What is Due Diligence in Real Estate?
In real estate investing, due diligence is a series of procedures and steps taken to ensure you’re investing in a property that won’t cost you a lot down the road. A diligent investor will never agree to do business with an individual, corporation, or government agency without conducting adequate due diligence.
Because of the housing crisis, foreclosures are becoming more common. Due to the ease at which anyone can purchase real estate online, it is possible to discover foreclosure auctions online at our premium subscription at propertyonion.com. They have an extensive database of all foreclosures across the country and are constantly updating it as new information comes out about upcoming auctions.
To be diligent, determine if foreclosure auctions are ideal for your portfolio — or whether you want to pass on purchasing properties at auction and attend private sales instead. Understand what due diligence means in both cases.
Discover the keys to successful investing in property and learn how due diligence can help guide your decisions. This guide will introduce you to all the steps involved.
What does due diligence mean?
According to Lexis Nexis, due diligence is identifying, investigating, and addressing legal, financial, and other risks associated with investment to ensure that it is financially sound and meets legal requirements.
The purpose of due diligence is two-fold: first, it protects the buyer from engaging in an illegal transaction; second, it ensures that the seller is not enmeshed in some fraud or scam.
Any time you purchase something as large as a property or business, you need to know what you’re getting into. This is especially true when you’re buying from an individual or a small company, which may not have the same level of transparency and oversight as larger corporations do. If there are red flags along the way, it’s your job to spot them before you sign on the dotted line.
The term “due diligence” comes from law but has been used in business for decades to describe how thorough someone’s research should be before making an important decision. Due diligence means doing everything possible to ensure that your investment is sound.
Due diligence in real estate
Due diligence is a process of gathering information about the property, including its past and current use, checking financial records, reviewing legal documents, inspecting the physical property in person, and any relevant laws that may affect the property. The goal of due diligence is to ensure that you’re aware of all potential risks before investing in real estate.
Due diligence can be performed by lawyers, accountants, or other professionals or yourself. The aim is to uncover any information that may affect the value of an asset, such as lawsuits, liens against property, or environmental problems.
This process is often called pre-purchase due diligence because it’s done before purchasing a property. It can help buyers avoid investing in properties with hidden problems or issues that might result in significant repair costs down the road.
The investor’s perspective on due diligence can be broken up into three main parts:
Financial Due Diligence
There are several reasons to perform financial due diligence in real estate. First, they can help you identify and understand the financial implications of your investment.
Secondly, they will help you reduce risk by identifying potential issues with a property, borrower, or both.
And finally, they can help you determine if a deal is fair by comparing your findings against the seller’s cash flow analysis or pro forma data.
This process includes analyzing:
● The market value of the property.
● The structure of the loan used to purchase it.
● The taxes paid by owners on their properties.
● The current condition of the property (including any repairs needed).
A property analysis will typically include an assessment of the location and demographics of a property, as well as its size and condition. It will also include an analysis of any existing leases or contracts associated with a building or property.
The goal of this step is to determine what kind of income stream exists for a building or property so that investors can decide how much money they might be able to earn from it if they purchase it.
There are many ways this can be done, including:
● An appraisal by an independent appraiser, who will conduct research and make judgments based on current market conditions.
● A survey by an engineer will determine whether there are any structural problems with the building.
● A title search by an attorney who will check records related to ownership and liens against any outstanding debts related to the property (e.g., mortgages).
Legal Due Diligence
It’s crucial to understand the legal due diligence process when purchasing a property. According to Lawyered, Legal due diligence is the process of investigating and verifying the legal documents associated with a property, as well as its title.
This includes researching and confirming that all ownership documents are legally binding and that there are no outstanding claims against the property. In addition to ensuring that there are no outstanding claims against the property, legal due diligence also helps to determine whether there are any liens or easements on the property.
These can affect what you can do with your new investment! The best way to prevent these issues from happening is by hiring a professional real estate lawyer specializing in legal due diligence.
Steps to Take During Due Diligence Period in Your Real Estate Transaction
Due diligence is the period after an offer has been accepted and before closing takes place. It’s a time when you can learn more about the property you’re investing in, get some answers to your questions, and ensure you have all the information you need to make an informed decision.
To make sure it goes smoothly and as planned, here are some steps you should take during this time:
● Research the property and the seller’s financials.
● Inspect the property, including all appliances, fixtures, and systems.
● Review environmental concerns and zoning issues with a lawyer or real estate agent.
● Review whether any liens or lawsuits are pending against the property.
● Make sure all permits are up-to-date, especially if you’re planning on doing major renovations on the investment property.
● Look into local codes regarding building permits and inspections needed for renovations or additions to your property’s structure or systems (such as roofing additions).
What is due diligence when it comes to county foreclosure auctions?
Due diligence is a crucial part of any real estate transaction, and county foreclosure auctions are no exception. County foreclosure auctions are held by local governments as a way to clear tax liens and other debts owed by delinquent property owners. County foreclosure auctions are often advertised as being held by the county or municipality, but they’re held by a third-party auctioneer who works on behalf of the government entity.
The auctioneer typically advertises the properties for sale, conducts the bidding, and manages the sale process from start to finish. The auctioneer also collects payment from successful bidders at the end of each sale event.
Due diligence is an important part of any real estate transaction because it helps protect buyers from legal issues that could arise down the line.
For example, if you buy an investment property at a county foreclosure auction but don’t perform due diligence on your new property, like one of our simplified title searches, you could end up with left over liens, judgement or other problems that make it difficult for you to sell the property later on down the road. If you didn’t do your due diligence, you might end up buying a property that simply gets foreclosed on again by another lien holder that you didn’t even realize had a claim on the property before your purchase.
It’s imperative to do your due diligence before bidding on a property at a foreclosure auction for many reasons:
● To make sure that the property is structurally sound. There are times when people don’t bother “laying eyes” on the property only to find out after the auction it burnt down, the roof caved in, etc..
● Ensuring that the bid amount you are going to make considers all liens and judgments currently encumbering the property.
● To make sure that there aren’t any additional fees associated with owning or renting out this particular property (such as taxes, maintenance costs, deed restrictions, rental restrictions, etc.).
Key Takeaway: Let us at propertyonion.com help you find the ideal property that is not listed on the MLS.
Talk to the experts
Each day, real estate investors across the country are flipping houses, often at a rapid pace. However, it is not always easy to determine the true value of a specific piece of property.
Many factors can impact the profit and loss of investing in various properties. Goals ought to be established before beginning a deal to achieve them. Thus, real estate investors must take their time when pursuing potential deals.
When purchasing at your county foreclosure or tax deed auction, due diligence is of the utmost importance. You cannot skimp on this stage of the process. Due diligence is where an investor will either make or lose money. Spend time using our educational section researching how to do proper due diligence.
You absolutely must read this tutorial created by our co-founder, “Try and Do your Own Lien Search” it’s a great overview of what goes into the serious end of proper due diligence. Then let us create title searches for you, and you should be well on your way to becoming an expert.