One, you want to reduce or eliminate investment risk; in other words, you want to know exactly what's wrong (or right!) with a property before you sink any money into it.



Two, you want to find "diamonds in the rough." These are houses that look like lumps of worthless coal on the surface, but once you get below that surface you find they shine like financial diamonds because they're structurally sound and a great investment bargain. Two Areas of Due Diligence Generally speaking, due diligence breaks into two areas—physical inspection of the property and inspection of all documents and records concerning that specific property. In this article, I'll consider only physical inspections. I'll cover inspection of documents and records in a separate article. Physical Inspection of Properties You or a selected inspector will always want visit any property you're considering for investment. Often, the signs of decay or lack of maintenance will be obvious—a leaky roof, foundation cracks, cracks in the walls, plumbing leaks, etc.—and your visit will prevent you from wasting further time and money on that house.

Of course, the opposite can also be true; that is, you find the "diamond in the rough" I mentioned earlier. In that case, you'll want to jump on the property quickly before it becomes known to other investors.

When problems are found in a property, you can require that the seller correct those problems or reduce the price before you sign any contract. Generally speaking, there are two general categories of defects:

The obvious defects I mentioned earlier--peeling paint, broken windows, leaking plumbing, warped floors, etc. Hidden defects--corroded pipes in the walls, roof or window leaks that don't show up until it rains or snows, etc. These are the dangerous and expensive defects because they can be hazardous and cost a lot to repair. Without due diligence, you could end up reducing your profit or even suffering a loss.

Let's get more specific now. Here's what professional inspectors look at when they examine a property:

Overall structural integrity Property drainage/landscaping Walks and drives Foundation, footings, crawl space, basements, sub-flooring, decks Exterior walls, siding, trim Windows, doors, cabinets, counters Gutters, downspouts Roof, roof shingles, roof structures. chimneys, attic Floors, walls, ceilings, etc. HVAC systems Plumbing systems, (fixtures, supply lines, drains, water heating devices, etc.) Electrical system (wiring, service panel, devices, and service capacity Energy conservation/safety Items Insulation & ventilation Moisture intrusion/mold Pest Control Inspection Depending on the area of the country in which you live, insects can cause considerable damage to a property. These include such critters as termites, carpenter ants, powder post beetles, and any other bug that likes to munch on wood. Fungus, in the form of "dry rot," can also cause a lot of destruction. You'll need to hire a specialist (pest control inspector) to examine the property for any of these problems. If any problems are identified, the pest control inspector should provide you with a diagram that indicates the location of any infestations. Serious problems need to be dealt with right away and are usually paid for by the seller.

To protect yourself against any of the problems mentioned above, make sure the purchase contract provides for cancellation without penalty or loss of earnest money if the physical condition of the property doesn't meet standards. A Note on "As-Is" Properties If a seller offers to sell you a property on an "as-is" basis, run the other way! He or she may simply be naïve about property laws, receiving bad advice from an agent, or, worst of all, a con artist.

Such sellers may think they're not required to correct any property defects before or after the sale. In most cases, they're flat out wrong and are in violation of state laws. In fact, they may well be charged with misrepresentation, fraud, or negligence. Needless to say, you don't want any part of a mess like that. One More Word of Advice The seller should allow you complete access to the property with no time limits. If he or she tries to restrict access or specifies only certain hours, be suspicious and demand complete access. If the seller refuses this request, then walk away from the deal.

Key Point: Never, ever fall in love with a property! Always inspect it (or have it inspected) with an objective mind!

Key Point: Choose the strategy that best suits your situation and your personality.