Real Estate Due Diligence

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I met Scott in 1999 at the Phoenix Open golf event. I knew of his reputation as one of the biggest mortgage bankers in Arizona, but I did not know that he knew me. Smiling as he walked up, he said, "I'm glad you're saying what you say about stocks and mutual funds. They're terrible investments."

At the time, I was under blistering attacks from financial planners and financial magazines that were supported by mutual fund company's advertising dollars. You may recall that in 1999, the stock market was red hot and people believed they were making billions in the new economy of the dot-com world. So to have a person of Scott's reputation back up my philosophy that stocks and mutual funds were risky investments was a welcome relief and validation. His pat on my back made watching the Phoenix Open even more enjoyable.

Today Scott is one of the three mortgage bankers I call when I need the straight story about real estate financing. It was Scott who, years ago, warned me of the real estate bubble being formed by the sub-prime mortgage fiasco. It was because of Scott that my wife, Kim, and I became more conservative in our real estate investments while others became real estate gamblers.

I'm an advocate for financial education because when you get smarter, you minimize risk. That's what this chapter is about. Scott has made me smarter, and the knowledge he has shared with me minimizes my risk with every new investment I make. His wisdom in this chapter will do the same for you.

—Robert Kiyosaki

When talking about the subject of real estate due diligence, you are really talking about nothing more than a team effort of discovery and verification. That's what due diligence is, and every real estate transaction you do, whether it is a single family home purchase or a very complex commercial real estate development, will require the buyer to take certain fundamental steps of underwriting. Only through that process can a buyer fully assess all aspects of the property he or she is purchasing. And if you are the buyer, you'll want to make sure you are diligent about due diligence.

TIP Benjamin Franklin once said, "Diligence is the mother of good luck."

When you as a real estate investor have identified a property that you want to purchase, you have come to the conclusion to buy it based on a series of somewhat superficial facts. You have usually seen the property, and generally have reviewed some of the financial information that the seller or broker has provided you. And based on this information and your belief that the property fits your business plan, you make an offer to purchase. Once the seller has accepted your offer, your work—or should I say your team's work—has just begun!

I am a real believer in putting together a very strong team when you approach a real estate acquisition. Many of the authors in this book have stated the exact same thing in their chapters. The fact is, most highly successful people or companies are built using a team approach to getting things done. No one can be an expert on every aspect of real estate, and frankly if you are investing on behalf of other people and are using their money, you should always seek competent third-party input.

In this chapter, I am going to walk you through a due diligence process and give you an overview of why the various members of your team are important. I am also going to include my Eight Tips and some real-life examples of why securing qualified and unbiased advice on your proposed acquisition is so critical.

To me, assembling a team to assist you with your due diligence is just like putting a puzzle together. Each of the team members have separate and specialized disciplines, but when they are brought together by you as the leader, the pieces come together, and all of a sudden the full picture comes to life. You can see what you are really buying!

I have separated the due diligence process into five main categories: physical review, legal, title, third party reports, and accounting tax. Let's start with the first one on this list.

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