Any experienced investor will tell you that due diligence are two of the most important words in investing. Due diligence is defined by Investopedia as, “The care a reasonable person should take before entering into an agreement or a transaction to another party.”
I learned the importance of due diligence soon after my first real estate blunder.
There are 3 types of due diligence: Financial, Physical, and Legal. As a rule of thumb, always perform the financial due diligence first. If the numbers don’t work out, then you didn’t waste any money or time on the property inspection or legal work. The majority of deals that don’t go to closing are because of the financial due diligence. We recommend a minimum of a 30 day due diligence period for inspecting smaller properties, and at least 45 to 60 days for the larger properties. Be sure to add extensions in the contract for length of the due diligence period.
The due diligence period should not commence until you’ve received ALL the requested financial documents. This will motivate the seller to turn over all the records in a timely fashion so you can perform an accurate analysis of the property’s performance much more quickly. Once the time period expires, you are in jeopardy of losing your down payment if you do not go to closing. (Read More)