This article is an excerpt from the Shortform book guide to "The Book on Rental Property Investing" by Brandon Turner. Shortform has the world's best summaries and analyses of books you should be reading.
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Are you ready to close a real estate deal? What is “due diligence” in real estate?
Due diligence is a critical chance to troubleshoot the property and its documentation before closing a deal. You need to make sure you’re getting what you paid for and that everything’s legally in order.
Below, we’ll cover both on-site and documentary troubleshooting and how Brandon Turner advises navigating them.
The Physical Inspection
First, The Book on Rental Property Investment advises conducting an inspection of the property as part of the process of due diligence in real estate. He argues it’s best to hire a third-party professional to ensure thoroughness and neutrality, but he recommends attending their inspection to get a hands-on sense of any issues. Remember that if you arranged an EMD with contingencies, you can back out of the sale at this point if you discover major problems.
(Shortform note: Certain types of property purchases—particularly commercial or business ones—may require inspections beyond those of residential properties. A restaurant, for example, likely requires additional inspections from both the health and fire departments. From the health department, it might need proof that mop and hand sinks, floor drains, and washable surfaces are in working order. Similarly, kitchen hoods, fire suppression systems, and ductwork would demand approval from fire officials. These requirements should be clearly stated in state, federal, and local laws.)
Reviewing Paperwork
Now, turn your attention to paperwork, Turner suggests. Ensure the title (the document that dictates ownership rights over the property) is present and correct. Also check for easements (rights of access to the property), covenants (the terms of a property’s legal use), and liens (claims on a property to ensure debt repayment). The best situation is when a property has a “clean” title without liens or other encroachments—meaning your ownership isn’t complicated by any other debt or ownership claims on the property.
| Buying Properties With Liens Of all the paperwork Turner suggests reviewing, checking for liens is arguably most important. As he notes, properties with liens may be more complex to purchase and own. However, some experts argue that a lien’s presence doesn’t mean that you must halt a purchase; you just need to be aware of the risk. For example, know that a lien means that a creditor is using that home as collateral for money owed by the seller. Many times, this is due to owed back taxes. If you’re determined to proceed with the sale, be aware that the burden of the owner’s debt will legally pass to you. It’s also best to pay even closer attention to the condition of the home in these cases—many times, homeowners who are in debt are more likely to fall behind in repairs or upkeep of their properties, especially if they think they’re on the verge of losing them to a creditor. |
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Here's what you'll find in our full The Book on Rental Property Investing summary:
- An educational guide to locating, buying, and managing real estate property
- The major pitfalls new investors encounter and how to overcome them
- How to hunt down, select, finance, and purchase your first property
