You will hear me talking about doing your due diligence for each real estate deal on social media or videos and other podcasts. You might be thinking, what is due diligence? Due diligence changes with the type of lender you use. A commercial lender might have a real estate due diligence checklist a mile long, especially if there is a lot of money in it. A private money lender or no lender at all might not require any checklist. Due diligence is reviewing documents, going through the property, and making sure you know everything important about the property before you purchase it.
Join Dr. Matt as he talks about doing your due diligence in real estate deals. The amount of due diligence changes with the size of the deal, but it still matters. ALWAYS do your research before pulling the trigger on anything. If you love this content and want to see more, check out our other show notes from previous episodes.
Due Diligence Needed
- One of the first things I do for a smaller unit, when beginning my real estate due diligence checklist, is a financial audit. If the numbers don’t make sense, you can walk away from the deal without wasting time on the rest of the due diligence list.
- The seller or wholesaler might have some numbers already, but they may not be complete or as informative as you actually need them to be.
- Property Audit is the next step if the financial audit makes sense. You can hire a contractor or you can go yourself. Go through the property and check out the hot water tanks, the furnace, air conditioning, electrical panel etc. Does the condition of the property make sense with the rent you should get? Or do you need to do some work on the property to make it worth the rent amount you want?
- If you’re new to real estate investing, take a contractor with you. They can write down all the things that might need updated and let you know what the cost would be. You might not want to buy the property after you do the walkthrough or you might need to negotiate the price with the seller.
- Site survey is your next step.
- They will cost anywhere from $300-$500. This will help you find out where the land actually ends. Find out if there are any encroachments on the land from neighbors. If your driveway is in the neighbor’s yard (technically) the seller can get that fixed so it isn’t an issue down the road.
- Next on the real estate due diligence checklist is a market report. Find out how the macro-market is doing. How healthy is it and what are the trends? The macro-market is a good guideline, but the micro-market trends are much more important.
- An Environmental site survey is not to find property corner’s but it is to find out of the owner of the building decided to dispose of hazardous waste on that property. You think it’s a joke until you realize that these things happen and people make bad decisions. You don’t want your building to end up with some sort of disease from something that has been spreading in the ground for the last twenty years.
Large Multi-family Units
- Always, always get a financial audit
- You can always use some SWAG (Scientific Wild Ass Guess) to figure out how much you could rent out the place and how that factors into the price of the unit. If the numbers don’t make sense, you can walk away from the deal without wasting time on the rest of the due diligence list.
- Do a third party energy efficiency test. Most places might be built with energy efficiency in mind, but anything built before 2008 is probably not built with that in mind. Your building’s value is its income! If the building is leaking energy that is costing you unnecessary income, you might want to do some renovations or step away from the deal. If you, as the owner, are paying utilities like water I highly suggest you go in and replace every single toilet in the building.
- One of the biggest differences in Multi-Family are the differences in insurance and taxes. You might have to depositing a full year’s worth of insurance payments.
- Assets can be held for a very long time, which means the tax rate of the property will be changed (sometimes in large amounts) if the building was owned for years and years. That change in taxes could keep you from doing the deal. A commercial lender will more than likely have those kinds of financial issues laid out, but a hard money lender will not.
If you love the returns of real estate investing, but don’t want to deal with any people, you have the option to be the bank. You can be part of a trust or a fund. Right now, I have a fund set up for accredited investors with over $5 million in assets. The fund has preferred interest and 70% profit sharing. Visit me at investwithdrmatt.com to find out if you have the opportunity to invest with us.
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