To not know is Cause for Concern. To not ask is Inexcusable.
Investing in real estate can be very rewarding financially but at times it is not for the faint of heart. This is especially true when buyers are not vigilant and diligent. Real estate investors need to exercise due diligence in a number of areas before committing to purchase real property. While investigating a home or property, issues may crop up that can be described as either cosmetic defects, fault lines, or land mines. Cosmetic defects are minor faults in a home are easy to spot and fix. They have very little, if any, impact on the value of the investment. Real estate fault lines are visually detectable on the surface but they require further investigation below the surface in order to assess potential impacts on the property’s value. Real estate land mines, if not discovered before investing in a property, have the potential to ruin your day, and your investment.
The business side of real estate investing has been described in a myriad of articles by expert authors. Sophisticated investors will often tell you things like: do not over extend yourself; do not get emotionally attached to what you plan to buy; run the numbers to see if the planned investment makes financial sense; calculate the risk (both short and longer term); look for location; and obtain professional help and advice if you are not an experienced investor. While each of these aspects of investing has merit they will not be discussed here. This article focuses on 8 topics that have the potential to adversely affect, and even damage a real estate investment. The following points apply to residential real estate but many of them can also apply to commercial properties.
Keep it Real
Reality real estate TV programs have multiplied like rabbits in recent years. It is important to remember that these shows are made for TV first and foremost. While they may offer entertainment value to interested viewers, not all of the so called lessons should not be applied to real life situations. Some of the personalities on these shows are merely actors portraying the licensed professionals that they are assumed to represent. Enjoy the shows for what they are but consult with real practicing professionals in the real estate industry for help, information, and advice.
Check the Title
The title of a property can have any number of things registered and recorded on it. This starts with the type of current ownership. The owners of Freehold properties will be registered as either joint tenants or tenants in common. Knowing this distinction is important because it can affect the ability of a seller to place the property for sale in some situations. Titles can also have legal and other notations on them that prevent the transfer of the title from a seller to a buyer in some situations and circumstances. Have the title reviewed by a lawyer if you are not sure of what the entries mean.
Check Municipal Files
Local municipalities generally maintain files on homes and properties within their jurisdictional areas. This is one of the first things that an investor should check to ensure that everything is as it should be with the home and/or property. Many files contain routine information but once in a while a file may contain something of significance that could affect the value of the property. For example, a significant local improvement may be planned for the area within which the property is located that will result in a future significant financial levy on the property. This is something that should be discovered before, and not after, a commitment to purchase the investment property.
The construction, renovation and demolition of residences are regulated by building permit application processes at the municipal level. These lower levels of government are given the responsibility to ensure that construction, renovation and demolition plans meet the requirements of prescribed codes. The municipal planning department should have things such as building and occupancy permits on file for the home. If the home has had a major renovation with no corresponding permit on file for the renovation it is time to ask more detailed questions. If a home was built or renovated without the required permits and related inspections, it is impossible to know if it was built to code. Insurance companies take a very dim view on construction done without the required permits when something goes awfully wrong.
Talk to Local Residents
Few people really know a specific neighborhood like the people who live in it. Neighbours can be both watchful and nosy when it comes to the goings on is “their” community. People talk and they routinely share information about other people. If there is a drug lord or gang living in a local community, the people who live nearby will likely know, or as a minimum, suspect something nefarious is occurring. Knowledge of someone dying a horrible death in a home, rumours of haunted houses, and many other things may be the subject of banter by local residences. Stigmatized properties are homes that are associated with certain events that, while they may not directly affect the appearance, function or use of the property, may affect the value of the property in the eyes of others. Knock on a few doors and talk to neighbors about your interest in acquiring the property and you may find out some very interesting things that do not show up in local databases.
Discover Latent Defects
Almost all homes have some defects that can vary from very minor to quite major. Patent defects are obvious flaws that are discoverable upon inspection and ordinary vigilance on the part of a purchaser. They include things like a hole or crack in a wall. Latent defects are more significant because they are not visible upon ordinary inspection but they materially affect the property’s use or value. Many areas have laws that require material latent defects to be disclosed by sellers. These types of defects are often disclosed in documents such as property disclosure statements filled out by the seller. When no such documents exist, a prudent buyer will ask about the existence of these types of defects. Additional investigations and inspections are also prudent approaches to ascertain where or not the property is affected by such defects.
Confirm Property Access
Physical access to most urban properties is fairly obvious and straight forward. Sometimes, however, access is less obvious with rural properties. Consider an entrance to the back of an out building on a rural property that originates from a neighboring property. Is there an agreement in place to provide for such access? Property access is about more than how one enters a specific property. It is also about who can enter the property with the requisite authorization. For example, the title to a property can reveal easements and rights of way that give rights to other people and/or organizations to enter the property under specified circumstances. This is information that a buyer needs to know before buying a property.
Investigate and Inspect
As a rule a buyer should not buy an investment property without having completed reasonable investigations into, and inspections of, the real estate. This due diligence is the only way to reduce the risk of caveat emptor which is the legal principal that makes the buyer responsible for checking the quality and suitability of goods before a purchase is make. There are a number of different databases that can be checked to ascertain specific things about a home. As well, there are any number of inspections that can be completed on a specific type of home and property. This is where professional local help comes in if you are not experienced enough to know what to check, and under what circumstances. When you plan to buy in a specific local area engage a local expert to help you decide what types of investigations and inspections should be done.
Tip of the Investment Iceberg
These 8 tips represent the tip of the iceberg on what a buyer should do when considering the purchase of a real estate investment. Relying on these alone will not give you all of the information that you need to make informed real estate investment decisions. They are, however, a good starting point that will help you see what may lie below the surface of a home or property. A competent and experienced local real estate agent with expert market and area knowledge can be a very beneficial ally to most real estate investors.