If you’ve researched any sort of investment topic, then you’ve most likely heard the term “due diligence” before. It’s a widely used phrase that seems pretty straightforward, but it can mean a lot of different things, especially in the real estate space.
So, what does “due diligence” mean for potential home buyers or business real estate investors? What types of things are involved in the process? And how does one go about it?
BASICS OF REAL ESTATE DUE DILIGENCE
In the real estate industry, “doing your due diligence” essentially means conducting thorough research before buying a property.
This research can happen in a variety of different ways. Reviewing documents, scouring the market for different deals, doing financial calculations, and carrying out property inspections are just a few examples of due diligence steps every buyer needs to take.
However, the process can vary significantly depending on the type of real estate space you want to purchase. Let’s take a look at the residential side of things first.
DUE DILIGENCE PROCESS: RESIDENTIAL REAL ESTATE
Here’s a very simplified checklist of the different steps you’ll need to take before you close on a residential real estate property.
- Explore different properties and real estate markets. One of the most important things you can do when looking for a home is to simply take a look at what’s out there. Drive through the neighborhoods you’re considering moving to. Tour multiple open houses. Look online at different listings. In other words, create options for yourself! The last thing you want to do is contractually place yourself in a home or mortgage agreement that you can’t handle, or that you don’t like, for that matter.
- Gather multiple bids for mortgage financing. After you find your ideal home, you’ll need to secure ideal financing. Getting multiple bids may take a little extra time, but it will give you much-needed options.
- Have the property appraised. Unless you’re buying in cash, an appraisal is a required step in the home-buying process which can protect you from paying a potentially over-inflated price on the property.
- Inspect the property. Before you purchase your property, you’ll need to have it inspected. Most home buyers opt to have a professional home inspector assess their potential property, who will look for material defects, cosmetic defects, maintenance needs, etc. Click here to learn more about home inspections and why they’re important.
- Determine your insurance eligibility/needs. Seeing as your home is ultimately an asset, you’ll need to take great care to make sure it’s protected. Take some time to gather quotes and potential policy options from different insurance agencies. Learn more about different types of policies here.
- Research the history of your potential home’s title. When you dive into your potential home’s chain of title (history of ownership), you’ll be made aware of any encumbrances (limits on what you can do with the property) that could lead to significant financial consequences. This would also be a good time to consider purchasing title insurance.
DUE DILIGENCE PROCESS: COMMERCIAL REAL ESTATE
Investing in commercial real estate typically requires more due diligence work compared to residential real estate. Each step of the process usually involves more documents, personnel, regulations, etc.
- Get your documents in order. If you’re purchasing a piece of real estate for commercial use, you’ll need to make sure you have all your documents ready, in order to avoid delays or unnecessary expenses. These typically include property surveys, appraisals, leases, government documents, titles, tax forms, zoning documents, city records, offering memorandums, etc. Be sure to bring in attorneys, financial advisors, and accountants as needed.
- Consider your financing options. There are a number of different ways to finance a commercial investment property. Do your research on the types of loans available to you, such as hard money loans, conventional mortgage loans, bridge loans, small business loans, etc.
- Gather a team of professionals to inspect the property. It’s ideal to have a professional property inspector, property manager, contractor, architect, commercial real estate broker, tenants, and other important parties present at the time of inspection, given the size and scope of most commercial buildings.
- Hire site consultants. Partnering with environmental engineers, surveyors, traffic engineers, and other types of consultants can help you decide to confirm or stop pursuing a business real estate property based on how well it suits your needs. These experts will inform you of any potential site contamination or environmental issues, give you precise information regarding property lines and boundaries, and will allow you to get a better understanding of how the surrounding infrastructure will support (or hinder) your business.
- If necessary, partner with architects and engineers. If you’re planning to make any changes to your investment property, you’ll need to work with trusted architects and engineers who can carry out renovations and/or develop your site to make it as useful as possible for your business.
- Investigate potential legal issues. One of the most important things you can do before you close on a commercial property is to hire an attorney who will make you aware of any potential liabilities related to the property or the seller.
- Review your insurance policies. Make sure that every part of your business real estate property, as well as your business itself, has adequate insurance coverage before you close.
FIND COMMERCIAL REAL ESTATE IN IOWA
If you’re an investor looking to purchase commercial real estate in Iowa, or a business owner seeking out consumer-friendly commercial real estate for lease, then you should begin your search in the City of Altoona!
Located just minutes east of downtown Des Moines and in the heart of a major transportation hub, our community is a hotbed for economic development. We brought in over 4 million visitors and $677 million in taxable retail sales in 2021 alone. Altoona, Iowa real estate opportunities are continuing to grow in value each year—now is the time to get involved!