Posts Tagged ‘reviewing books and records’

Conducting Due Diligence, Part 2 — Reviewing books and records

Sunday, February 3rd, 2008

Following the outline presented in “Real Estate Investing for Dummies,” we continue with the key points in reviewing books and records during due diligence for fixer upper house investors.

As mentioned, real estate purchase contracts allow the sale to be canceled without loss of earnest money if the buyer’s physical inspection isn’t satisfactory. Although, additional negociation between buyer and seller often results in the seller offering to fix the problems encountered.

Issues that are resolved during the review of books and records can eliminate future disagreements with your tenants. Verify all information in writing and set up a good filing system for your new property.

Some things to have on hand before the purchase is finalized:

1. Seller-verified income and expense statement for at least the past 12 months.

2. Seller-verified rent roll. This includes a list of all tenants, move-in date, lease expiration date, current rent, and security deposit.

3. Seller-verified list of all tenant security deposits on hand. It’s best to have the seller to provide you with all security deposits so that you don’t have to recollect them when you take over.

4. Tenant applications, leases, work orders and correspondence for each tenant.

5. Copies of all service agreements (for maintenance, landscaping, pest control,

6. Copies of required governmental licenses and permits.

7. List of all personal property included in the purchase (for example, appliances, equipment, supplies and furniture).

8. Copies of the latest utility bills (electricity, natural gas, water/sewer, trash, etc.) Also, check to see if the seller has any deposits with utility companies.

9. A copy of seller insurance policy and loss history. This will help you determine how much insurance you will need to carry.

Make sure you verify the accuracy of all records you receive. Most sellers are probably honest, but you don’t know if information is being withheld unless you have copies of everything that you have a question about.

Next up: Inspecting the Property

Learn about managing tenants in compliance with the Fair Housing Act at Bigger Pockets.

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Conducting Formal Due Diligence

Wednesday, January 30th, 2008

I am currently reading “Real Estate Investing for Dummies” by Tyson and Griswold, a well-written and thorough book that covers the basics of what real estate investors should know. I’ve long considered “Investing in Real Estate” by McLean and Eldred as one of the best introductory texts for real estate investing. Yet after reading the “Dummies” book, I find it equally as good, and perhaps a little more accessable for the new investor.

Here is my list of Top New Real Estate Books that I posted on Amazon.

To assist those who invest in fixer upper houses, I’m incorporating key parts of the “Due Diligence” chapter from the “Dummies” book with my own real estate observations.

Once you have made an offer on a house and it had been accepted by the seller, the “due diligence” period begins and you have until the close of escrow (or completion of the sale) to check out the physical and financial condition of the property. If you discover that the property has problems, but you think the deal is still worth pursuing, the seller may be willing to correct any deficiences, or give you money to to complete the necessary work yourself.

It’s during this time frame that you must get all of your questions answered and be sure you know what you are getting. If done properly, it will require quite a bit of effort on your part. But it must be done, if you wait until after the property is in your possession, its too late to ask the seller to replace that broken furnace.

You should work closely with the seller but take his word for anything. Only trust what you have in writing.

In my case, most of the house that I buy aren’t bought from the owner. They have been reposessed by a bank, the Veteran Administration or HUD. But I still do due diligence by having my friend/handyman go through house with a fine tooth comb. He knows more about the house repair than anyone I know.

There are two key components of due diligence process:

1. review of books and records
2. the physical inspection

A thorough look at these two components should allow you to determine if the property is worthwhile, priced right, and your goals. The due diligence is your last opportunity to either complete the transaction, or cancel the escrow, have your money returned, and look for another property.

Next post: Reviewing Books and Records

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