Looking to buy a new property? Wait. A little wrong decision can cost you a lot. But don’t worry. Here is a comprehensive real estate due diligence checklist that can help you make an informed and right decision.
Comprehensive Real Estate Due Diligence Checklist
Let’s face it. There’s no way you can eliminate the risk factor 100% when it comes to real estate investment. No matter how much research you put into a property before acquiring it, nothing can guarantee a stable return on your investment.
But, that’s not going to stop any of us from stepping on the real estate bandwagon. After all, real estate is still considered safer than many other investment options and a preferred one for passive rental income.
If you’re convinced that you want to invest in real estate, you should be thorough with your due diligence on rental property.
What is a Real Estate Due Diligence Checklist?
Everyone needs their peace of mind when it comes to investing hard-earned money. To make sure you get a good night’s sleep after purchasing a property, you’ll have to check and double-check all the necessary aspects.
This includes the home’s condition, amenities, and location. Mainly, everything that can help you reduce the risk factor as much as you can.
However, keeping everything in mind can become tricky when you’re on the field. Enter your real estate due diligence checklist.
A property investment due diligence checklist comprises of all the assets and liabilities of the property you’re about to purchase. Using it as a guide, you can conduct detailed research on your desired property and weigh out benefits before making a decision.
We’ve compiled a rental property due diligence checklist in this article to help potential real estate investors find a way out of their ordeal.
15 Key Diligence Items in a Real Estate Transaction
Diligence is crucial in executing on the right piece of real estate. If you conduct your diligence right up front, your investment should pan out with things you can control. In today’s age, you can use apps like Dealcheck to analyze properties and make better investment decisions.
There is always a qualitative component that you need to cover off on.
Usually, when you show any interest in buying a particular property, the owner will insist that it is highly profitable. Mark our words, don’t fall for it.
Instead, conduct your own financial due diligence on a rental property to make sure the profit margin mentioned by the owner is correct. For that, you’ll need to round up the complete expenditure history.
Additionally, check the total current expenses and previous income statements for the property as well.
Go back at least five years when looking for leasing cost and capital expenses. Other than that, take a look at verified financial statements from at least three years back.
This will give you a clear picture of your investment and whether you’ll get safe returns on it or not.
Also, you should definitely consider creating a financial model so you understand the financial returns upfront. I created a rental property spreadsheet that takes 5 seconds to download.
Here is a brief tutorial and example of how to use the rental property Excel spreadsheet.
Basic Property Information
Goes without saying, you should go through every piece of information regarding the physical condition of the property. For that, you’ll probably need a professional property inspector to do the job for you.
You see, a professional inspector can pick out the flaws and problems in the property that won’t be visible to you. Besides that, if there’s an appraisal already made for the property, you can get it counter-inspected to check whether the facts are correct.
Mainly, the primary property information includes structural and mechanical reports. These consist of details about the electric fittings, HVAC and venting details, and roofing specifics.
Moreover, it’s important to check the foundation, construction, insulation, and other amenities of the property. All these precautions help you assess the liabilities of your property, so you can decide whether it’s worth investing in or not.
Environmental and Geotechnical Reports
After you’ve acquired the necessary information about the building’s structure and foundation, you’ll need to inspect some other aspects as well.
The environmental reports will give you a precise evaluation of your property regarding its impact on the environment.
For example, if there’s lead paint or asbestos used anywhere in the construction and details about mold and mildew buildup. It will point out anything that serves as a risk to the living environment in the long run.
Furthermore, the geotechnical aspects such as soil reports and other land-related documents are important to help you figure out the durability of the property.
If you’re going through a due diligence checklist for rental property, this clause is a must. The ADA requirements are certain utilities and amenities incorporated in the design and construction of the property to support disabled residents.
Under the Americans with Disabilities Act, all housing properties must comply with these requirements. Each property has a certificate confirming compliance.
You should check the certificate thoroughly, or else you can get into legal trouble after acquiring the property. If there isn’t any certificate verifying it’s compliance, you can get it investigated yourself to avoid further expenses and legal issues.
Energy Expenses and Maintenance Report
Another thing you’ll have to review before purchasing a property is how much it’ll cost you. Let’s face it – no one wants to spend more than they have to on a rental property.
That’s why you should check the electricity reports and maintenance expenses for the property beforehand. With this information, you can easily figure out whether the property is worth investing it, or it’ll cost you more than its worth.
Besides that, the maintenance report will show you how well-kept the property has been by its previous owner. This includes the maintenance of basic equipment around the house as well.
The more productive expenditure on it throughout the years, the more beneficial the property will be for you in terms of rental income.
Occupancy Certificates and Licenses
When acquiring a property, you should have a record of previous owners, tenants, and their rental period. All of this is listed duly on an occupancy certificate.
Along with their names and ownership period, the occupancy certificates will tell you about their payment structure, advance payments, and deposits against the property.
Most investors are looking to generate passive income through rental properties. In this case, you should evaluate the profit range you’ll get in the area you’re purchasing. You can search online to find out where you can get the most beneficial properties.
Other than that, you can hire real estate agents or professional appraisers to get some insight into how the market works. Mainly, you’ll need to know if the area is trending currently or not?
Besides that, a professional real estate advisor can tell you in which areas rental yields are high or get high in near future.
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With the increasing number of middle persons in real estate deals such as agents and appraisers, it’s common for people to trust the professionals and buy properties without taking a look at it themselves.
Never do that. You see, there’s only so much that certificates, reports, and appraisals can tell you. In the end, you should take a look at the property yourself to see how you feel about it.
We know what you’re thinking. You’re not a professional, and even if there was an underlying problem or flaw, you wouldn’t be able to identify it right away.
Nevertheless, before starting your due diligence for rental property, you should take a look at the property and neighborhood yourself. This will help you decide whether you should continue with further research on your real estate due diligence checklist or not.
See Related: Free Real Estate Investing Excel Spreadsheet
Land Title Confirmation
Next, when you’re completely satisfied with the physical structure and locational profitability, you’ll have to make sure it has a clear title. This means you’ll need to legally confirm whether the person selling you the property actually owns it or not.
Sometimes, people get fooled by fake property owners and end up buying a property that doesn’t have a legally backed ownership.
This will not only get your investment stuck but will also eliminate any chances of profit in the future. Just a little due diligence on your end can save you from a disastrous outcome.
Simply ask for the title company to provide proper documentation proving their title for the property. This will also include recent tax payment amount verification as proof.
Once you go through that, you can be sure your property deal will not be held up by any legal judgments or tax liens.
Besides that, you can also apply for title insurance for extra security. Having title insurance will keep you safe against any heir claims, unpaid taxes, and pending mortgages on the property.
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One thing you should check while buying a property is whether it’s built according to the Certificate of Zoning Compliance. The Certificate of Zoning Compliance is issued by the local municipality or the state government.
If your property does not comply with the zoning regulations, you can be subjected to a lawsuit. The government has the right to demolish part of your property that exceeds the regulations.
Zoning compliance is usually not an issue if you’re consulting a proper real estate agent. Anyway, you can never be more careful.
If you don’t want to get a professional inspection, you can get access to a list of zoning rules and ordinances in the area to check for yourself.
See Related: Considerations When Selling Property at a Loss
Tenancy investigation is an essential part of your real estate due diligence checklist. The best way is to get your hands on a list of all previous tenants.
The list should include everything from their rent amount, payments, tenancy period, and lease details. Additionally, you should get all the details on other cost pools. These include overcharge and late rent fees to the tenants.
Other important aspects to check during tenancy due diligence are the amendments and subleases added to tenant leases, if any. This will help you find out any long-standing tenant issues and resolve them before you acquire the property.
After that, you should send these lease details for verification. This will help you create a good relationship with the tenants and ensure a smooth transition of ownership.
See Related: How to Get a HELOC on a Rental Property
Acquiring a Tenant Estoppel Certificate
Another vital addition to your tenancy due diligence is obtaining a tenant estoppel certificate. This certificate binds your tenant to the lease, rent, and security deposit as mandated at the beginning of the tenancy.
The tenant agrees to all these clauses and confirms that all the details are correct. This keeps you safe from any wrong allegations by the tenants after you acquire the property.
By creating an estoppel certificate, you can dig up any disputes the present owner has with the tenants.
This, in turn, can help you resolve them so that they don’t come back to bug you when you’ve bought the property.
If you don’t know what an estoppel and other terms like these are, here are some top real estate investing terms to learn more.
It’s crucial to get a thorough taxation review of your property so that none of the amount lands up on your end after the deal is closed. You can quickly get this information from your appraiser or from the neighborhood tax collector.
Furthermore, reviewing the real estate tax bills will give you an idea of the amount you’ll have to pay as tax in the future.
That’s why checking the previous bills can help you decide whether the property is profitable for you or not. You can also get your own tax bill estimate from the tax collector to know the amount for sure.
This is where you should use a tool like Landlord Studio. It’s an easy app that will help you track and do the required bookkeeping for your rental property. You’ll never miss a beat come tax season.
Contracts and Insurance
When it comes to real estate investments, legal issues are the worst concerns of all. The last thing you want when you’re expecting a steady passive income is a swarm of litigation and insurance problems.
Conducting proper due diligence on all contracts and insurance policies can help you avoid a situation like that. Look for any pending litigations regarding the property from the past.
Additionally, get an insurance quotation yourself and compare it to the current insurance policy. This can help you get a clear representation of the insurance and its effect on the property.
See Related: 5 Ways to Invest in Real Estate with Little Money
Business Operation Due Diligence
In case you’re purchasing a property for commercial use, operational due diligence is an important aspect of a commercial real estate due diligence checklist. All the other elements are somewhat similar in both rental, residential, and commercial properties.
However, when you’re buying a commercial property, it’s not just a building. Sometimes, there are many other things, such as vendors, business relationships, and employees that you acquire with the property.
To make sure your business runs smoothly after the shift in ownership, you should check on the company’s current relationships with its employees and business partners.
Take a look into employee metrics, benefits, and wages. This can help you find room for improvement and make the property more profitable.
Besides that, look for any payment disputes with vendors or suppliers. This way, you can eliminate them before you buy the property.
See Related: Should You Sell to a House Investor?
That wraps up our real estate due diligence checklist. If you’re a beginner who has just started considering real estate investment, don’t get overwhelmed by the long list of due diligence.
Although real estate isn’t a piece of cake, if done right, it can give you good returns. So, whenever you think a property is too good for the price, it probably is.
Make sure you follow this due diligence checklist and see that your target property ticks all the boxes before closing the deal. You’ll thank us later.
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