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Due Diligence: 10 Steps to Take Before You Buy

Rick Sharga is executive vice president of Auction.com. As one of the country’s most frequently quoted sources on foreclosure, mortgage and real estate trends, Sharga has appeared on NBC Nightly News, CNN, CBS, ABC World News, CNBC, FOX and NPR. He has briefed government organizations such as the Federal Reserve and Senate Banking Committee and corporations like JPMorgan Chase, Citibank and Deutsche Bank on foreclosure trends, and done foreclosure training for leading real estate organizations. Sharga shares his advice on how to protect yourself before you buy any type of property.

Due diligence is one of the most critical periods in any real estate transaction. But many buyers cut corners in the due diligence process in their haste to have their bid accepted. Here are 10 due diligence steps you shouldn’t skip, especially if you’re considering a foreclosure, bank-owned property or short sale.

1. Do a title review. Always get a preliminary title report on any foreclosure property you’re interested in buying, and look for any secondary liens or tax liens. Make sure there aren’t any hidden liens or encumbrances on the property that will blossom into unpleasant surprises later.

A lot of paperwork got lost during the real estate crisis as companies like New Century went through bankruptcy. The courts are still unwinding cases where people sold properties they didn’t own. That’s why it’s so important to ensure that the title is clear and that the property really is for sale. You’d be surprised at how many investors decide they’re not going to get title insurance, but it’s just not worth the risk.

2. Inspect the property thoroughly. You may not be able to get inside a foreclosure property that’s still occupied. But if you can, have a licensed professional inspector review the house for evidence of structural defects, water damage or other major problems.

But most importantly, make sure everything is functional. I know of one case where an owner who had lost his home to foreclosure did what some owners do in that situation: He ripped the wiring out of the walls and took the piping. But then he did something different: After he was done, he put up new drywall. So when they did an inspection of the house, it looked fine, but there was no wiring or piping behind the walls.

3. Consider the surrounding property and neighborhood. Don’t confine your inspection to the structure itself. Look around at the landscaping. Does the property back up against a bank that has no vegetation? Will the drainage work in the event of a heavy storm?

Check out the surrounding neighborhood as well, as its condition can affect the value of your property. Do you see pride of ownership in the other homes? Or do you see abandoned properties in the area? And note that abandoned houses aren’t just a problem in “bad” neighborhoods. Because of the recent housing crisis, you might find abandoned or unfinished homes even in relatively new housing developments.

4. Examine recent sales activity. Look at how many days homes have stayed on the market. Are properties moving quickly or languishing? What are the buy vs. rent trends in the neighborhood? How many of the homes sold were distressed inventory? Too many sales overall could suggest that people are leaving the neighborhood — see if there’s an underlying reason why.

5. Review price trends. Are they going up? Have they plateaued? How do they compare to what they were during the last peak? That information should give you an idea of whether property values are going up or down, and help you figure out what you should be spending.

6. Find out how many homes in the area are in foreclosure. Too many suggests price weakness over the near term. Are there a disproportionate amount of distressed properties in the area? Before the crisis, only about 1 percent of properties went into foreclosure in any given year — or one home out of every 100. In today’s environment, you might see maybe three or four. But more than that might indicate a problem and a reason the property is priced as attractively as it is.

7. Look at the upside potential. Are you near a good school? Are you near a transportation hub? Are there new businesses that are popping up or being launched in the area? Those are potentially all good upside opportunities for you. Conversely, has there been a plant shutdown recently? That will probably lower property values. The local chamber of commerce can supply some of this information; it also helps to have some local connections.

8. Go to open houses. See what the standard of quality is in other homes that are currently for sale. Are tile countertops fine, or do I need to install granite or do other home improvements? This is a good thing to do whether you’re planning to flip the home or rent it. It doesn’t mean you have to overspend. But you want to meet the neighborhood standard or be slightly above it, and spend as little as you can to attain that standard.

9. Research zoning requirements. If you’re going to rent out the property, consult with a real estate attorney to see if there are any local ordinances or laws that might make it difficult to be a landlord. Some areas aren’t zoned for rental property. Some developments limit the number of rentals in the neighborhood; others have limits on the number of adults who can live in a single house, which could be a problem if you plan to rent to people who want to room-share (like college students).

10. Check your liability insurance. If you’re going to be a landlord, check with your insurance agent to find out how much liability and property insurance you’ll need.

While these 10 steps may sound like extra work, they’ll pay off in the long run. Whether you’re going to occupy it, flip it or rent it, real estate is one of the most expensive investments you’ll ever make. It makes sense to protect it.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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What is Title Insurance Anyway?

One of the costs you will encounter in 99% of real estate transactions is a charge for title insurance. What exactly is title insurance?

Unlike Other Insurance

Title insurance is unlike any other kind of insurance. Normally insurance protects a person against bad things happening in the future. Title insurance protects a homeowner against bad things that have happened in the past that the homeowner might not otherwise know about.

What Does a Title Policy Do?

A title insurance policy protects the new owner or the lender against problems such as fraudulent sales, liens, encroachments of fences and boundary lines, unreleased mortgages and tax liens, and other problems with the title to the property. The purpose of a title insurance policy is to provide reassurance—what I call the “sleep at night factor”—to the homeowner, so that the owner actually owns what he or she thinks they own!

What Does the Title Company Do?

Before issuing the title commitment (the promise to issue the policy after closing), the title company will do a thorough search of the real estate and court records in your jurisdiction to make sure the seller actually owns the property being sold and that there are no judgments, tax liens, unreleased mortgages or other problems affecting the property. The title company may also require a survey or an improvement location certificate to make sure the property does not encroach on the next door neighbor property. After doing the research (which may go back 20 years or more), the title company will issue the title commitment and will list any problems it has found with the property. Most title companies will work with the seller to address and fix title problems prior to the sale. In many states, the title company will also prepare all the legal documents needed to transfer the title and complete the transaction at closing.

What Kinds of Title Insurance Are There?

There are two common types of title insurance: the Owner’s Policy and the Lender’s Policy. The Owner’s Policy protects the new owner of the property against the types of title problems mentioned above, and serves as the promise from the title company that if a title problem shows up later, the title company will either fix the problem or will compensate the owner.

A Lender’s Policy protects the mortgage lender against similar issues, and also assures the mortgage lender that if the owner stops making payments on the loan, the lender will be able to act against the property without someone else making a claim on the property superior to the lender’s claim.

In a typical sale transaction, both the owner’s policy and the lender’s policy are issued at the same time by the title company. In a refinance transaction, only a lender’s policy is produced by the title company.

Who Pays for What?

In many jurisdictions the seller of a property will pay for the owner’s policy of title insurance covering the new buyer, and the buyer will pay for the lender’s policy. Different jurisdictions may have different practices, so you should check with your local title company to determine what your costs may be. The services of an attorney may also be required by your state.

Shop Around!

Speaking of checking with your local title company, be sure to shop around for the best title insurance rates and services for your transaction. As the owner of the property, you have the right to choose the title company that suits you best, and any attempts to steer your business to a particular title company chosen by someone else may be unlawful.

For more information on title insurance, check the website of the American Land Title Association at www.alta.org and click on “Consumer Information.”

© 2008 Thomas H. McMillen

Tom McMillen, Attorney at Law
Title Officer, Ethical Title Services, LLC
www.ethicaltitle.com

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What a Title Agency Does for By-Owner Sellers

There are many reasons for buying or selling a home without the assistance of a realtor, but one service provider you can’t complete a “for sale by owner” transaction without is the title agency. Using a title agency not only ensures that your closing goes smoothly, it also safeguards your transaction.

What Does a Title Agency Do?

A title agency’s job is to make sure the closing happens. To do this, the agency will make sure all the paperwork is in order, conduct a title search and order the reports and surveys needed to transfer property ownership.

Two of the biggest contributions of the title agency are the title search and providing title insurance.

A title search is a public records examination of the property’s title. This research determines that the property is clear of liens and is eligible for sale. The very last thing you want to do is buy a house and then find out there are liens against it, or worse, a co-owner didn’t sign off on the sale! A title search will uncover issues like these so they can be resolved before the closing.

Title insurance is required by most mortgage lenders. This insurance protects the lender (and a separate policy protects the buyer) from unforeseen defects in the title. These problems usually don’t show up in the title search, which is why this extra protection is needed. A title insurance policy means the title company will help you defend you from claims against the title. It’s a one-time fee, paid at closing and never again.

Other Services from the Title Agency

• Closing Facilitation: The title agency can host and facilitate the closing on neutral ground. As an impartial service provider, the agency does not work “for” the buyer over the seller, or vice versa. The title agency just wants the sale to happen, and it’s their job to make sure it does. A title agency does this by collecting all of the documentation needed from both sides, making sure it’s all filled out properly and signed. Having a second set of eyes to look over everything is especially helpful in a by-owner transaction.

• Paperwork Filing: The title agency files the closing paperwork with the appropriate government agencies and makes sure the buyer, seller and mortgage lenders all get copies of the closing documents.

• Escrow and Notary Services: Title agencies can also act as escrow agents, hold earnest money and disburse funds. They can also provide notary services for document completion.

The important thing to remember is that the title agency is there to help you with your by-owner transaction when you might not have any other real estate professionals assisting you and looking over the contract to make sure everything is in order.

Jennifer Ferri is the Owner and Operator of Title Junction, a Florida-based real estate title agency. Title Junction provides for sale by owner help in Fort Myers and Cape Coral, Florida.

Please note that this editorial content was provided by Title-Junction.com, who is not employed by ForSaleByOwner.com or by Tribune Digital Marketplaces. This article has been republished for additional education purposes. This article is not affiliated with any links or products that appear on the on the same pages. Read more about our editorial policy.