The importance of due diligence in real estate investing

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Looking For Clues (188 / 365)

If you are planning to venture into real estate investing, and have done some research, I’m quite sure you have already encountered the phrase “Due Diligence” many times over.

I believe it even became a buzzword of sorts last year because some people I know reminded others to always do their due diligence, pretty much like what I said here. But what is due diligence and why is it very important in real estate investing?

Definition of due diligence in real estate investing

In a nutshell, I would define due diligence in real estate investing as a process where you are taking the necessary and reasonable steps before the acquisition of a property and this may include, but is not limited to, conducting research and analysis that would cover the physical, legal, and financial aspects of a property.

Much of these can be done through property inspections, a visit to the local Registry of Deeds, City/Municipality Assessors office, Home Owners Association, etc. The rest calls for some number crunching.

Don’t forget to start with banks or lending institutions who should disclose any information they may have, including if the property has any liens, encumbrances, pending court cases, problems with technical descriptions on the title, illegal occupants, physical defects that are too costly to fix, arrears and/or real estate taxes that the buyer will have to shoulder, etc..

The information above that you can get from the sellers themselves (the banks or lending institutions) will definitely help you get started when you conduct your due diligence, but you have to keep in mind that you will have to verify the information you may get. If  some of the information you need is not readily available, you may have to fill-in the blanks yourself.

Warning

Here’s a warning though, due diligence can be tedious, time consuming, and may require a lot of legwork. Which is why you should only do a “reasonable” amount of due diligence on properties that you have already pre-screened and have made it into your shortlist. You can’t do your due diligence on every property you see, that would be a recipe for wasted time, money, and effort.

Defining what is a “reasonable” amount of due diligence would greatly depend on the circumstances behind the deal or the property you are looking at.

Note: Make no mistake, no matter how tedious conducting due diligence may seem, it is definitely something a real estate investor cannot do without, especially with foreclosed properties, because they are for sale on an as is where is basis. The good thing about due diligence is it becomes easier with practice, and you can even outsource it if needed.

Do your due diligence fast if…

For example, if you are hard pressed on giving an offer for a property because you believe there are a lot of other interested buyers, then you need to do your due diligence fast so you can submit your offer before your competitors. In this case, a reasonable amount of due diligence might be limited to the bare essentials or non-negotiable’s.

You can take your time if…

On the other hand, If a deal has no urgency, a more thorough due diligence can be done. For example, if you believe that a foreclosed property has been in the market for so long with no takers, but you still believe the numbers look promising, then you have the luxury of taking your time to do a more thorough due diligence.

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Obviously, a big deal that is worth tens or even hundreds of millions of pesos would naturally call for extraordinary due diligence, which can take a longer time to complete.

Let me tell you a story…

I remember the very first time I won on my bid for a foreclosed property during an auction.

I was the lone bidder and when the auctioneer banged his gavel which signaled my win, I really felt happy and relieved because I had finally won!

Imagine how I felt later on when I thought to myself “Maybe there is a problem with the foreclosed property others have seen which I have not, which is why no one else made a bid… except me! Oh no!”

Was it a case of finding an opportunity others missed, or was I the one who missed seeing a problem that discouraged other real estate investors from buying the same property?

If I had done my due diligence properly, I would not have had the feeling above in the first place, right?! Actually, I believe one cannot be 100% sure that he made the right decision in buying a property. But at the very least, doing proper due diligence allows one to make a well informed decision, and you would less likely have any regrets or “buyer’s remorse”.

An ounce of prevention…

As the late Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.”, and that is exactly what due diligence is for. It should prevent you from buying a property that has problems or will give you problems down the road.

It is far better and easier to just walk away from a problematic property BEFORE you purchase it, than trying to “cure” its problems (which can be very costly) or dispose it later (it might even be harder to sell) AFTER you have already purchased it and parted with your money.

Note - To help you with your due diligence, a copy of Version 1.0 of our Due Diligence Checklist is now for all followers of our Facebook page. Here’s a link to the download page: Due Diligence Checklist)

Conclusion

To answer the question, “What is the importance of due diligence in real estate investing?”, let me summarize it below:

When it comes to real estate investing, your best defense is conducting proper due diligence! – Jay Castillo

Happy real estate investing!

~~~

To our success and financial freedom!

Jay Castillo

Real Estate Investor
PRC Real Estate Broker License No. 3194
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines Facebook Page

Text by Jay Castillo and Cherry Castillo. Copyright © 2008 – 2012 All rights reserved.

Photo credit: somegeekintn, on Flickr

Full disclosure: Nothing to disclose.

P.S.  I wrote this post to make a brief overview on “why” due diligence is important. To get an idea of “how” due diligence can be done, checkout my post on the 31 Questions you need to ask when inquiring about a foreclosed property which you can turn into a due diligence checklist for real estate.

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About Jay Castillo

Jay is the founder of Foreclosurephilippines.com where he shares real estate investing tips and foreclosed property listings. He was an I.T. Manager that loved to make things work, which is exactly what he did when he crossed-over to Real Estate Investing and Internet Marketing. He is also a licensed real estate broker with PRC License # 3194 ... [Continue reading]

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  • pol

    Hi Jay,

    I have an agent which is selling me a foreclosed property of NHMFC. She told me that I would have to pay 300K and assume the balance. Is this legal?

    Thanks,

  • http://marketpilipinas.com Dherish

    Thank you so much Sir Jay for sharing this article :)
    More Power and god bless

  • Angelo

    Any seminar on real estate agent Jay? If there are coming seminars, what are the schedules? Thanks and more power!

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Angelo, Urban Institute has a 12-hour CPE for Sales Persons on June 29-30 at the AIM in Makati, 12:30pm to 7pm. For more details, please contact them directly through the following:

      Telephone:

      (+63) 2187462

      Mobile:

      Globe: (+63) 915-457-3596
      Smart: (+63) 939-137-9242

      Email:

      urbanet.ph@gmail.com
      info@urban-institute.com

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  • http://www.myproperty.ph/ Jillian Cariola

    Great article, and a good story to give an example. Being careful about your real estate transactions helps you avoid buyer’s remorse. Sometimes we feel like all real estate properties are good investments, but the truth is that if we’re not careful, we might end up paying more through repairs and renovations than we initially did.

    • http://www.foreclosurephilippines.com Jay Castillo

      You sure got that right Jillian, thanks for dropping by!

  • Hoover Uydebaron

    Hi Jay… would you be interested in an article on how to do a basic legal due diligence of properties here in the Philippines.

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Hoover, sure, that would be great! Thanks!

  • Avicmagpoc

    dear sir,

    thank you fo this very informative site. ive learned and saved a lot thru reading your blog.

    dra avic

    • http://www.foreclosurephilippines.com Jay Castillo

      You’re welcome and thank you also Dra Avic for the feedback, much appreciated!

  • http://www.virtualbusinessmatters.com/ Red Denal

    Thank you so much Kuya Jay for insisting the importance of due diligence in real estate investing. Doing it and practicing due diligence in any form of investing or in any business is second to none. Indeed.

    Keep sharing more. Happy investing to everyone! :)

    Regards,
    Red @ http://www.virtualbusinessmatters.com

    • http://www.foreclosurephilippines.com Jay Castillo

      You’re welcome and thank you also Reden!

  • precy

    Yes, Mary is right, a big challenge for OFWs who want to invest but are not physically present to see the property.

    Anyway, Jay, thanks a lot for this article. I am motivated to enter foreclosed property investing when I read your blogs :)

    more power
    precy

    • http://www.foreclosurephilippines.com Jay Castillo

      I totally agree Precy. It is still a big challenge for OFW’s to invest while abroad.
      Thank you also for the kind words, good morning!

  • Mary

    this is the initial & crucial ‘problem’ of an OFW on property investing…

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Mary, yes, this is a big challenge for OFW’s. I suppose finding someone you can trust (ideally a close relative) to do the due diligence for you would be the next best thing to doing it yourself. Thanks for the comment, cheers!

  • http://twitter.com/djdimaliuat DJ Dimaliuat

    Very nice Jay :)

    • http://www.foreclosurephilippines.com Jay Castillo

      Thanks DJ!

  • Ed

    thank you Jay for writing about this topic….now i have a better picture of what due diligence really means…..

    more power to you as you share a lot of valuable information about foreclosure investing.

    Ed

    • http://www.foreclosurephilippines.com Jay Castillo

      You’re welcome Ed. Thank you also for dropping by, cheers!