without penalty or loss of earnest money if
the physical condition of the property doesn't meet
standards. A Note on "As-Is" Properties If a seller offers
to sell you a property on an "as-is" basis, run the other
way! He or she may simply be naïve about property
laws, receiving bad advice from an agent, or, worst of all,
a con artist.
Such sellers may think they're not required to correct any
property defects before or after the sale. In most cases,
they're flat out wrong and are in violation of state laws.
In fact, they may well be charged with misrepresentation,
fraud, or negligence. Needless to say, you don't want any
part of a mess like that. One More Word of Advice The
seller should allow you complete access to the property
with no time limits. If he or she tries to restrict access
or specifies only certain hours, be suspicious and demand
complete access. If the seller refuses this request, then
walk away from the deal.
Key Point: Never, ever fall in love with a property! Always
inspect it (or have it inspected) with an objective mind!
Key Point: Choose the strategy that best suits your
situation and your personality.
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg is the creator of the renowned "Buyers
First" Program. His deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
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