20-steps to successfully close on an investment property
You ran your numbers and made an offer to buy a property. Your offer has been accepted! Now what?
Here are the 20 steps we take when doing our due diligence through closing. Notably missing from this list is a home inspection. That's because we don't hire home inspectors! We inspect the property ourselves and with our contractors.
I'll write another post this week on how we inspect properties for problems and repairs. This post is more focused on everything ELSE you'll need to do. If you'd like to catch that post on inspections, you can scroll to the bottom and subscribe to our e-mail list!
1. Flood map search
I usually check this off the list before I even go see a property, but I keep it at the top of my due diligence checklist because I always like to double-check. We do NOT buy in flood zones. I've been inside many flooded homes right after the water receded and the damage is devastating. I'll pass on that experience! Here's a link to the FEMA flood map, where you can search by address:
Zoning is important for single-family flips where your looking to expand the property. I typically look into zoning prior to making an offer, but it's good to double-check. The town dictates what you can build; how big you can build; and what can occupy the space once you're done: a business, residence, industrial, etc.
It's also good to double-check the zoning when you're buying a multi-family property because maybe you're zoned for more units than what exists. That could be a huge value-add opportunity!
3. Tank Sweep
This is one of the most important steps we take after getting a signed contract. Here in the northeast (and anywhere where there is old housing stock) you must sweep for buried tanks. They're so common here in New Jersey that we prefer to use a company that takes a layered approach. In addition to a visual inspection and a metal detection scan, they also do a ground penetrating radar scan to pinpoint a tank or any other anomalies.
I probably don't need to tell you why this is important, but just in case you are unaware, an oil tank leak can cost millions to clean up. It is highly unlikely and a worst case scenario, but I do know someone who had to pay over $500,000 to clean up a spill when it leaked under two neighboring homes. I'm definitely not interested in that!
4. Land Survey
If you're using an attorney, they will probably order this for you. However, I have worked with attorneys who didn't share the survey until closing day or they never ordered it. So I like to communicate early on that I will order the survey myself. A survey can take several days or up to a week to come back. I like to get my hands on one as early as possible for two reasons:
First, a property survey is how you know what you are buying. That detached garage that you thought was yours? It's not. The driveway? It's shared. That crumbling retaining wall? It belongs to a neighbor. We live in a densely populated area so knowing where my property ends and where another begins really matters.
Second, getting back to zoning rules, if a town dictates that you cannot build within 30-feet of the property line, then you need to know where that line is and if you can conform. Without a survey, your architect will not be able to start drawings.
Depending on the property and how well you know your market, this may be an easy one or it may be worth double-checking. What utility hook-ups already exist at the property and what else is available? For example, if you're buying in a rural or an older suburban area, you may be on propane or oil, but by calling the local natural gas company, you may discover they are coming into the area and you are eligible for hook-up. Gas is way cheaper and cleaner than oil, so converting could add value to your property. The same thing goes for converting from septic to public sewer, if available.
6. OPRA: Easements, permits & violations
In our state, OPRA stands for Open Public Records Act. In New York, it's called FOIL, or Freedom of Information Law. Each state has their own acronym, but the point is: file for any public records you can get, such as easements, past building permits, plans or violations. They may even have a property survey on file! That could save you $700. We file for this early on because some towns can be slow to respond.
7. Attorney review
Full disclosure: we don't always use an attorney when buying property, but if you're doing this for the first time you probably should. Your attorney can add or change language in the contract of sale to protect your interests. You should contact an attorney as soon as possible. Typically, attorney review lasts 3 days after your offer is accepted. Make sure you have a standard inspection clause and financing clause in your contract. Those are the two typical tools to get out of a purchase if the due diligence process uncovers problems.
If you made it through Phase I without finding any glaring issues, you're most likely headed to closing! We uncover the majority of our deal breakers in Phase I. Phase II & III will help you close with guns blazing so you can fire on all cylinders on the day you get the keys.
This is a vital step and required by all lending institutions. Your attorney will most likely order title for you. I like to order it myself since we have a preferred company that is very fast. They can run title in 5 days or less.
Running title means uncovering every possible lien on the property. The title company will make sure there are no conflicts that could come back to bite you after closing. All debts tied to the property must be settled prior to a transfer of ownership. The title company will work to clear any issues and provide insurance. I've never had a problem getting past this step of the process.
As soon as I get my survey back, I engage my architect to draw up whatever we are trying to do with the property. The architect should also know the local zoning laws and can help you through any questions you may have on what is possible with your property.
10. Certificate of Occupancy
In our market, we are required to apply for a certificate of occupancy, even if the property is vacant and we are going to be renovating. This is basically a fire inspection. They make sure there are extinguishers, smoke alarms, carbon monoxide detectors and no major hazards. We apply for this early on because some towns are slower than others.
11. Loan application
I don't apply for a loan until Phase II because if the house has an underground oil tank or some major problem, I don't want to do all the paperwork until we're definitely moving forward. We use hard money or private lenders to fund our projects so they move pretty fast. They can close in as little as one-week. But if you're using a traditional mortgage lender, you should anticipate 30-days to close.
SOW stands for Scope of Work! This is an outline where we write down absolutely everything we plan to do to the property. After talking with our architect, we typically have a good idea of what renovations will include.
It's helpful to do a video walk through, noting everything you see that needs to be fixed. I play it back at home so I can type it up and get organized. This is a fantastic way to get your head around a large project. I'd be happy to send you one of our past SOW's if you leave your e-mail in the comments section below.
Whether it's builders insurance, vacant home insurance or homeowners insurance - you obviously want to make sure you are fully insured on closing day! Contact a broker and ask them to shop the best rates for you. Your lender may dictate the benchmarks for your insurance policy.
Your due diligence is basically done by Phase III and the focus is now on getting ready to renovate. Once you own the property, you don't want to waste a day!
14. Plan approval
Typically, architects do preliminary drawings and then final drawings. After some back and forth, we carefully review our architects plans before giving them final approval. It's important to take your time to go over this and ask questions if there are any symbols you don't understand because some building departments can be real sticklers if you need to make even the slightest plan change later on in the process.
15. Contractor Quotes
Now that we have our final drawings with all our mechanicals laid out - electric, plumbing and HVAC - we can show them to our contractors and ask them to quote us out! It's 100-times easier for them to quote you accurately and quickly when architectural plans are finalized for their review.
16. Contractor Selection & Permits
Once our quotes come in, we can pick our best bids for our early phases of construction such as demo and the trades (framing, electric, plumbing, HVAC).
We then pick up our blank carbon copy permit forms from the town and ask our contractors to fill them out and stamp them. We review and hold onto them until closing, because you cannot submit to the town until you are the owner! But I like to have everything ready to go.
Yay! Now the fun part. Get the keys. Take some pictures. Don't forget to do your final walk through prior to sitting down at the closing table! Make sure the house is still standing!
19. Submit Permits
On closing day, if possible, drive straight to the building department and drop off your building permits. This starts the clock for the town to respond so you can begin construction as soon as possible!
20. Utility Hook Up & Secure the Home
On closing day, it's also a good idea to drive back over to the property and change the locks. Make sure everything is secure because you now own the home! I also call up the electric and gas provider to hook up the utilities in my name. If the demo crew is coming the next day, they'll need power to run their tools!
I hope this was helpful! If you have any questions or comments, I'd love to hear your thoughts below. Please share your e-mail address if you'd like me to send over our due diligence checklist that lists everything detailed above!
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