Do your due diligence before you buy that next investment property!
It’s true, the market for good investment properties is hot and quite competitive right now, but it’s important to make the right investment decision, which means you’ll need to take a few extra steps before closing the deal. While it’s important to act fast when the right deal comes your way, there is more to do than simply executing the offer and going to closing
Once you’ve located that potential investment, made the offer and have the executed purchase contract in hand, it’s time to do your due diligence before completing the transaction. But just what does “due diligence” mean, and where do you begin?
It may sound obvious, but due diligence covers all the basics for investigating that real estate opportunity. Verify the after repaired value, get the property inspected and create that repair budget—these are the most important steps to take before completing your transaction. So as soon as you have the green light from your seller, and the financing is in place (which should be secured before you make the offer), follow these simple instructions before you move forward:
Verify the After Repaired Value (ARV)
The first thing to do when you have the property under contract is to make sure the house is worth enough after it’s repaired. So you’ll need to determine the after repaired, market value of the property. Market value is best determined by comparing your house to those properties selling at top market value in any given neighborhood. After repaired value is determined by assessing properties similar in size, year built and other features, in the same part of town (preferably in the same subdivision). You’re objective here is to compare “apples to apples.” If you’re buying the property from a wholesale real estate company like Big State Home Buyers, then the agent you’re working with can show you the comparable sales and walk you through the value assessment.
If you’re buying directly from the seller or from a foreclosure auction, you’ll need to find a realtor, appraiser or other professional who can help you pull the numbers. Most people know a realtor that would be happy to do this for free. But even if you don’t, you can find a local agent that would be glad to run these comparable sales for you for next to nothing. Offer them a gift card to a good restaurant or a small fee and ask them to run comparable sales for you—to pull a broker’s price opinion (BPO). It doesn’t take more than a few minutes to do so, and a good realtor will be glad to oblige so he can earn try to your business on the next investment opportunity.
A word of caution though—do not rely on the tax record value or websites like Zillow to give you an accurate assessment of value. These values are often too high or too low—rarely accurate. And it’s crucial to have accurate information here, so go the extra step and be sure you’ve got professional advice here.
Get the Property Inspected
When you walk the house, you’ll be able to tell rather quickly what sort of cosmetic repairs the house needs. But the cosmetic repairs are easy and are rarely that costly if you know how to shop for supplies and have a good contractor in place. It’s the major systems of the house you’ll need help with. Have a professional inspector look at the HVAC, roof, foundation and other major components of the house. Don’t get caught up with every tiny detail—get the overall picture and focus on the big-ticket items. For instance, a cracked tile could be a sign of foundation problems, but sometimes it’s just a cracked tile and while its important to find out the source of any issues with the house, you don’t want minor issues to scare you away. Most of those are easy fixes, even if you don’t know how to repair them yourself.
Create Your Repair Budget
Once you have the inspection report and you know for sure what needs to be repaired, replaced or simply touched up then you can fashion a repair budget. Check with your local investment firm or other contacts you know for a good handyman. It’s important to talk to a few contractors to be sure they know how to handle your project at the right price. Alternatively, you could contact companies like Rent Ready Contractors and get an investor-friendly repair service to do the full service remodel. Also, be sure to give yourself a 10% cushion in your repair estimate. No matter how accurate or detailed the bid may be, leave a little room for error or additional repairs that may not be visible when you first inspect.
Once you have your ARV, the inspection report and an accurate repair budget, you’re ready to roll! Check the numbers again to be sure that 25% discount is still there after verifying all of this information, and once you’re comfortable with all of your information, you’ll be ready to close on that investment property.
It’s important to have this team in place up front. Good deals go quickly and it’s important to know your inspector, contractor and funding source ahead of time, that way you can complete your due diligence in a couple of days. Wholesale agencies and sellers alike will want to know you have your plan in place before accepting your offer.
For referrals to good contractors, inspectors and tips on finding your next great deal, contact Big State Home Buyers at (713) 263-7466. Or, check us out on the web by visiting www.BigStateHouseDeals.com. We are here to help you build the most effective real estate portfolio and we are always just a phone call away.