Due Diligence - JV Partners

If your potential RE investment includes having a partner, use due diligence on them too. You might be in the deal for 5 years with them. Are you sure they're going to keep the terms of your agreement for all that time? Do your personalities match up well enough so that if something goes sideways you'll both agree to stay the course?



Do you know them well enough?


I suggest you get to know them socially. See how they do life outside of business. Ask them if they will agree to have a criminal record check done, of course you'll have to do it yourself if they ask. Have a look inside their car and their house. Offer to do the same. Will they do what they say they'll do? 


What have they been up to?


Some people have a public persona (whether they know it or not). Type their name (in quotes) into a google search and look closely at what comes up. Check if they have a Facebook, LinkedIn, Google+ or whatever account. It's fun to see what people do online these days. Oh by the way, check yourself too.


What's their track record?


Have they done this kind of transaction before? Is there anyone who can vouch for their performance in business? How's their work record? If the deal needs more money injected, are they ready to help out?


Are they going to be around for the whole project?


If you look at the big picture, what are the prospects for these potential partners in the near and far future? Are they steadily employed?



It's inconvenient and intrusive to do the above. If you've got $50k on the line in your deal, it's probably worth it IMO.

Due Diligence - Go Look at the Place

One can buy a property without ever looking at it. It's easy and is done every day - by experienced investors. It takes quite a while to become "experienced".


I suggest you go look at properties at every opportunity if you want to become a well-grounded RE investor. After a while you'll notice some interesting patterns. There is a relationship between what's written in an MLS listing and what a property is, but it's tenuous. Realtors want us to feel excited about their listings. I want you to see it for what it is.


To understand a property's worth, one has to use one's senses and discover these things:


how does it smell, look, feel
has it been kept maintained
how much life is left in it's systems
how can it be changed to add value (this is a big one)


We can pay an expert to report all the above but the last one is our responsibility because that's where the money is really made.


Here's what a personal inspection reveals: what needs fixing, what can be improved and/or brought up to date and who should I talk to to help figure out how much all that will cost. 


If the roof / furnace / electircal / kitchen / bathroom / paint / rugs / floor etc looks old then if I fix them, how much will I increase the value of the property for re-sale? Or, if I'm going to rent it, what do I have to fix so that it's liveable for tenants? 


Inspection Checklist


Roof
Exterior
Plumbing
Attic
Electrical
Ventilation
Heating
Cooling
Interior
Garage
Appliances
Basement/Crawlspace

Due Diligence - What Value?

Here's some more thoughts on being diligent in one's research before acquiring a property.

How does one decide the value (price) of a property?

If I'm a flipper, I want to get a property at a low price, fix it up, and sell it at a higher price. If I like to do long-term-holds then the price isn't as important as how much income the property can generate for me.

Who decides the dollar value? Are there any other values I should know about?

If a property is for sale, it has a selling price. It's likely that a realtor assisted in figuring out the sale price. If it's a single family home up to a four-plex, the way that's done is relatively simple. Find similar properties in the area that have sold recently, account for differences in age, size and amenities then assign a sale price An experienced realtor will also use a bit of gut-feel to tweak the final price. That comes from watching the market trends and having experience with the selling process. Notice that on MLS listings there is an asking price and a sold price. The seller may want $450,000 AND the sale price may end up being $425,000 or even $475,000. It all depends on what happened during the selling/buying process.

There's an assessed value associated with all properties. This is a dollar value assigned by the local assessment authority, using a complex formula, that is used as the basis for taxation. As an investor, the assessed value can be useful if you're comparing two or more different properties that look the same. Other than that, I don't find assessed value all that useful.

On the property, the land and the improvements (buildings) each have their own value according to the assessor. If on a $500,000 property the land value is $450,000, guess what the actual building is worth? Not much, comparatively. In that case, the dirt is expensive and the buildings might be eligible for tearing down and re-building. If you build a $200,000 house on the land, will the property now be worth $650,000 (450+200)? You better check with your realtor before you build because the comparable properties in that area might be selling for $600,000. Building in that case is not a good idea.

If I'm a flipper then there's my selling price, ie: the price I'm going to sell the property at when I'm done fixing it up. Again, my realtor can help me decide if fixing the place will get me enough increased value that I can make a profit. The realtor uses local selling price comparisons as before. There are many factors that influence that price, which is one of the main reasons we are learning about due diligence. Understanding how the realtor does all that will help you choose the correct property to invest in more efficiently.

Do you see a pattern developing here? There appears to be a realtor involved in many of the value decisions. I can't emphasize enough the advantage of having an experienced realtor on your team.

Due Diligence - Legal Factors

Every property in Canada (that I know of) is somehow registered with a local government. Let's assume it's a province.

In BC, there's a piece of data called "Legal Name". It's kept by the Land Title and Survey Authority of British Columbia (LTSA). It's the ultimate name a property has for legal purposes. It's the kind of data that you don't want to fool with. It points back to the results of a survey map of the property. All legal contracts must have this field on it or it's not legal IMO. If you misspell it on a document, the document it worthless. You'll see it on the Contract of Purchase and Sale. Don't EVER misspell it, it's too important. If you're using a realtor, get them to deal with it.

Every property has a title. "A title is evidence of the registered owner's interest in the lands" I stole that directly off the BC LTSA website. The title is stored on the Automated Land Title Office System (ALTOS) in BC. Anybody can get a title report on any property in BC. There's an automated retreival system call BC-Online which anybody can get an account with, and for a small fee, get title reports. The title contains REALLY IMPORTANT information about the property. The important data is: Registered Owner, Taxation Authority, Description of Land, Legal Notation, Charges Liens and Interests, Mortgage and Easement.

As an investor, I want to know if the property I'm looking at is real and if anybody besides the owner has an interest in it. From the above we can see that a taxation authority wants taxes paid or they can take the property away. As well there may be liens against the property and the lien holders can influence things. If there's a mortgage then the mortgage holder is in first place to get paid if the property is sold. Easements are things like rights-of-way that governments have legally registered against the property. They can invoke their right-of-way any time they want. It's a little burden that comes along with owning the property. If you can't interpret the Title report, find someone who can. Your lawyer should be able to give you all the details. Your realtor can get you the report and interpret most of it. If you don't have a title report, you haven't been diligent.

When you want to talk to the local government (city perhaps) about a property, you merely have to mention the Property Id and they can get you all kinds of information about local taxes, utilities, location, etc. The property id is on the Title Report. Some local governments keep a file on a property if there has been complaints, inspections or whatever about it. If you ask nicely, down at city hall. they may tell you if there is a file and what's in it. This historical information can be pricelss when deciding things like - what amount to offer, are the upgrades legal, is the property a nuisance, etc.

BC-Online can get you a report of who's owned the property over the years. The reason an investor might want to see this is to check if the buyer is telling the truth about their ownership. Also, if the property has been sold every year for the last five years then there must be something fishy about it. Follow your nose and find out what's going on.

The above data is easily obtained and is a must have for every investor.

The Critical Importance of Rental Property Inspections

The Critical Importance of Rental Property Inspections:

'via Blog this'

Due Diligence - the team

You've listened to your mentor/teacher/guide. You've acted fast and tied up a skookum (that's Canadian for cool) property. Now's the time to do the due. In my November 2011 post I listed many (but not all) things to look at before buying.


You might ask, how do I, a newbie RE investor, know how/who/where to check all those things?


As with many aspects to RE investing, you don't have to do much, you just ask someone to do it for you!!!


So, here's the list and the people who should attract to help you be diligent:

• a legal name - Realtor
• a title - Realtor/Lawyer
• a history of ownership - Realtor
• a retail value - Realtor
• an assessed value - Assessment Authority
• land and/or building(s) - Surveyor, municipality, inspector
• a location - Surveyor, municipality
• a degree of repair - inspector, contractor, experienced tradespeople
• a history of repair - current owner
• a reputation - police, municipality
• neighbours - neighbours
• an owners value - current owner
• a membership in a local or larger economy - REIN, municipality, Realtor, Investors club, your RE investor friends

You might (and should) ask what if I'm not using a Realtor to buy this property? Who do I ask for those points above?  Ask a Realtor!! You do know a realtor don't you? If not, you better find one. I'll talk about that in another post. Realtors are helpful, knowledgeable, and want your business. If they are RE investors too, then you've got a powerful member on your team.

If you are buying this property through a realtor, you many not have access to the buyer. Ask for access anyway. If denied, ask the realtor for all the details on the property and it's history. They may say "I don't know". Then you ask "How can I find out?". Keep asking them and everyone else until you get answers.

Using a surveyor is optional. What you want is a recent surveyor's report. The report gives you an accurate picture of where the property lines are. Ask the current owner, realtor or whomever if there's a surveyor's report you can look at. Offer a bit of $$ if necessary. This is usually required when building on this and adjacent lots are REALLY close to the property lines or the lot is an odd shape or if fences, driveways, etc sit on the property lines.

What's a REIN? It's Real Estate Investors Network. These folks do a TON of research on economic indicators for RE investors. If you're going to do a quick flip on the property, this isn't so important. If you're doing a long term hold, it's nice to know what's happening in the area around the property that can affect it's value. 

Some of the above folks will want to be paid for their service. Until you can do what they do (ie. inspecting) it's worth the money.


Gord
http://www.victoriarei.com

Due Diligence

The teachers say "Do Your Due Diligence!" before acquiring a property (or doing any kind of investment).

What does Due Diligence mean?

A quick search finds: "Reasonable steps taken by a person in order to satisfy a legal requirement, esp. in buying or selling something."

So there's a legal component, ok, got it.

Wikipedia says "an investigation of a business or person prior to signing a contract, or an act with a certain standard of care."

There's likely a person or persons involved. Noted.

Wikipedia also mentions audits, esp. with regard to acquiring a company.

Ok, for any investment property, there definitely is:

• a legal name
• a title
• a history of ownership
• a retail value
• an assessed value
• land and/or building(s)
• a location
• a degree of repair
• a history of repair
• a reputation
• neighbours
• an owners value
• a membership in a local or larger economy

If I can do an audit on all the above, then a decision to buy becomes self-evident.

Assuming I know what I want!