What can due diligence tell you about the property you have under contract?

Once you’ve entered into a contract on your investment property but haven’t closed yet, the work doesn’t stop. In fact, what you do next may have a big impact on your return. At this stage, you’re entering the due diligence period, a window of time during which you’re going to work to confirm you’re getting the asset you are paying for. This all-important window usually lasts from a few weeks to about a month. There is a lot for you to do.

Get under the hood

We cannot overstate the importance of a full inspection of your investment property by a qualified professional. The closing of your deal should hinge on the inspection results. The inspector will study any structures on the property and look for potential red flags. It could cose you dearly to discover water damage, foundation trouble and other things like this after you buy. He or she also tests any systems on the property, including the heating and cooling units.

You should also have other inspections carried out beyond the basics. Pest inspectors investigate properties for signs of any infestations. You can arrange for a professional to come in and test for expensive-to-fix biotoxins, such as asbestos, mold and radon. Don’t stop at just inspecting the properly for problems. Look at the neighborhood as a whole to see if there are any local issues that could impact your investment, such as the property being near an environmental hazard or in a flood zone. These are the sorts of things that could be used as a reason to reopen the negotiations.

Take a look at the title

During the due diligence period, the title, or chain of ownership, to the property will be reviewed by professionals. This is done to ensure there are no snags in the current or past legal ownership of the home that could come back to haunt you later. Things like boundary disputes with neighbors or an undisclosed person who still has legal rights to the property you want to buy could hinder you.

Dig into the financials

Once you have the real financial information about the property from the seller, you can do your own “audit” to ensure the estimates you received before represent reality. Loans, rent, expenses and income should be verified with third parties such as banks and tenants. Copies of the seller’s tax returns can also be a goldmine. You need to dig deeper if you find any inconsistencies between what you were told and what the returns show.

When due diligence is done right, you’ll know what exactly you are paying for. Keep yourself on top of all that you need to do so you don’t make a costly oversight.

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