Due Diligence

In real estate investing the one thing that should always be done is due diligence. Due diligence means investigating any and everything that has to do with the property you are purchasing, selling, assigning, wholesaling, and any other type of transaction. This includes looking into the projected after repair value, repair cost, title, ownership, address, legal description, property boundaries, liens, mortgages, etc.  The last thing you want is be involved in a fraudulent transaction that could ruin your reputation and even worse, cause someone to lose money. So how is this done?

Well, there are a few things to look into when considering buying a home. In this example we will examine a purchase from a wholesaler that contracted the property from an REO agent. I chose this as an example because this is what many investors are accustomed to seeing and what has been used to defraud many investors as well. When purchasing a property in this manner you want to see the original contract going from the current owner to the wholesaler. Even if the wholesaler is double closing the property, you want to see this contract to make sure they have the right sell or assign it. Once you confirm that the wholesaler indeed has the property under contract you want to see the title commitment that the title company will provide the wholesaler. Assuming you are using your own go-to title company, which is different than the one the wholesaler is using, you can use your title commitment to make sure it matches up with the wholesaler’s title commitment. Keep in mind that title companies are human and can also make mistakes. Yes, they do insure their mistakes but double checking them to prevent these mistakes can save you tons of time and money.

Something else you can do to make sure you are purchasing the home from the correct seller is to match the names on the contracts with the names on the tax records. The owner of record should be on the original contract selling the home to the wholesaler. The wholesaler can be either an individual or company and you should check both, especially if you are going to make a down payment of any kind. The state comptroller’s office can provide you with the company’s status. If it is in good standing and still active you now know it is an actual existing company. You can then check the BBB to see if they have any complaints. If the wholesaler is an individual I would get a copy of his/her ID before turning over any funds. In this situation I would also demand that the down payment be deposited with the title company not his/her pocket.  When working with someone for the first time, asking your local REIA members if they have done business with a particular company or individual is also a great idea.

A few weeks ago we were in the middle of closing a property we contracted from an REO agent and discovered another investor had already closed on the same property. I was not too worried because I still had not closed on the property. We found out about the other investor when we showed up to take measurements for remodeling ideas and ran into the other investor’s contractor. After some digging I confirmed I had the contract from the true owner, in this case the FNMA. It turns out the other investor/ company thought they had purchased this property in a package deal. If they had done these simple steps they would have discovered that they were purchasing the home from someone who was not in a position to sell. This company has done many deals and would be considered a very experienced investor, which goes to show that it can happen to anyone so do your due diligence.Performing due diligence will increase your chances of making money and reduce your exposure.