What Due Diligence Should I Do Before Investing in Real Estate?
Due diligence is defined as “an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.” When investing in real estate, due diligence is very important because most transactions are “as-is” or “buyer beware,” unless the seller does something fraudulent. So what type of due diligence should you undertake when investing in real property?
Of course, there’s no specific answer to this question because every scenario is fact specific. This article is designed to get your creative juices flowing. If an item of due diligence you see below triggers that you need to look at some other factor, or item, then do it!
When buying real estate, we would suggest studying or reviewing the following:
- Title. Review the title insurance commitment. Take a look at what requirements are shown on Schedule B-I, and review any exceptions listed on Schedule B-II.
- Zoning. Is the property zoned for your intended use: Residential, Commercial, Warehouse, Mixed use?
- Survey. What does the survey show? Where are the easements, setbacks, encroachments, etc.? Where is the fence? Do any structures encroach onto your property, or does your structure encroach onto your neighbor’s property?
- Tenants (Leases). Are you buying something that is leased or vacant? If leased, how much was the security deposit, and is the deposit going to be paid to you by the seller directly, or calculated as a credit on the closing documents? What is the rent? Is there a written lease? Have you verified these facts with the tenant (you don’t want a seller telling you the deposit is $1,000 to later find the signed lease agreement showing the deposit was $1,500 – unless you want to be out $500)?
- Inspection. Have you done an inspection of the property? The roof? The plumbing? The electrical? The HVAC? Did you search for any open Permits, or for work done without a Permit? Do you want a separate HVAC inspection (to make sure the sellers didn’t pump up the unit with freon prior to your inspection).
- Environmental. If this is commercial property, you may need to do one or more environmental inspections – especially if the property used to be a car wash, gas station, dry cleaner, or some other chemical-heavy or chemical-reliant business.
Buying the promissory note & mortgage is becoming a more popular method of investing in real estate. Instead of buying the house, you buy the debt against the house, thus making money on the collection of interest income, or you get the house back if the borrower / homeowner stops making payments. To buy the promissory note, you will want to know, in addition to the information above:
- Title. Is the loan you’re buying in first position, or is your note & mortgage subordinate to another obligation? Is the loan you’re buying a purchase money obligation, or a refinance? Are there are IRS liens or other judgments? Is the property in an association (homeowner or condominium)? Does the lender have the original-signed documents and a Lender’s Title Insurance Policy? Are property taxes paid and current? If not, how much is due to the property tax collector, is there a tax lien or certificate, and is there a tax sale approaching?
- Assignments / Allonges. Does the seller have all assignments of the mortgage, and is the promissory note endorsed or contain an Allonge (a separate page for the endorsement)? Has the assignment(s) been recorded?
- Borrower. What is the borrower’s ability to pay? What is the payment history on the loan (has the borrower made all payments)? Has there been any correspondence between the previous lender and the borrower?
- Details of the promissory note. What is the interest rate? Are the payments current? Has the loan ever been modified previously?
Doing your due diligence is critical so that you enter into a transaction with as little risk as possible. A little research (even at a slight cost) may save you thousands or hundreds of thousands of dollars in the long run.
Yesner Law can help with your due diligence. Please contact us to schedule a free initial consultation to discuss your options at 727-261-0224 or email me directly at firstname.lastname@example.org. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.