Step 5: What to Look for When Conducting Due Diligence
The offer is on the table and all that stands between you and your potential new rental property is the due diligence. In this step, you’ll determine if the deal checks out and you become the proud new owner, or if the deal isn’t such a deal after all and you resume the investment property search. This is the time to investigate the property and ensure you know what you will be agreeing to. The three aspects you’ll want to thoroughly inspect when conducting due diligence are: title, document and the physical property.
Title inspections typically require a title company or lawyer’s review. In this part of the inspection, you’re ensuring the seller has the legal right to sell the property and that there are no outstanding liens. A lien is a legal claim against a property made to secure payment for a debt—they’re a way for creditors to collect on what they are owed. Fortunately for prospective buyers, liens are a matter of public record and are fairly easy to uncover. When you’re considering purchase of a rental property, it’s important to look for a clear title, meaning the property’s title is clear of any outstanding liens. At this stage, you will also order title insurance which protects you from title issues down the road if you decide to move forward with the purchase.
In this part of the inspection, several of the key documents for review include:
- Seller Disclosures and Tax Returns
- Current Lease and Rent Roll
- The Tenant Estoppel Certificates and Security Deposits (for tenanted properties)
- Utility bills
- Any recent maintenance documents
- HOA, if applicable, as you’ll want to familiarize yourself with the covenants, conditions and restrictions
This physical property inspection is crucial. A professional inspector can uncover serious issues and open your eyes to the property’s true condition. It’s recommended that you be present for the inspection and take an active role. Ask the inspector questions as they conduct the inspection; it will help you to know the property inside and out. Inspections for a single-family home can range from $200-500 but they are worth their weight in gold! A good inspection can save you significant time and expense in the event the property has serious issues that would otherwise have gone unseen. Depending on the age and location of the home, you may also want to inspect the property for asbestos, lead-based paint (if built before 1978) or possible pest infestations (e.g. termites, rodents, etc.). The more thorough the inspection, the better off you are in the long run.
If you’ve performed all of the recommended due diligence and the property still meets your criteria, you’re in the home stretch nearing closing the deal! Stay tuned for the last article in this series—The Ins and Outs of Owning a Rental Property.