Due Dilligence?

Hi,
I am intrested in this form of investing, but I also want to protect myself. What do I need to do as far as ‘due diligence’? All I have heard to do is research the property through a title search and make sure the land is not a former gas station, former dry cleaner, etc. Is there anything else that I need to research? Any replies would be appreciated. I’m new but I would really like to invest in these sales. I would also like to make a well informed decision on my part. :stuck_out_tongue:

Thanks,

Andrea

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Andrea

Howdy Andrea:

There are many things to check out before you spend money on inspections. I am almost under contract on a 30,000 foot building in Corpus that I have not even seen yet. I plan on starting the due diligence this weekend and also going to the beach at the same time. First I will look over the neighborhood and see if it is declining or being renovated or stagnate. Then I will talk to the tenants and see what their plans are. Would they pay more rent for a nicer looking building for instance and do they know other folks that would like to lease a space. I will contact other landlords and tenants in the area to get a market study of what the rent could be on a nicer looking building. I am looking for exactly how nice should I make the place. I just saw an old car dealer building here in Austin rehabbed completely and turned into a yuppie strip center. I am sure the rent was increased. Is this a possibility with this deal as well.

So far I have spent next to nothing. Next comes the physical inspection of the building if I still want to proceed. My lender will want a list of repairs I intend to make and I will need to get some bids on a lot of the work to be done once I figure out what I want to do of course. This will take a few weeks at least with this size of a project. Yours may only take a day or two and you may want to hire some professional help with the inspection if you are not familiar with the construction business.

After this I will need to hire an appraiser, probably the lenders appraiser will have to be used. I will be getting the value after the property if rehabbed and leased up at the new hopefully higher rents. The last report the lender will need is the environmental Phase 1 study. This will probably cost a few grand and I will wait until last to order it. I hope the bank actually has one that they did before they loaned on the property or before they foreclosed on it.

Now to put all the pieces together and see if the numbers will work with the amount of rehab and the purchase price and the carrying costs and closing costs and hard money fees etc. This is the scary part because the appraisal has to be 30 5 more that the total costs so the lender will loan me 70% of the value and I can borrow 100% of the hard costs.

You will also need to know your exit strategy. Do you plan on holding for rental and getting a long term loan after the rehab or selling it. You can afford to pay more if you are keeping it and can borrow enough long term. Adding up all the costs involved on the selling end should also be included in your study of the deal.

Also consider the time it took other sellers to sell their property if you plan on reselling. The overall market conditions in the area could make or break the deal.

Thanks for your response! I fogot to put in my topic that I wanted to pursue Tax Lein Certificates or Tax Lein Sales. Would this process be needed for houses you buy at an auction too?

Thanks,
Andrea

Howdy Andrea:

Just a little different. You will not want to spend any money on appraisals and inspections. You will just want to do your own comps and look over the property and area yourself. Hard to spend money on property that may be pulled from sale at last minute or that you may get out bid on. There is always the possibility the owner will come up and pay the taxes just before the day of the sale.

Also keep in mind you will have a hard time finding financing because it is hard to get a title policy on tax sales because the owner has the right to redeem or file lawsuits etc. Your best bet is to find the owner before the sale and get the deed and then pay the taxes before the sale.

I’m sorry to bother you again, but when you say contact the owner to get the deed–how do you do that? Do you mean take over their mortgage payments and pay the taxes?? ???
Thanks,
Andrea

I’m like a baby trying to soak in as much information to learn the process. Thanks for your help too!

Andrea

Howdy Andrea:

There are a lot of different situations when it comes to tax foreclosure sales, some have no mortgage and some do. It just depends on the deal as how to approach the owner and if there is any equity and if you can even find the owner. It may be best also to wait until after the sale to get the deed which will give you the redemption rights.

Most of the time the mortgage company will step up and pay the back taxes before it gets to the sale and then they may foreclose against the owner instead. You just need to look at each deal and decide if it is worth bothering with and then the best way to proceed.

Thanks so much. I really appreciate your input. I plan to put it to use in the very near future.

Thanks again,
Andrea

Tax Liens sales and Tax Auction sales have different rules for each state, county, or even municipality. So you should know them before the sale. A Tax Lien sales is when the owners owe back taxes, it goes to the sale and you usually bid on the interest rate. In NJ it starts at 18% and goes down, so if you are the lowest at 15% you pay the taxes, and when the owner is ready to pay, they owe the taxes, plus 15% interest. This is a cash only deal. If they fail to pay within a certain amount of time (usually two years) you can file to take the property. Do some research first. Don’t want to end up with environmental issues such as industrial sites, swamps, chemical dumps, meth labs etc. Because if you end up with the property, you will be responsible for clean up.