This very long blog post about how to do due diligence on a property.
It was originally going to be a “few slides in my stories” on instagram but became a long winded blog post instead. But you guys had so many questions after I talked a little about the due diligence we did on a 4 / 5 unit property we recently put a letter of intent in on, but had our offer flat out rejected.
As they say, all things happen for a reason and we very quickly decided not to continue negotiating because of all the dirt we dug up doing due diligence on the property.
So before I start, I wanted to point out that different due diligence is required for everyone and every deal. It can depend on the strategy you’re using (buy and hold vs flip,) the location (PA vs FL,) the property type and size, whether it has public or private water and sewer and so much more.
With this blog post on how to do due diligence on a property already one of my longer posts on my blog, it’s definitely not comprehensive for every situation. So you get a feel for if some of this due diligence might apply to you, I’ll briefly go over our strategy and the important details on the property.
The due diligence I outline below was done for a five unit property, consisting of a three unit building and duplex, on 6 acres with two septic systems with 5 garages, a few storage sheds and few other structures. Our strategy was going to be owner occupied buy and hold (house hack) for a few years while we slowly fixed it up. After a few years of rehabbing and renting out the units we’d hope to refinance, get our money back out and do it again (aka the brrrr strategy.)
But again, we decided not to pursue the property all thanks to our preliminary due diligence, which I’ll go over now. (Had we started negotiations we would have gone on to do more due diligence, a title search and things like that.)
Don’t want to reach the whole post? Here’s a quick breakdown:
- Read the listing
- Read additional documents uploaded with listing
- Look through old listings (you’d be surprised what you can find in them!)
- Ask seller’s agent for rent roll and leases
- Ask for access to public information regarding the property
- Contact appropriate city/town/county departments for information/permits, etc.
- Ask a bunch of questions to anyone who will answer
- Speak to people in real life
Read the Listing
This might sound funny as a first step, but you’d be surprised how many people don’t read the entire listing. No matter where you read it, Zillow, Redfin, a copy sent by your agent, there can be some valuable information right there. For example, in the write up for this property it was being advertised as a 4 unit but the listing pictures showed it was being used as a 5 unit.
Often times in a listing write up you can find information about how long a property has been vacant, what upgrades have been done and when and what amenities are in the area, all of which can be very helpful in determining if you want to purchase a property.
Check to See What Documents Have Been Uploaded to the MLS with the Listing
As a real estate agent in Montgomery County, Pennsylvania I have access to the MLS so the first thing I do is see if a seller’s disclosure was uploaded. This document is where the homeowner has to disclose any known defects with the property. In the seller’s disclosure, oftentimes you’ll find out about roof leaks, termite/bug damage, structural issues, types of plumbing used throughout the house- basically everything they know about the house (well, that’s how it’s supposed to be anyway. Buyer beware as they say.)
For multifamily properties a lot of agents will upload income and expenses for the property which greatly helps with running the numbers and determining if it’s a deal. If the property had any inspections done by the seller or previous buyer, agents will sometimes upload that information as well.
For this particular 4/5 unit a previous buyer backed out after the septic systems failed their inspections. The awesome agent uploaded the inspection reports to the MLS which meant we didn’t have to spend the $900 (two systems!) for those precious reports. We benefited from this by learning that the one septic system had a back pitched pipe (ew, think backups) and both septic systems drain fields were so completely saturated that a hydraulic load test could not even be performed.
So I called the septic company that did the inspections and they warned that because the owner never pumped the systems, did not maintain things properly and illegally added 5 washers and 2 bathrooms to the property – the soil might be so saturated that a typical septic system might not be feasible anymore.
Worst case scenario, a holding tank would be needed for the property, maybe even multiple hold tanks depending on how many units they service. Those tanks would need to be pumped out constantly for hundreds upon hundreds of dollars every month, effectively rendering the property “worthless” – in their words.
Yikes.
Ask for Rent Roll & Leases
This section is pretty sure because when I asked the seller’s agent for rent roll and leases all I got back was a text listing what was rented and for how much but it also stated there were no written leases. So I ran my numbers based on the property being vacant at the time of settlement.
Look Through Old Listings
Again, as a real estate agent in Montgomery County Pennsylvania, I have access to the MLS which saves previous listings, this means I can see private agent remarks from previous listings. Sometimes these reveal details not disclosed to the public, like failed septic systems, contingencies the seller needs (like finding a suitable home) and other random things that might be important. If you’re serious about a property a good agent won’t hesitate to do this for you. (I don’t use Zillow and Redfin, is it possible to see old listings on there? I’d love to know in the comments.)
Right to Know Request aka Request to Access Public Information
I then did a “right to know request” which is a request to access any public records on file for the property. Check to see if your city/town/county provides information on things like permits, notices and violations regarding the property – it should all be public knowledge.
I had to fill out a form but if you’re town/city doesn’t have one, just write a letter to your city/town/borough office requesting information on the property and make sure to provide as many ways for them to contact you as possible. It also helps if you already have the address, tax id or parcel number included in the letter to make it easier and quicker for them to get information for you. Where would you write the letter to? City/Town/Borough offices, sewer departments, water departments, public works departments, any governmental agencies all might have useful information on the property.
In the town where this property is located they are on the BALL and do their best to upload everything from the physical files to a google drive online – which they simply grant you access to! (I also downloaded every single thing in the online file to my own cloud file just in case they only granted me access for a short period of time.)
The information I received from the township was by far the most helpful because it contained all the violations, notices, permits and plans associated with the property since 1975.
From the file I learned that the original septic system is less than 100 feet away from the well. This isn’t a huge deal for us, but in order for someone to get FHA financing on a property the well and septic need to be more than 100 feet apart. This fact could hurt us if we wanted to sell in the future because we’d be limiting our buyer pool to conventional and cash buyers.
I also learned the addition to the single family home was started without any permits. Not only that, but after several notices from the township, the owner finally submitted building plans that were ultimately denied. The township denied the owner’s buildings plans because they wanted plans approved by an architect. They didn’t believe his plans for the structure and supports were sufficient. However, approved plans were never submitted but somehow the structure was given a U&O (use and occupancy) years later. Was there a mistake on the part of the township or some kind of loop hole the owner found?
There were also notices to the owner explicitly stating the single family home could not be turned into two units and could not have two kitchens. What did the owner do? He turned the single family home on the property into two units illegally.
They also stated that a second septic system must be approved and permitted in order for the township to even begin to consider allowing a two unit. HOWEVER, there was already a second septic system! WHAT? How could there already be a second system if they are stating a permit must be filed before a second system will be approved? So the property only legally has one permit for one septic system which means one of the buildings on the property is worthless.
Oh… and there were two letters regarding the fact that “the sewage system was malfunctioning onto the surface of the ground profusely.” Do you know what that means? Yep. Poop all over the yard. It also means that particular property is already on the health department’s radar which might make it difficult for us.
Health Department Permit Request
I had already put in a request to the county’s health department asking for copies of any permits they had on file for the property. I contacted this same county before about septic permits so I had the guy’s email already.
I originally found the contact information for the health department online and then called and asked for the appropriate person to speak to about septic permits. Luckily I’m organizing my life and I had saved his contact information from the due diligence on a previous property in the same county, so for future properties I can skip all the middle steps and go straight to the source. Long winded, but all that to say you’ll eventually get a process down for doing due diligence and it won’t seem so daunting and overwhelming.
Anyway, the health department only had one permit and one repair permit. Here’s where the fun detective work comes in… the permit was for the original septic system but the repair permit was for the other system. WHAT? How is it possible the township approved a repair on a septic system that never had an installation permit in the first place?
I’ll tell you how this mess happened! Because the owner used the house address of the original septic system, not the address for the home that would be using the septic system. So my guess is the department didn’t realize the repair was for the other system because the owner misled them into thinking it was for the system that actually held the permit.
Bottom line, if you are able to get information about the property you’re doing due diligence on, read every single word on every single document you can get your hands on. I even made a timeline from the notices so I could follow the order of events to make sure I had my facts straight.
Ask Questions & Speak to People IRL
Most anyone you speak to while doing due diligence will tell you they can’t give you advice, only information about a property. So I emailed a township official to ask about the process of ensuring the property would be able to be rented out and also told him our plans of being owner occupants and how we wanted to do things right, provide good housing for people and increase the value of the property.
I guess he liked what I said because he called me soon after and gave me “off the record” advice to put an offer in as if the property as a single family home. That one sentence that came out of his mouth was GOLD. From that, I was able to determine that the township knows he turned a single family property into a 5 unit and future use of that property is most likely only allowed to be a single family.
He also gave me a heads up that I could try and prove the original farmhouse with 2 units attached was legal prior to ordinances going into effect but that would entail getting in contact with a bunch of previous owners and trying to figure out if I could prove that is just another headache on top of the bajillion other headaches this property could have brought was just too much. If there were only one or two of the issues above, we definitely would have tried to negotiate more, but it all became just too much for us.
So the hunt for a multifamily house hack continues!
P.S. Thank you for the Feedback, especially over on Instagram, I really appreciate it. When you guys tell me you want to hear more about something, I feel accountable to get that information to you if I know I can provide a little insight into something. Lately there have been long lag times between blog posts because while I know I must have something valuable share, I don’t always realize it’s valuable to someone until someone tells me it’s valuable or asks me more about a certain topic I know about. And when I was a little girl I thought I wanted to be a teacher, so this blog lets me get a little of that side me down on paper- or eh- onto the internetsssss.
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