Due Diligence for Real Estate Investing – An Overview

Due diligence drives the land development transaction because it supplies you with information you will need about a whole range of issues. These can include details about the zoning, location of public utility lines, soil classifications and prior subdivisions of the property. This need for information arises in your very first contact with the land parcel and continues as long as you are pursuing it or are involved with it by contract. In fact, your need to know different things about the property exists until you: (a) decide not to buy it; (b) put it under contract and subsequently bail out of the deal; or (c) sell the land or assign the contract to someone else.

While location may be the most important characteristic of a real estate parcel, thorough due diligence is critical to determining if the potential land development deal is viable. The information you obtain through your investigation is focused on your bottom-line question: do I want to buy this land parcel?

When you're doing your research, you should remember a couple of basic principles. Effective, thorough investigation usually must be hand's on. It will be time consuming to do and there are usually no short cuts. For every piece of data, there is a primary source. The primary source is likeliest to be the most accurate and current source of information. For instance, the primary source for real estate documents that are recorded (such as deeds, liens, easements, mortgages and subdivision plans) is the actual record of filings maintained by the applicable governmental department as well as the documents themselves that show the recording information on them. These are usually kept at the courthouse for the county in which the property is located.

Your local government or municipality is the primary source for zoning, subdivision and other ordinances because they originate and enact these local laws. The governmental body (local, county or otherwise) that is empowered to issue land development approvals is the source if you need to verify what conditions and restrictions may have been imposed when the parcel was subdivided. FEMA is the primary source for flood mapping and information because it is the repository and publisher of this data.

You might wonder if you could save time by doing the research online. After all, why should you go look at the actual document if you can obtain the information by using a database? The short answer is that you can't be sure that what you're getting online is accurate and up to date. In short, databases are great tools as long as you remember that they should never be used as a substitute for hands-on research at the primary source.

At best, these online collections of data (including those maintained by governmental agencies or departments) are secondary or tertiary sources, not primary ones. (The governmental database, however, may be the next best thing to the primary source depending on the manner in which it was created and the frequency with which it is updated.) In the case of third-party sources for information (such as subscription services for ordinances, mapping and real estate sales or other data), vendors have purchased from the primary sources the right to charge people a fee for accessing this data.

For several reasons, the farther you move away from the primary source of information, the greater the likelihood that the information may not be current and accurate. There is the time factor. The information has to pass from the primary source down the line through other people or organizations. Data, documents or mapping can easily change or become outdated over even a short period of time. In addition, there is the "garbage in, garbage out" principle. The integrity of any database or compilation, governmental or not, hangs on the thoroughness and competence of the people responsible for compiling and maintaining it.

Databases, however, can save you a tremendous amount of time and effort. You can use them most effectively as screening tools and to gather preliminary information subject to confirmation and further research if the situation or property warrants it. In addition, they can be invaluable in identifying specific contacts if you have questions and need additional details or clarification.

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