The due diligence process is the final inspection process when you are purchasing a property. It is the time period after you have an accepted offer on the property and the moment before you sign the myriad of dotted lines and receive the shiny keys from the seller or Realtor®. This is your final opportunity to back out of the deal or get issues on the property corrected via price reductions or last minute repairs.
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During due diligence, you will have the opportunity to review any outstanding leases on the property (if there are tenants occupying the property), get information from the homeowners association (if applicable), and make sure that the property is in the condition that you expected. In this post, we will focus on the inspection process where you save (or lose) the most money during a property purchase. One of the 5 Enduring Rules to go by when investing in real estate, whether you are just dipping your toes into the real estate game or staying the course with a multi-property portfolio, is “Building a Strong Team.” A key component of your team is a property inspector, who could be a general inspector for basic whole house inspections. Moreover, various specialists may be helpful to have on call during the inspection in order to track down major issues such as plumbing and roofing.
A general inspector is a very important part of the due diligence process unless you know a lot about construction, plumbing, roofing, etc. Even if you are an expert, consider the point of view from an inspector who may have 30+ years of experience looking at houses. He/she may find something you missed and it is a fantastic peer review. That extra money you spend now could save you a lot more in the long run.
Other specialists may be needed as you go through the due diligence process and inspect the property. If you are purchasing an older home, insurance companies often have strict rules on the useful life of roofing and other structural components of the house. A roof you thought had 10 years on it could be flagged by the insurance agent for replacement in a year. A roofing expert can check the roof out during the due diligence process and warn you of any major issues that can be corrected by the seller before you take ownership.
Plumbing is not something you should leave to chance either. An investor shared a story in a seminar about an older property, pre-1970s, who had a plumbing nightmare after a toilet backed up. Unbeknownst to the investor, this house had sewer piping made out of “Orangeburg”, which is fiber conduit pipe that was popular until around 1970 when it was eventually replaced by PVC pipe. This Orangeburg pipe collapsed over time and caused quite a mess–and a blow to the pocketbook uglier than the sewage mishap that also occurred in the master bathroom! It cost the investor over $10K to have a sewer company dig up the front yard, remove the old pipe, put in PVC pipe, and reconnect it. Good thing he had a property manager to coordinate the aftermath and repairs, but the hefty fee could have been avoided if he performed his due diligence. Learning his lesson, he would have had a plumbing and drain service come to the rescue. One of the many “rooter” companies out there can run a fiber optic camera through the pipes, hunt down and identify the Orangeburg, and send the replacement bill to the seller before they pawn the keys off on you. That seminar I attended was well worth the money just for that one tip alone. Take lessons learned like this to heart wherever you can and use them to accelerate your understanding.
So remember, before you sign that check and walk away with the keys, make sure to do your due diligence and get that property inspected right down to its innards! You will certainly be glad you did.
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The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.