How to Conduct Your Pre-Contract Due Diligence in Creative Real Estate Investing

July 13, 2008 | By | 2 Replies More

How to Conduct Your Pre-Contract Due Diligence in Creative Real Estate InvestingA seller lead comes in from one of your many marketing strategies. You call on the phone and gather all of the information about the homeowner and his property. Now what?

Value the Property

First and foremost, my goal is to figure out a conservative estimate of a property’s value. If there isn’t enough equity in a property to meet our buying criteria, I quickly put the lead in the trash can or forward it to a realtor who may be able to help them. I never want to waste any time going to look at a property when I could have disqualified it upfront.

The best way to estimate value is through MLS (multiple listing service). This is the tool Realtors use to comp (or value) property. If you aren’t an agent, I would suggest befriending one.

The next best thing to MLS is Zillow. This free online tool can at least give you an idea to what a property could be worth.

Another way is to find out the tax value on a property. All of the counties that I’ve bought property within have a website that give you basic information about a property i.e. who owns it, when they bought it, what they paid for it, bedrooms, baths, square footage, etc. Depending on the county, tax values can be pretty far off. In Charleston County, they are typically 15 to 20 % lower than actual value, and in Greenville County, they are an accurate assessment of actual value. You will have to figure this out for yourself.

But remember, do not spend too much time determining a property’s value before you have a contract on the it. You simply want a conservative estimate for now for negotiating purposes.

Estimate Repairs

After being in the real estate investing business for awhile, you will be able to walk into a home and have a general idea of what it would cost to renovate. Until then, you may want to have a general contractor at your side prior to negotiating with the homeowner.

My business partner, Dusty, handles all of the in-house negotiations with homeowners. He has been through hundreds and hundreds of houses now, so he can estimate repairs and go right into the negotiation.

It is understood with the homeowner that after we contract the property, we send one of our contractors through to do a thorough inspection. If we find any additional unknown repairs, the agreement would have to be amended.

Watch out for this Common Gotcha

I have talked to a seller on the phone and rushed right over to the property only to find out, it was the seller’s sister, grandson, cousin, or friend. Make sure that you know exactly who is on title. Whenever I got started, I wasted a lot of time talking to people that didn’t have the authority to sell the house in the first place.

It is a requirement now that anytime I set up an appointment with a homeowner, all parties on the title must be present.

Your county website will again come in handy to research the owners of the subject property as this is public information.

Pre-Contract Due Diligence Breakdown

Get a conservative value for the subject property by using MLS, Zillow, and/or your county website. Estimate repairs with a contractor’s help or if you have been in the business for awhile, estimate yourself. And make sure you are meeting with everyone on title when negotiating. This will save a lot of time and heartache.

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Category: Tips and Tricks

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  1. mccann says:

    I spent a couple weeks researching a property and negotiating with a homeowner and then found out the owner’s sister was on the deed too. She didn’t even want to sell. I wasted a lot of time on it.

    Good advice.