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 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, and you should call out an expert to inspect it. There should be braces against the foundation wall if there are large cracks of if it is moving at all.

• Plumbing leaks, missing plumbing or rusted galvanized plumbing.

• Roof leaks or substantial roof damage.

• Improper drainage.

• Knob and tube wiring (this almost certainly needs to be upgraded.)

Again, this list is by no means exhaustive.

New investors should always get a qualified home inspector to inspect the house and then review that report in detail. Indeed, it’s not a bad idea for experienced investors to do the same. You should also have the inspector do a pest and dry rot inspection. These reports will help you identify problems and can also be useful in renegotiating the price with the seller if you discover a major problem. A seller is much more likely to believe a property inspector’s word than yours.

And never be afraid to walk away. If your due diligence proves a property isn’t worth buying, don’t buy it! Just because you are under contract doesn’t mean that you have to follow through with the purchase, especially if the property is not in the condition you had anticipated when you got it under contract.

One last bit of advice regarding due diligence; I recommend getting a plumber to scope the sewer line on any property that is more than 30 years old. We have purchased several properties with broken sewer lines, and they generally cost $3500 to $6000 to replace depending on the length, depth and accessibility.

During your due diligence, you will need to put together a scope of work. Real estate investment requires rehab and unfortunately, most investors underbudget their rehabs and end up spending way more than they anticipated.

I recommend getting some bids on the major work and then to add a

contingency to your budget for unforeseen problems (around 10 to 20 percent). Double check your original rehab estimate from before you got the property under contract to ensure your scope and budget are in line with your original expectations. Again, it’s always better to find out you were wrong before you buy and back out then to purchase a bad deal.

Lastly, as noted above, any problem you find before your inspection period has run out can be used as leverage to renegotiate the purchase price. If you find an unexpected problem after you close, the seller isn’t going to be eager to compensate you for it. So do that boring,

tedious, often repetitive, sometimes mind-numbingly so and generallynot-fun due diligence up front and save yourself a lot of headaches in the long run.

(For a much more in depth look at due diligence, please check out Andrew’s article here: https://bit.ly/2WIVdWg )

Andrew Syrios is a local Real Estate Investorand partner at Stewardship Properties. You can learn more about Andrew and his company at

• StewardshipProperties.com

• 333Rent.com

• AndrewSyrios.com