Even before moving on the ways to clear due diligence while buying a property. Let us understand and analyze what is due diligence. Well, you must have heard about the phrase, “let the buyer beware”. One of the biggest drawbacks or let’s say risk in buying a rental is that you are also buying the seller’s problem. Due diligence in real estate helps you in avoiding making any big financial mistake by learning everything that you need to know about the rental property you are going to buy. Let us have a brief look at what due diligence in real estate refers to.

No matter what kind of property you are looking for i.e. a single-family home or a large family home, due diligence is going to be time-consuming and an in-depth process. It refers to investigating facts about the financial and physical condition of the property and also the area where the property is located. A better way to think about due diligence is doing your homework, that too twice, one, before you make an offer and two when your contract is accepted. If you are a rental property investor, it helps you to verify that you are getting the property and cash flow that you are paying for. You must be wondering about how this process of due diligence works. Let us have a look at the same.

How does the process of due diligence work? In most real estate contacts, due diligence is pre-defined in the contract. Some states have a period of 10 days and others of 15 and so on. There are times when the clock starts ticking on the period of due diligence when the real estate contract is executed between the seller and the buyer and other times the countdown begins when the escrow is opened. However, if you are looking forward to investing in real estate then signing up for the short-term due diligence could put you in a position where you will not have enough time to fully research the property you are investing in. If you are looking for ways to extend the period of due diligence and your owner refuses for the same then you are at total risk of losing the earnest money deposit if you decide not to make the purchase. When you happen to invest in income-producing real estate, there is a lot to consider than just the physical condition of the property. Let us have a look at how it is done or how to do due diligence when buying a rental property.

Pre offer due-diligence There is quite a lot that you can do before making an offer for the property. The more information you have before making the offer, the better for you while making the offer.

1. Do the analysis of the area While doing the same, you can have a look at the following.

• Look at the population and the job growth.
• Percentage of renter-occupied households.
• Vacancy rates and median rents.
• Neighborhood and school rankings.
• The value trends of the property.
• The crime rates.

2. Pro forma financial statement

• Check out the gross rental income.
• Check out the other incomes such as applications or the late fees.
• Look for vacancy and credit loss.
• Repairs and maintenance.
• Look for the property taxes and insurance.

3. Look at the review of the financing options Based on your analysis of the area and pro forma, you can now shop around for a loan if you are financing your purchase.

This is about the conduct that you can do before finalizing the deal. Now let us have a look at post-offer due diligence and how this works.

Post-offer due diligence After your offer has been accepted, the clock starts to run on the period of your due diligence. Let us have a look at how this can be conducted.

1. Physical inspection

• You can conduct a general inspection of checking the structural items such as roof and foundation.
• You can have a look at the utilities on the property.
• You can analyze the condition of each room.
• You can have a look at the outside grounds, including sidewalks, driveway, and drainage.
• If you are getting or buying a property in a rural area then it requires septic inspection, well water inspection, and a phase 1 environmental report for property near the commercial or industrial area.

2. Financial due diligence and review

• Have a look at the profit and loss statement for the current and the last two years.
• Have a look at the review section of the income tax of the previous owner that shows income and expenses to the IRS.
• Have a look at the current rent roll.
• Review the lease in terms of the expiration date, deposit amount, and any other agreement such as discounted rent in exchange for the tenant doing the landscaping.
• Look at the allowance for pets, and the additional pet rent if any.
• Have a look at the detailed list of repairs and capital improvements including invoices and proof of payment.
• Have a glance at the copies of existing service contracts such as landscaping and property management.

3. Legal and loan issues

• Make sure that you review and analyze homeowners association covenants and restrictions to verify that the property can be rented.
• Analyze the strength of the homeowners association by reviewing the profit and loss statement and also the balance sheet.
• Make sure that you check the pending litigation and the proof of paid receipts for the recent works.
• You can get quotes from landlord insurance and also homeowners.
• Make sure that you review the history of the title search provided by the third party.
• Do not forget to verify the cost of the owner’s title insurance.

These are the mandatory things that you should consider checking before making any final decision for your real estate investment. Due diligence will help you to stay ahead and safe which is for your own good. Thus, make sure to do the same before you decide to make a decision for yourself. If you are looking for assistance and some guidance with due diligence then you can consider seeking help from Better Capital and get the best guidance in the same. For more information, you can visit us at about and clear all your doubts and queries with us.