Due Diligence A Beginner’s Guide Article by Andrew Syrios
Due diligence is boring, tedious, often repetitive, sometimes mindnumbingly so and generally-not-fun at all. That being said, you have to do it and you really need to do it well. Proper due diligence is absolutely essential to make sure you avoid making expensive mistakes. I have both saved large sums of money by finding major problems with properties during due diligence and lost large sums of money by missing things I should have caught during due diligence. Some examples of the misses include broken sewer lines, a DIY electrical job gone insane where each switch turned on every light in the house and a foundation that began to sink rapidly after we removed a broken front patio (which was, unbeknownst to us, the only thing keeping the house from sinking further). It doesn’t take a large number of such mistakes to cost
Page 12
you dearly. So don’t skimp on your due diligence ladies and gentlemen. When you get a house or small multi-family apartment under contract, you will usually have 30 days to close it, of which the first 10 to 15 days are the “inspection period.” If you back out during the initial inspection period, you should be able to get your earnest money deposit returned. All of this is negotiable, of course, but it is very important to know what your time constraints right from the beginning. That being said, there can always be too much of a good thing. If you buy a lot of properties like we do, missing an item here or there, every once in a while, is just the cost of doing business. That doesn’t mean you shouldn’t do any due diligence of course. What it does mean, however, is that you may be able to justify a more “down and dirty” version of due diligence. On the other hand, if you are just
getting started or are only buying one property per year or something like that, you can’t afford to make a mistake. That one needs to be good, so thorough due diligence becomes an absolute must. Thorough due diligence requires turning on the utilities if they are off (although this is not always possible if the property is in disrepair or if the seller refuses). But if at all possible, you want to get the utilities on so you can check to make sure the electrical, HVAC and plumbing all work. Some other things to look for (although by no means a complete list) are as follows
•
Fuse boxes (it would be a good idea to replace these).
•
Signs of pest damage or dry rot.
•
Movement or large cracks in the foundation wall. If the wall has moved more than four inches, this should be very concerning,
Grow Your Business
