10 Steps Before You Buy A Home: Due Diligence
Do your homework before you home-shop.
Due diligence in real estate transactions is crucial for both buyers and sellers. It involves researching the details of a proposed transaction, including the legal aspects and financial implications, to ensure that all parties involved are protected. Through due diligence, buyers can identify potential liabilities associated with a property before committing to purchase. Similarly, sellers can ensure that they are getting fair market value for their property by understanding what potential buyers need to know about it. If you are considering a short sale, foreclosure, or bank-owned property, you should not skip these steps.
1. Title Review
When buying a foreclosure property, always get a preliminary title report and make sure there are no secondary liens or tax liens on the property, as well as any liens on the property itself. Make sure there are no hidden liens or encumbrances on the property that could cause you problems down the road.
As companies like New Century filed for bankruptcy during the real estate crisis, a lot of paperwork was lost. People who sold properties they did not own are still being unwinded by the courts. The title must be clear and the property must really be for sale, which is why it’s so crucial to make sure that the property is indeed for sale. Investors often decide it’s just not worth the risk to get title insurance, but you’d be surprised how many do.
2. Thoroughly inspect the property
Foreclosure properties that are still occupied may be impossible to enter. However, if you can, have a licensed professional inspector examine the property to ensure that there are no structural defects, water damage, or any other major issues.
Make sure everything is functional, but most importantly, make sure it works. During a foreclosure, I know of one case where an owner ripped out the
wiring and piping from the walls after losing their home to foreclosure. His next step was to install new drywall after he finished the project. After they inspected the house, they found no wiring or pipes behind the walls, but it looked fine.
3. Analyze the neighborhood and surrounding properties
Be sure to inspect more than just the structure itself. View the landscaping around you. Are there no trees on the bank backing up to the property? In the event of a severe storm, will the drainage system be able to handle the water?
Your property’s value can also be affected by the condition of the neighborhood surrounding it. Does anyone else in the neighborhood seem to take pride in their homes? Is there an abandoned property in the area? It’s important to note that abandoned houses aren’t just a problem in “bad” neighborhoods. It is possible, even in housing developments that are relatively new, to find abandoned or unfinished homes as a result of the recent housing crisis.
4. Analyze recent sales activity
You can check how long homes have been on the market by looking at the days they have been on. Have properties moved quickly or have they sat still for a long time? In the neighborhood, what is the ratio of buys to rents? Are there any distressed homes in the inventory that were sold? The number of sales in a neighborhood may indicate that people are leaving – investigate as to why this might be happening.
5. Analyze price trends
Is there an increase? Is there a plateau? Compared to the peak, how have they changed? You should be able to determine whether property values are rising or falling based on that information, and you can determine how much to spend based on that information.
6. Identify the number of foreclosed homes in your area
Price weakness is likely in the short term if there are too many of them. Is the area disproportionately affected by distressed properties? There were only one or two homes in every 100 that went into foreclosure before the financial crisis. The number of them might be three or four in the current environment.
However, there may be more to the story than that, which may indicate that there is a problem and a reason for the property’s attractive price.
7. Consider the potential upside
Are you near a good school? Are you near a transportation hub? Are there new businesses that are popping up or being launched in the area? Those are potentially all good upside opportunities for you. Conversely, has there been a plant shutdown recently? That will probably lower property values. The local chamber of commerce can supply some of this information; it also helps to have some local connections.
8. Visit open houses
Take a look at other homes that are currently for sale to determine the standard of quality. Does tile work fine for countertops, or do I need to install granite or make other improvements to my home? If you plan to flip the house or rent it, this is a good thing to do. Overspending is not necessary. It’s best to meet or slightly exceed the neighborhood standard, and spend as little as possible on it.
9. Find out what the zoning requirements are
Consult with a real estate attorney if you intend to rent out the property to find out if there are any local ordinances or laws that could hinder your landlord’s efforts. Rental properties aren’t allowed in some areas. There are some developments that restrict the number of rentals you can have in a neighborhood; others limit the number of adults who can live in one house, which can cause problems if you plan to rent to students or other people who like to room share.
10. Check your liability insurance
Get liability and property insurance from your insurance agent if you’re planning to be a landlord.
This 10-step process may seem time-consuming, but it will pay off in the long run. The cost of real estate is one of the highest investments you will ever make, regardless of whether you intend to occupy the property, flip it or rent it out. Keeping it safe makes sense.