Real estate is basically a game of hide and seek
In real estate, you have to master the game of hide and seek. Here’s how you play: The seller hides the problems of the property and the buyer seeks to find them. Unfortunately, it takes a lot more effort to find a problem than to hide one.
Once you close, the problems of the property are now your problems and no recourse exists except for a good old fashioned lawsuit or a match and some lighter fluid. So don’t shorten your investigation!
Salespeople and brokers will often say, “We don’t have time to do detailed due diligence. You will lose the case. I say, “Then I’m going to lose the case!”
The common belief among inexperienced real estate investors is that due diligence is simply checking the financial records of the property – rent records, service contracts, operating expenses, building systems, etc. In my world, this is just the beginning. You need to know what is going on with the property, the seller and the immediate area in which the property is located.
Go out and talk to people in the neighborhood. Talk to building residents, building staff, neighbors, police, and others. It’s amazing how much you will learn by doing this.
Read local newspapers, watch local news, and check the town or city website. Try to keep your ear glued to the pavement. Often the results I discover will affect my buying decision.
A concrete example of the importance of seeking out hidden information brings this message home. A few years ago, my partner and I were on our way to a lawyer’s office to sign a contract to purchase 20 acres of undeveloped land on Long Island. We arrived early and decided to take one last look at the property.
While driving through the neighborhood, we came across a construction crew working on a new residential development site less than a mile from the land we were purchasing. We stopped and struck up a conversation with the men. I asked how many houses they were building and what the purchase prices were. When I asked why the prices were so high (in fact, they were much higher than the sale prices I had expected), a man replied, “Because it’s the latest development site for a half acre that the city will approve since the recent zoning to one acre lots.
wow! The new zoning regulations for the land would only allow us to build 20 houses on the site, which is half the number of houses we planned to build. If we had signed the contract before learning this, the results would have been disastrous.
Obviously, we didn’t end up with the purchase, but we almost lost this game of hide and seek!
Go the extra mile to find out what the seller may be hiding using these tactics:
- Examine the history of the property.
A review of the existing title policy can reveal a fair amount of historical information about the property. The title report will reveal, among other things, any suspicious environmental use of the property in the past, such as a gas station or dry cleaner. Historical information about interior improvements will allow you to determine what actions you can take to maximize the value of the property. If possible, interview previous owners and occupants of the property to learn the inside history of the property.
- Find out what motivates the seller.
In any real estate transaction, carry out a thorough investigation not only of propertybut the owneralso. Is real estate the main profession of the owner? What is the landlord’s reputation as landlord and landlord? Is the owner in financial difficulty? How flexible has the seller been in past transactions? A great way to find out more about the owner is to network with professionals, such as lawyers, accountants, appraisers, brokers, bankers, etc. Understanding the characteristics of the owner can prove beneficial for the negotiation.
- Find out why the property is for sale.
Again, tap on your network to discover important information. Does the owner want to cash out? Is the value of the property at the maximum? Should the real estate market go down? Are there any issues with the property? Is the seller considering upgrading to a higher property category?
- Do extra due diligence.
If you think a certain property is a good investment because it’s in a good location, looks in good shape, has below-market rents, and sells for just 50,000 $ unit, you won’t last very long in actual domain. You should do extensive research and have third-party expert diagnostic tests performed to determine if the property is a good investment. Go beyond analytical due diligence to verify records and uncover hidden information.
Shyness and a laissez-faire attitude can cost you money. Always do what it takes to win the game of hide and seek.
Written by Sam Liebman.
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