Doing your “Due Diligence”.

I asked that question several times when I first came to this site and it seemed I would get various answers, but none very specific. Finally, someone pointed out that due diligence varies from for each type of purchase you may be doing. If you are doing REO (Real Estate/Bank owned properties), there are certain things you check for in your due diligence that may not apply to a Contract for Deed, where you can probably walk through the house you are purchasing and may be able to use your own contract.



I’m not an expert. As a matter of fact, what I’m sharing here are the things I’m learning on my first deal! But what I’ve found has been a treasure trove. I’m sure there will be things you can add, but just in case this helps someone else, here is my story.



The Find: I found this house by driving through neighborhoods. When people ask me what I did on the weekend, I tell them I went ‘sailing’. They then ask if I have a sailboat. “No, I went garage sailing.” Actually, I drive my wife to garage sales and while driving through the neighborhoods, I look for properties that have that magic look of being rundown and possibly abandoned.



The grass was building up and the house was all boarded up and had one of those dreaded ‘orange’ tags that the county uses to mark properties as ‘condemned’. I asked a neighbor about the property and they told me that the owner had been a little ‘whacko’ and had been digging under the house. Sounds like the house of Edgar Allen Poe I thought. Because it was boarded up, I couldn't look inside. Who knew what erie things I might find within.



The County: My best information came from the building department. I don’t normally go to the building department except to get a burn permit. I found that for a few dollars (California is looking for money any way they can), the county offices will give you tons of information. I was able to get a list of everything the county required to be fixed on the property for the ‘condemned’ status to be ‘inhabitable’. In this case, it appears that Joe Homeowner was a little bit too much into the home improvement shows and did some major changes to his house without permits or engineering plans. This triggered numerous calls from the neighbors and then the county stepped in. First lesson learned, I need to have a permit for everything and then to make friends with these neighbors.



The particular property had several building permits on file, including an open permit that still had a year left to go before it expired. I had found a gold mine. First, the permit follows the property at sale, and two it told me everything the previous owner had gotten the county to approve on paper for the repairs. Things got even better on my second trip to the county offices. I was able to see (not copy) the site plans for the property as well as an engineering report for the repairs that had to be done for the property. The engineering plans had 3 pages of detail including repairs for doors, windows, electrical, pluming etc and which rooms in the house needed these repairs. I was able to compare the engineering details with the floor plan of the house and know almost every detail of what needed to be repaired. I didn’t need to go inside the house, I had all of the estimates on the table in front of me at the county offices!



As if that wasn’t enough, it got better. I was also able to obtain a copy of the building permit status sheet that showed which items had already been inspected and approved by the building inspector. My cost of repairs was getting shorter and my effort was being reduced. Now that doesn’t mean that the next inspector won’t change things, but that just eliminates that much work off my ‘to do’ list.



The Property: I visited the house again the next day with my digital camera. Walking around the outside of the house, I found a ventilation screen missing from the side of the house. I stuck my camera under the house and started taking pictures. I needed to know if the Edgar Allen Poe story was true. When I got home, I put the pictures on my laptop and was able to see the type of construction and the condition underneath the house. I don’t know if this was legal, but I figure this is one of those cases where it’s better to ask for forgiveness rather than permission. Besides, I can tell the tattle tale neighbors I’m part of a neighborhood blight cleanup program and I’m collecting details that will add thousands of dollars to the value of their home.



The last step in my due diligence was to get a listing of comparison sales for the property. I obtained 5 listings from a half mile radius that had sold in the last 8 months. I then drove by each of these houses and took pictures of these homes as well. This proved to be very valuable. While investigating the other properties, I found that the comparisons for one house in particular was about 200,000 over the others. After seeing this particular house, I realized that I could not compare this house to the one I was investigating, even though on paper it was the most similar (same number of rooms, square feet, year built, etc.). My house was paneled with T-111 siding, the other house was stucco and looked very modern. My house looked much more like the rest of the houses in the neighborhood in my comparison list. Oh well, I thought I might be making a 100,000 dollars based off this comparison. Now, I know that I cannot.



Conclusion: After my two trips to the county offices, and several trips by the property, I have been able to come up with an accurate value of what the house can retail for, as well as a fairly detailed basis of what my costs will be to make the property ready for retail. I’m in communications with the bank negotiating an offer they might be willing to accept and that will still allow me to not lose money on the property. Now I feel like I know what I will be getting into when I get the keys and permission to remove the plywood from over the windows, and I won’t won’t be surprised more than necessary. Happy hunting.