What Is Due Diligence When Buying a House?
"Tom Stone", a reader and frequent commenter on this and other housing bubble blogs and someone who is extremely knowledgeable about buying property, shared with me what he considers due diligence when buying a house. As it would benefit readers, here's what he had to say (gently edited):
Hello Marinite,The great thing is that all of those excellent recommendations by Tom do not require a real estate agent. You can do them all on your own for very little money compared to what you would pay a commission-based agent. But if you still insist on using an agent, then make sure that when you settle on a commission you aren't paying the agent for the work you did yourself.
Here are my thoughts, please feel free to edit in any way you see fit.
I would like to emphasize that I do not think it is a good idea to buy a home at this time, and probably won't be for a year, or more.
"Due Diligence" is defined as the kind and amount of research a "Prudent Person" would undertake when borrowing hundreds of thousands of dollars to buy a home.
First, determine your price range by considering the amount of your down payment, and a reasonable percentage of your income for debt service. I will assume 25% of your gross income is available to cover principle, interest, taxes and insurance. (Yes I can get you a loan at 55% DTI to 95% cltv, if that sounds good, call 1-800-273-TALK.)*
I go online to OFHEO and check the information for the Metropolitan Statistical Area (MSA) I am interested in. I go to the Census Bureau to see how the Demographics look, I Google "Economic studies, Oz MSA" and read them, I Google "Demographic Studies, Narnia MSA" and read them, I check school ratings, crime statistics, and the "megan's law" site on line. I check online for Geological hazards such as flood zones or earthquake faults, unstable hillsides or the presence of Levees. USGS has a helpful site for much of this, state and county information may also be available online. I Google "superfund sites". These basic steps should give you a neighborhood or two to look at closely. GET OUT OF YOUR CAR AND WALK THE NEIGHBORHOOD! Preferably on a Saturday afternoon or evening around dinner time...drive through the neighborhood with your windows open, on a weeknight, on Friday, and on Saturday, about 10 PM. If you can, drive through late morning on a weekday as well. Go to Open houses in the area. If there is a property that looks right, check Trulia, Domania and Zillow, and print out the information you get. Look at recent comparable sales, ring the doorbells, tell the folks you are thinking about buying on "x" St, and ask their advice. "Can you tell me anything about the neighborhood, I'm afraid of making an expensive mistake".
So far, it is looking good, and I'm in love with the big redwood and rhododendrons in the yard. So, off to the county recorder's office to see what there is to see. I check the address, and I check the owner's name as well for other properties in the county. I look at the date purchased the type of note, any refi's, notices of default, different mailing addresses, etc. If there is a different mailing address, I check to see who owns it. I do the same for any other properties owned by the same person(s). I check by name as well for such things as a DBA, a divorce, etc. I then either do a lexis/nexis search, or go to an online info broker such as "detective search" and buy a report on the seller. If the seller is self-employed I would buy a dun&bradstreet report on the business. I would look for any signs of distress, particularly if the seller is in a housing related business, and would tailor my offer accordingly. My offer would be contingent upon a THOROUGH inspection of the property, and modified by any problems encountered by the inspectors.
Some may quibble with my assumption that 25% is an appropriate percentage of gross income to spend on your home. It is conservative. Others may feel that using an information broker to gain insight into the sellers financial situation is invasive. Fair enough, don't do it. My position is that ANY and ALL publicly available information on the property and the seller(s) should be part of my due diligence, whether buying for myself, or acting as an agent.
*PS the 800#, above, is the national suicide prevention hotline...