Real Estate Terms Explained: Due Diligenceby Al Susoeff
This is another excerpt from an upcoming book and set of training tools I am working on. Feel free to comment all you want; that's what will help me make this product better for all my students!
Due Diligence Wikipedia defines due diligence as a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.
In a nutshell it means you and only you are responsible for checking out a prospective deal. The Seller is not responsible for telling you the truth. A Buyer is a liar. The Agent cannot be trusted. The broker is full of crap. And nobody else involved is going to shoot you straight. Okay, it’s not really all that bad, and we have plenty of checks and balances to make sure that deals are on the up and up, but the bottom line is YOU need to do a little CYA, which is short for “cover your assets”!
I know this is a novel idea in our entitlement society, and you can sue people all you want, but ultimately you must be responsible, you must do the research and you will have to decide what is the best deal for you.
So, here are a few things to consider when evaluating a property:
Environmental Factors: Look at the environmental history of the property. What you are trying to determine is how environmentally safe the property is. Find out whether the property has any history of gas leaks, hazardous storage sites or other harmful materials (such as asbestos or lead based paint). To perform this due diligence step thoroughly, hire an environmental consultant and/or a home inspector.. The consultant will have the tools and expertise to provide you with a comprehensive report about the environmental status of your potential new home. While the consultant should know what to look for, you should focus heavily on whether the land contains wetlands, flooding potential or endangered species. Also, determine whether there is lead-based paint, asbestos, mold, or signs of rot in the home. In addition, perform a title search of the property to determine whether you have mineral, oil or gas rights in the property.
Up to Code: Ensure that the home you are buying complies with all building, zoning and local ordinance laws in your county. Check with the zoning board to find out what the property is zoned as. If it is zoned for one-story, single-family residences, ensure that your home is a one-story home and that you will not be using it as a multiple-family dwelling. In addition, hire a building or home inspector to perform a thorough check of the physical aspects of the property. Ensure that doorways and stairways have been properly maintained. Check the plumbing and the electrical wiring. Inspect the property for damage from pests (such as mice or termites). A little “Buyer Beware” caveat here; home inspectors are not always what they seem. Many have never been involved with any sort of construction whatsoever and really do not know much more than how to nit-pick a home to death. I have experimented with leaving certain things undone, important things like properly working plumbing to see if the inspector will catch them, and about 25% of the time they miss the majors in favor of some sloppy painting. Again, the responsibility ultimately rests with YOU the consumer.
Check Your Title: This step goes hand in hand with checking your mineral rights in the property. A title search will tell you whether the seller has the right to transfer title to you and whether any other party will assert greater rights to the property. It will usually find any liens, judgments or other “clouds” that may be on the title to the property Title searching can be complicated. Hire a title company or a real estate attorney to ensure a thorough check has been performed. Do not do this step yourself, (unless you happen to be a real estate attorney). If you insist on not listening to me and want to perform a title search on your own, visit the local property records division and ask the clerk to get you started.
Al Susoeff, Jr. is a Real Estate Investor, Trainer, Coach, Author and Civil Engineer from Central Arkansas. You can read more of his articles at www.ASusoeff.com