5 Steps to Good Due Diligence on Real Estate Investments
Becoming a real estate investor is an exciting dream for many people. When that dream becomes a reality many new investors are ready to rush in to purchase their first property. The excitement of the process can cause them to overlook some key due diligence steps necessary to making a wise investment decision.
As a new investor, ensure that you are completing the due diligence necessary to form a valid opinion on a property complete these 5 steps.
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Financing Options
Before making an offer you need to have your financing options in place. Making a cash offer can help speed the process along, but you need to have everything in place. If you plan on paying cash you will be required to have a proof of funds letter. This document will show your total funds, ensuring to the seller that you have the cash to fund the transaction.
If you are going to obtain a loan, you will need to obtain a pre-approval letter that specifies how much you are approved for. The financing that you use will play a role in other terms that are established in your real estate deal.
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Familiarize Yourself with the Market
When you are looking to purchase a house as a real estate investment it is important that you look not just at the house, but the market as a whole. It is helpful to familiarize yourself with the trends that are taking place in that neighborhood and city. If the house is right but the market is declining it may not be a good investment.
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Really Look at the Property
Don’t let your emotions rush you into making a bad decision. When you find a property you are interested in purchasing bring in a few trusted professionals for a second opinion. Have an inspector come and look at the house. A third party will be helpful in making sure you aren’t just overlooking problems out of your excitement to make an investment.
Take some time to really look around the house and the property, performing the necessary due diligence. Contact the local governments to see if you can find previous listing information on the house. See if the descriptions still match or if there has been any non-permitted work that has been completed on the house.
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Know When to Walk Away
Since you are looking to make a good investment, it is important that you know when to walk away. Before making an offer determine what your cut-off purchase price is going to be. Counteroffers and negotiations can go back and forth many times between buyers and sellers. It is easy to get caught up in the excitement of wanting to “win the deal” that you end up offering or agreeing to a higher sales price than what you wanted. Make sure you establish a number that you are not willing to go above, and then don’t be afraid to walk away if you need to.
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Have an Exit Strategy
When you are purchasing property as a real estate investment you need to know what your plan is with the property. Having an exit strategy can be the difference between a smart investment and throwing your money away.
You need to know if you are planning to rent the house or sell the house. Make sure you have a backup plan if your first plan isn’t working. Having an exit strategy in place ensures that you don’t get stuck with a house and carrying costs that you can’t afford to handle.
Sometimes the difference between making a good investment or a bad one boils down to the amount of time that the investor puts into making the decision. This decision is directly linked to the due diligence performed throughout the process.
Buying a house, even as an investment, is an emotional process and not one that should be rushed into. Only after completing your due diligence will you know if your investment is a good one or not.