The Crucial Role of Due Diligence in Real Estate: How to Avoid Costly Mistakes
When purchasing real estate, the due diligence period is arguably the most critical phase of the process. Sellers often provide limited information, leaving you to fill in the gaps. While it may be tempting to overlook potential red flags, doing thorough research can save you from costly mistakes.
I learned this the hard way during a couple of investment attempts. In one case, I was interested in buying a VRBO property in Colorado Springs. The home was only two years old, yet had $200k in repairs done. Despite my efforts, no one would tell me why the repairs were needed. Most contractors refused to share details, except one, who warned me about a serious issue: the foundation. He revealed that the mountain area where the house was located was prone to shifting. That was all I needed to hear—I backed out immediately.
In another instance, I was evaluating a large commercial property. When I requested the financials, I was handed documents that were so vague they raised more questions than answers. This experience reminded me that relying solely on what the seller or agent provides can be dangerous. Realtors are often focused on their commission, not necessarily your long-term success. It’s essential to dig deeper.
With that in mind, here are 5 essential steps to perform effective due diligence when buying real estate:
1. Inspect the Property Beyond the Surface
Hire a qualified inspector to check the property thoroughly. Don’t just rely on basic inspections—consider specialists like foundation experts, electricians, and roofers if any concerns arise. In my Colorado Springs case, I wouldn’t have uncovered the foundation issue without digging beyond surface-level inspections.
2. Request Detailed Financial Records
Don’t accept vague or incomplete financial records. Insist on receiving detailed profit and loss statements, tax records, and utility bills. In the commercial property scenario, the basic financials provided were not enough. Always push for comprehensive documentation that gives a clear picture of income and expenses.
3. Research the Property’s History
Look into any major repairs or modifications that have been made. As I discovered with the VRBO, $200k in work on a two-year-old house was a red flag. Investigating why repairs were made—and who did them—can reveal hidden problems.
4. Speak with Neighbors and Local Contractors
Don’t hesitate to contact people who are familiar with the property or the area. Sometimes neighbors or contractors can offer insight that agents or sellers won’t. I was able to confirm the bad foundation issue in Colorado Springs only after one contractor finally opened up.
5. Understand the Local Market
Study the local real estate market trends and potential risks. If you’re purchasing a property in an area known for natural risks, like my experience with the shifting mountain area, be extra cautious. Understanding the local geography, regulations, and economic conditions is key.
When making such a significant investment, never shy away from asking tough questions or conducting extra research. In the end, it’s your money and your risk. Ensure you’re fully informed before moving forward.
Disclaimer: Always consult with a licensed real estate professional and legal advisor for your specific situation before making any decisions.
