Due Diligence is the investigation of the physical and financial state of the property and area you plan on investing in. A good way to think of this is “doing your homework”, and its a great chance for you as an investor to find out if this investment is right for you. In this article we have broken down the process into three sections; Physical, Financial, and Legal - where we will go into the steps we take to become a confident investor!
Physical Due Diligence
Conduct a preliminary analysis of the area before you submit an offer. Get a sense of the neighborhood, and check out the property at different times of day. Along with that meeting the neighbors is always helpful because they can give you the history and some insight on the neighborhood. You can also join neighborhood facebook groups if you can't do it in person.
Get repair quotes during due diligence, before you purchase. This step can actually result in a reduction on your purchase price, and you may be able to get the seller to help you cover repairs or lower the closing costs.
Physical Inspections: After you go under contract, arrange for a property inspection conducted by a licensed professional.
Upcoming developments and building plans: Ask the city's land and zoning department for the current 10-year plan, with this you can anticipate if these developments will increase or decrease the value of your investment or call one of our agents who is in the know and can give you feel of current and upcoming development in the area.
Get a formal property appraisal: This step will compare your prospective property to similar properties in comparable areas. If your getting a loan to finance the property this will be part of the financing process.
Financial Due Diligence
Prepare to run an in-depth cash flow analysis by requesting documents for rental income, tax liability, repair quotes, & principal and interest rates on the loans you are considering. And don't forget to include landlord tax deductions if you plan on renting the property out!
Shop around for financing and avoid the temptation to go with the first lender you speak with. This can give you the opportunity to get lower rates and a better deal.
Set a rent estimate using your financial analysis for your future tenants.
Legal due diligence
Review all seller disclosures; you should get these shortly after you open escrow on the investment property.
If you are purchasing a home/condo within a Homeowners Association (HOA), get a copy of the declaration of covenants, codes, and restrictions that governs the community. The more information you can get from the HOA the better
Ask for the HOA’s financial statements so you can confirm the association is being managed properly and money is being spent properly.
Request a preliminary title report. This will allow you to see who currently owns the property and it is important because you want to make sure the seller will be able to transfer the title upon closing.
Research homeowners insurance. If you plan on financing the home insurance is mandatory and it is better to come into investing with some options or ideas about what you want.
Confirm that your intended use of the property, if you are renting the home or condo out, follows the town and municipal rules.
The value of due diligence is discovering a major problem before it becomes your responsibility. The value of doing your homework is huge and will save you time and money, along with giving you a feeling of confidence that this new asset will serve your portfolio for long into the future. We specialize in real estate investment in Philadelphia.
Contact us today and we will assist you in acquiring your first or next investment property!