Real Estate Investing - Doing your Due Diligence

We cannot stress enough the importance of doing your own due diligence. In hot real estate markets like those in Fresno and California, investors often find themselves competing with multiple offers and bidding wars.

The competition can be so tough that investors are just relieved when the offer is accepted, so much so that they forget to DO this necessary diligence bit!

Below is our Top 10 checklist for doing your due diligence:

1. Property Tax rates

• Property tax rates vary according to the county the property is located. In California, property tax rates vary between 1.0 to 1.4% of the assessed property value. If your property is located in Texas, property tax rates could be up to 2.8% and in New York, up to over 3.0%! The property tax could take a huge chunk out of your rental income and an investor must definitely be aware of this.

• As an investor, do your due diligence and find out how much the property tax rate is.

• How to do this? Every county should have a Tax Assessor’s Office. For example, for Fresno County, it is simply called the Fresno County Tax Assessor’s Office. Information is available so easily these days with the internet. Just do a search for the tax assessor’s office, find out their phone number and give them a call. If you provide them with the property address, they should be able to tell you what the tax rate is.

• The phone number for Fresno County Tax Assessor’s Office is 559.488.3534

2. Water, sewer and trash bills

• If the multiunit has a Master meter, then the landlord is probably paying the bill. The seller will probably provide a figure for the water bill in the income and expense statement. But an investor should do his/her own due diligence anyway.

• How? Well, each city should have a Public Utilities Department. In Fresno, there is a Utilities Billing and Collection division that is responsible for billing and collection of the City of Fresno’s utility fees. Again, find out their phone number and give them a call. State the property address and they should be able to give you the average monthly bill and sometimes the minimum and maximum charges as well.

• For the city of Fresno, the Utilities Billing Customer Service phone number is 559.621.6888

3. Gas and Electric bills

• For single family house, generally the tenant will be responsible for the gas and electric bill. But for multiunits, depending on how the property is metered, the tenant could be paying for electric only and the landlord could be paying for gas. There could also be some general area lighting that the landlord would be responsible for.

• Find out what company is responsible for providing gas and electric in the area. Again, call them up, give them the property address and they should be able to give you the average monthly bill amounts as well as the minimum and maximum amounts.

• For Fresno, the company to call is PG&E at 1.800.743.5000

4. Hire a good home inspector and read the home inspection report

• Find an inspector who is good and thorough, and preferably someone who is a member of a professional association such as the American Society of Home Inspectors (ASHI) or the California Real Estate Inspection Association (CREIA). Inspectors who are members of ASHI and CREIA must pass technical exams, meet specific standards of practice and cannot do any contracting work as a condition of their membership in those associations.

• You can also the call up a few of those inspectors and even ask them to provide a sample report.

• When the inspection is completed, take time to read and understand the report. Most inspectors are generally good about answering any questions you might have about the report.

5. Read the preliminary title report

• The preliminary title report is a statement summarizing the current condition of the title to the property, including any liens, encumbrances, covenants, conditions and restrictions (CC&Rs) and easements. The title company will often order this and provide the potential buyer with a copy.

• Take the time and read the preliminary title report. If there is any information you don’t understand, call up the escrow officer and ask. If the problem is complicated, hire an experienced real estate lawyer. Yes, lawyers do charge about $200-$300/hour but that amount is very, very small compared to the value of the property. Do your due diligence and seek advice from an expert if needed.

6. Compare tenant estoppels to rental agreements to income statement – are the rents stated the same?

• Make sure that what the tenants agree to paying as stated on the tenant estoppels match up with what is stated on the rental agreements and income statement. Do your due diligence. You do not want to discover later that the tenant is receiving some “special rent credit”.

7. Was security deposit collected?

• Again, compare the tenant estoppels to the rental agreements and make sure that the landlord has collected a security deposit and the numbers match on both pieces of paperwork.

• Sometimes, the tenants may be friends or relatives of the landlord and thus, a security deposit has not been collected.

8. Is the landlord paying for any other expense e.g. cable, etc.?

• Sometimes, a landlord may be paying for something extra such as cable TV as an incentive to attract tenants such as cable, etc. If so, an investor will want to know how much the costs are and how long the landlord is responsible for paying for it. The rental agreements should cover any such item. Do your due diligence and get the information.

9. Any other glaring expenses?

• Read the income/expense statement and make sure that there are no glaring large expenses especially under the category “miscellaneous”. If so, do your due diligence and find out the specific charges under that category.

10. Property insurance

• Property insurance is tricky these days. Do not wait until you are about to close escrow to call your insurance company. Once an offer is accepted, an investor should call and get quotes for property insurance immediately. If for some reason the property is not insurable or the rates are astronomical, you would want to know this right away.

• Rates vary widely among insurance companies. Do your due diligence and call several, at least 3, and get quotes from them.

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