Twitter
LinkedIn
YouTube
RSS
Facebook

Real Estate Investing: Due Diligence

The “Due Diligence Process” is the most important step for a real estate investor or potential investor for ensuring you are choosing the right property to purchase.  Yet surprisingly, many real estate investors skip various steps of this process…and regret it later.

There are four (4) distinctive stages in the due diligence process that are musts when you are purchasing either a single family house or a multi-family apartment building for investing purposes, because once you’ve closed escrow you are now married to the property and all of its baggage (like it or not). That’s why we have our own detailed, four-stage due diligent checklist we use at 37th Parallel Properties for our purchases.  By following a detailed checklist you can eliminate most of the risks…on any property, anywhere in the United States.

It reminds me of an adage referring to insurance: “You can’t purchase insurance after the fact.”  So we recommend doing the job right the first time.

Here’s our overview of each major step of due diligence for real estate investing.

The 37th Parallel Properties’ due diligence process has four distinctive phases. Each phase gives a “map” or “guideline” covering what tasks you need to do to conduct a complete and thorough job.  We have only highlight some items of the process here.

Due Diligence Stage 1 – 40,000-Foot View – Area Macro Analysis

Stage 1 due diligence is conducted when you have found a property and are evaluating it for purchase.  In this phase you must learn the demographics and other important fact-based information of the state, city and then the submarket of where the property is located. This step can be completed online from home by researching through public and private data sources.

Due Diligence Stage 2 – 20,000-Foot View – Area Sub-Market Analysis

After you find that the demographics and the related Stage 1 factors look favorable, it is time to conduct the Stage 2-level research. At this stage you are seeking out professionals/experts who live and work in the sub-markets where the property is located.  Prepare in advance a list of questions for each professional you call (we have a very detailed checklist of these questions).  You can conduct this stage of the due diligence process also from your home using your computer or cell phone.

Due Diligence Stage 3 – 10,000-Foot View – Visitation and Consultation

Stage 3 is what we call, “Hit the ground running.”  Now that you have found the demographics favorable and you like your potential “team,” it is time to meet with those professionals and tour the sub-market or markets in person.  This is the stage where you validate the research you conducted in Stages 1 & 2.  Meet with each expert, as you defined above, and drive around the sub-market or markets one to two miles in each direction — North, South, East and West from the subject property — and then crisscross in all directions to really get to know the sub-market surrounding area.

Due Diligence Stage 4 – Ground Zero

At Stage 4 of the due diligence process, you will want to analyze the property grounds for deferred maintenance, to validate financial/lease information, and to evaluate future cash-making opportunities.  We use our own thorough and detailed due diligence checklist for this phase that is too detailed for this overview article.

While there is much more to conducting the due diligence process than we’ve noted here, if you are interested in successful real estate investing, you must understand the importance of completing a thorough due diligence on every property you are purchasing.  Bottom line, if you don’t, and you close escrow, you have just inherited all the shortcomings of that particular property. Work smart and make it one of your “Money Rules” to conduct a thorough due diligence on every property you purchase.

This will reduce most of the risks in real estate investing.

I thought this was a great article, written by Ed Barriskill – for more info from Ed, go here:

http://www.37parallel.com/37th-parallel-properties-four-stage-due-diligence-process/

Nick

photocredit: rmaenielson.wordpress.com




One Response to “Real Estate Investing: Due Diligence”

  1. realestate says:

    I sold tons of land in SW Florida and most buyers were clueless about due diligence.

    I always told them that the more time to get inspections done, the better it was provided they used the time wisely, otherwise too much time hurt the contract because the seller’s feet were held to the fire for a longer time than ultimately needed.

    Its a fine line to get just the right time stipulated in the contract

Leave a Reply

You must be logged in to post a comment.