When you were growing up in school, you likely dreaded the thought of homework. You may likely have even despised the thought of doing further work outside of what was required during your school day. I know I certainly was not a fan. Fortunately, the real world does not distribute homework to you to further your professional learning. On the other hand, to be successful in most endeavors, it is wise to voluntarily do the homework to become fully aware and to give you the information necessary to act upon all the necessary components of the undertaking. Otherwise, there could be big trouble in overlooking these details.
In an investment real estate acquisition, most purchase agreements will be "as-is". This essentially means the seller is not warranting anything with regard to the real estate itself. It is up to the buyer to determine whether or not that "as-is" condition is satisfactory. After all, the buyer is going to have to deal with all the various issues that come with being the new property owner.
This is where due diligence comes in. When my clients enter into a purchase agreement to purchase cash-flowing investment real estate we have several steps to take to ensure our homework, or due-diligence, is sufficient and successful. First, we need to verify all leases associated with the property are sufficient and match the original communications reported from the seller. Then we need to match up the lease income to our pro-forma projections and the prior year or years financials reported to the IRS. Review utilities in depth, identify opportunities or challenges and obtain a list of any recent capital expenditures. Once these have been gathered and documented, it is time to physically inspect the condition of the property with qualified and professional contractors. We lean on these vendors to assist in estimating necessary improvements and utilize these figures to ensure our projections remain feasible for the expected life of the investment. During this time our financing needs to be underway where we are searching and securing the appropriate financing for the project. Further, we must seek environmental evaluations for qualifying properties and appraisals for leveraged undertakings. Negotiations, personnel placement and timeline planning continue during this process as well. Once we complete these steps we can move into coordinating with closing attorneys and title companies to ensure we are delivering a clear title from seller to buyer.
You still with me? You worn out yet? Make sure every "i" is dotted and every "t" is crossed because missing one or two of these due diligence steps could be very costly. Each piece of this puzzle needs follow up and needs to be completed in a timely manner, with skill. This is a big part of why my clients hire, refer and do repeat business with me - it is very valuable to be hyper-focused on this piece of the transaction. Do your homework in real estate before you close and your investments will be sure to become distinguished.
Let me take a moment to wish you a Happy New Year! Looking back at 2016 I can say it was the best year yet in my business and life. A lot of hard work, challenges, learning experiences, and winning celebrations encompassed 2016. I look forward to more goals achieved, memories made and milestones crossed in 2017. As always, if there's anything I can offer to you in your business or personally, don't hesitate to reach out to me. You know I am here to be your advisor on wealth building through real estate, but I am also always happy to help in any way possible.