Jason Hartman talks about doing your due diligence in a first of a two part series. He brings on investment counselor Adam Schroeder about key aspects of income property investing including checking home prices, contacting tax assessment offices for accurate tax numbers and doing home inspections.
Investor 0:00
I remember listening to you on the treadmill going this makes so much more sense. I just remember thinking like, I can’t wait until we pay off this bankruptcy so that we can once again, you know, start investing because at the time all of our focus was just pay that debt
Adam 0:13
back.
Adam 0:15
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. Here’s your host Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:06
Welcome to Episode 1377 1377 glad you could join us today as we talk about a very important aspect of income property investing. And that is none other than due diligence. Okay, due diligence, you got to do your due diligence, right. And Adam is here with me. He wanted to bring up this topic. Of course, we’ve talked about it many times over the last 14 years or so. And we’re going to talk about it again. Maybe we’ll go into a little more depth This time, we’ll add some different ideas to it. And just go ahead and approach that subject because it is all important. Many investors have been hurt and had financial penalties. It’s like getting a traffic ticket, you know, you’re going to have more expenses, and little more expensive. Yes, well, I don’t know if you’re in California, that traffic ticket can be really expensive. But you know, if you’re speeding on the on the highway, right, and you’re going too fast, you get a traffic ticket. If you’re going too fast in your income property purchases, you might get a ticket to. Now I do want to say that the biggest flaw of most people, most investors, the way they shoot themselves in the foot, or as Sarah would like to say, shoot themselves in the shoe. Because she takes every old saying or investment counselor, Sarah and sort of revises it for her own liking. And most people go too slowly. Okay, so this is not the problem most people have going too fast. Most people are suffering from the paralysis of analysis. And what we want to do is find a balance between the two. Don’t go too fast. Don’t go too slow. Be in the Goldilocks zone, right? It’s not too hot. Not too cold. It’s right where it should be. Adam, what do you have on tap for our due diligence discussion today?
Adam 2:59
Well, first off, it made me Think of the old Mountain Dew commercial. We got to do the do don’t know if that’s a reference that you get. But so I think we should start with pricing because I don’t
Jason Hartman 3:06
know that I know that commercial. But I do know that Mountain Dew is like soft drinks are terrible. And Mountain Dew is one of the most terrible because it has a massive amount of sugar. It has a massive amount of caffeine. And it is really bad. In fact, I saw a documentary once about these dentist that were going into Kentucky. Oddly, Kentucky is the big place for Mountain Dew. Apparently it’s really popular there. And they were treating people and they talk about all these terrible oral diseases and all this stuff. Just Mountain Dew is just wreaking havoc on people’s teeth in their mouth and it’s just bad stuff. So stay away from Mountain Dew. But do your due diligence. Go ahead.
Adam 3:52
Say we figured I figured we’d start with price because that’s the The first thing people look at whenever they’re looking for an investment property. Look, there are a couple different places You can find pricing and we’ll go over those and the first and biggest one is you can go to the MLS. Now there are important tidbits that we have to say about this. And that is that your property is likely to be on the higher end of the area because of the fact that you’re actually getting a renovated property. Most of the other ones on the block you know, don’t have a new roof don’t have a new h back system, don’t have new flooring, potentially him and they don’t have new paint jobs, new everything. So you’re likely going to be looking at properties that are a little bit less than what you’re paying, but you want to be sure that you’re in the same ballpark.
Jason Hartman 4:40
Okay, so so you’re not always getting the best house on the block. But we do want to make that disclaimer, and you’re not always getting a renovated house, occasionally people through our network by non renovated properties. However, we don’t recommend that. You know, it happens once in a blue moon. So it’s very rare, but on the occasion that you do, then those comps will become more meaningful. Go ahead. And one
Adam 5:07
of the important things, whenever you’re starting this also, your first part of due diligence is asking the provider for their scope of work. Okay, good. Good point. Yeah,
Jason Hartman 5:18
you can do so our local market specialist can provide you with her scope of work that they’ve done on the property. But remember, each property is starting at a different place. So that scope of work may be larger or smaller, depending on what they’re starting with. Right? If they’re starting with a real disaster, then it’s a money pit for them and the scope of work is huge. If not, then it’s it’s not not so much that way. Right? It might be a small scope of work or it’s just a cosmetic upgrade sometimes. Also, the scope of works very in detail. You know, I wish there was some standardization for this. contractor estimates quotes go work. It’s just all over the board. Okay? Don’t let them give you a scope of work that says renovate house. Okay. You know, it needs to have a degree of detail to it. How much detail? Well, that’s all debatable and I don’t think we can even go there without having visual aids. But just make sure you’re comfortable with the level of detail. And if it’s not detailed enough, ask for more.
Adam 6:27
Yeah, they should know, let’s be
Jason Hartman 6:29
honest. Right? Hopefully, if they don’t know what they’re doing to the property, that’s a big red flag at least. Right? Right. And what this scope of work does though, is it provides you with something to come back with later. If you have a maintenance problem or repair problem on that property later. You can just say to them, Look, this was in the scope of work. So if you agreed to give me a six month or a one year warranty and all the work you done to the property, okay? They’re not gonna want things they Get in touch, right and that renovation, then this should be your responsibility. And that’s what you’re saying to the local market specialist, maybe three or six months after you own the property, because now you’ve got that scope of work, you can look back on and you say, hey, you said you replaced this this toilet or you did the hbic system. So you should take care of any problems with that now, and they should not be my responsibility is the new buyer from you.
Adam 7:28
Go ahead. Absolutely. And then there’s another site you can go through which probably everybody here knows about and that’s Zillow. Now we have to throw in the fact that they gives us ever Never heard
Jason Hartman 7:37
of it, never heard of it.
Adam 7:40
Little bit of thing they gives estimates and nobody I don’t think anybody knows how exactly this estimate is figured. But it can give you a good idea of what other people are listing their homes for in the area that may or may not be on the MLS. So it’s a good place to go to get a general idea for
Jason Hartman 8:00
What the neighborhood is selling. Right right now, you know, Zillow, it’s the Wild West bit. Okay, there’s a lot of trash on Zillow. And I don’t mean bad properties, I mean trash listings, there are fake listings. There are properties that have either sold or rented a long time ago and they’re still up, it’s really a bit of a mess. But in the zestimate is a complex algorithm. It’s their secret sauce. You know, nobody knows exactly how it works, except the two people that know the formula for Coca Cola. Okay, it’s kind of like that. It’s kind of like Google’s search algorithm, right? And the thing you have to realize is that it’s, it’s a mess, right? However, compared to what, right compared to what we had before Zillow, we had really nothing like that we had other things of course, but we had nothing like that. So it’s better than than it used to be right it gives you a guideline. But it requires you to obviously use your intelligence and your reasoning skills to understand the accuracy or inaccuracy is one of the things I’ve also noticed about Zillow is that the pictures can be insanely misleading. Sometimes the pictures aren’t even the same house, they literally aren’t. This happens a lot in where you have a builder that may be built an infill project, and they built, you know, four or five houses in a neighborhood. And they’ll list the property at you know, 123 Elm Street, and they’ll put pictures of 675 Elm Street, and they’ll just to show you like a sample of their work, or their construction quality, and it’s not even the same house. I mean, this is really, really dangerous. Okay, it’s very misleading. So you got to be really careful, you know, it’s kind of like the old saying, Don’t believe everything you read online. Well, that’s for sure. It’s the same idea goes with a platform Listing Service, or a forum or a you know, anything. I mean, you’ve got a you’ve got to sift through this and really use some reasoning power, but but it’s better than what we had before.
Adam 10:22
So very good, good. And then the other place you can go and this is going to be the values are going to be off on this just because the way that all communities do it, but you can go to the county assessor and look at the property tax values. Now, most likely, there’s some sort of at least in Texas, there’s some sort of homestead exemption or in California, you know, you have a requirement of they can only go up what is it one person or just a couple percent a year because of 13. And so, it’s not necessarily the best way but if you can find out in general, what homes are being valued for in that neighborhood and don’t look at the problem. text value of your property, because obviously your property was purchased for less than it could have been by the market specialist if it had been updated and been a good home. Right. So look at the surrounding areas and just get a feel for, especially if you can find one that sold recently. You can usually see, you know what they’re valuing that. Right? Right, a good place to go to get a general idea.
Jason Hartman 11:23
It is and just realize that your taxes will be reassessed upon closing of the property. So that also brings us to another point, Adam, that does relate to due diligence. When you look at the performer, that the local market specialist posted on our platform. You’ve got to make sure that you verify those numbers with them to areas where they commonly understate maybe it’s intentional, maybe it’s not, that varies, but our taxes and insurance okay. Now, now the rent the rental value, and we’re going to talk about that in a moment. If you’re used to looking at properties through our network, and you you, you start to have an understanding of it. And then of course, there are some rent sites that I’m sure will mention in a moment that can help you but again, they’re kind of like the Zillow thing, it’s the same, same concept. You can get an idea if the rent is overstated. Okay, you’ll you’ll have a sense of that after a while of looking at properties. But the taxes and insurance can be also understated and those will affect your bottom line your net operating income or noi. So you really want to verify those things. And especially if you are on a disaster prone area, say a hurricane area. insurance can vary greatly, depending on which side of the highway you’re on. In other words, how close you are to the coastline or not. That can vary quite a bit. The type of construction of that home can make the entrance Prices vary quite a bit. Also be mindful of flood insurance, whether or not that is required. And so that’s another part of due diligence, you really want to know. And those tax values, especially on new construction properties, where maybe the tax assessor has assessed a vacant lot, then they’re assessing and improved lot. And most of the values in the improvement, you know about the Hartman, risk evaluator that can help you dramatically reduce your downside risk when investing. If you’re not aware of that, go to Jason Hartman, calm type Hartman, risk evaluator, we’ve, you know, done quite a few podcasts on that over the years, and just learn how that works. And understand what we call the L t i ratio, not to be confused with LTV, that’s loan to value ratio, this is the land to improvement ratio. So that tax assessor if they’re assessing a vacant lot, that tax rate and that comparable value is going to look Low, and it will be reassessed when you buy it, and those taxes will go up significantly. Now that may already be reflected on the performance, it may not. But that’s why we want you to do your due diligence. Hopefully it is already reflected. And you’re just confirming their number as that estimate. But we want you to be careful
Adam 14:21
that so let’s go into the since you were just talking about it, we can go into the property taxes a little bit more. That’s one area we were going to cover. And that is if you go and check on the values in the county tax assessor, you can also see most of the time what the tax bill was for that property. And then if you really want to know, you can actually call them I’ve done this on a couple properties. You just call them and you don’t have to ask what that property will be. You say hey, in the county, so you’re buying a property for $100,000 in that county in general for $100,000 house, how much will you be paying in property taxes, and they can give you a ball Park figure. So if they come back and say, usually $100,000 house has $1,000 in property taxes, and you look on our site and you see that it’s roughly $1,000 a year, then they’re probably giving you a good estimate. If you see that it’s $400 a year, well, then that might be because they put down what they’re paying in property tax, which will vary greatly from what you’re paying. So you can just call them up. Most people don’t call the county tax assessor. So their wait time is very short.
Jason Hartman 15:28
Yeah, yeah. You know, I gotta say, that has surprised me. Many times. They just pick up the phone. Yeah, it’s really great. You know, in the old days, we used to be a 45 minute wait for somebody. I called.
Adam 15:42
I called one office for the assessor and the assessor was the one who answered the phone. It wasn’t even a receptionist. He answered the phone and I was like, Yeah, can I talk to somebody about this? He’s like, and the assessor go, Okay. Wow. You know what I would have gotten here in Travis County off tech. Yeah,
Jason Hartman 15:58
like I remember I live in Orange County, California. You know, the assessor was john T. Morlock. So you know, that’s the name written on the envelope, which is kind of weird how our government puts the name of a person on there like personal branding. It’s sort of weird for government position, but, but whatever. It’s like he answered the phone himself. Well just call the White House. President Trump speaking. Can I help you? It’s funny.
Adam 16:24
I just walking by and the phone rang. So picked
Jason Hartman 16:25
it up. Yeah, that’s customer service. I tell you, that’s great. Okay, good. What else?
Adam 16:31
Alright, so let’s go into we know we’ve done price. We’ve done property taxes, why don’t we go into the first thing you’re going to want to do, potentially even before you get looking at properties, and that’s lenders. We have several lenders in our network that do nationwide lending for investors and that’s their bread and butter. They know it they can help you get a loan really quickly, but you can also go out into each individual market and look for local banks. credit unions. The one problem I’ve run into whenever I’ve tried to do this for our properties and for other people’s properties is that most smaller banks, most local banks and credit unions won’t give you an investment property loan until the loan size is over $100,000 once it gets over that they’re interested in, and they’ll give you an estimate. But until that point, a lot of them just won’t do it. They don’t think it’s worth their time. They’d rather give loans for owner occupied properties and other things. So that’s one problem you might run into when you go outside of our network. Okay, so that means loan amount raised over 100,000 in cF $2,000
Jason Hartman 17:41
property. Yeah, right. Right. Right. And that’s not always true. That’s just one lender that you happen to talk to. Right. It’s
Adam 17:49
been it’s been a couple of them that I’ve talked to that seems to be a number that a lot of them go with. And I’m not saying if your loan value isn’t $100,000 don’t try. I’m just saying that’s a problem. You may run into
Jason Hartman 18:00
Right, right? Okay, go ahead,
Adam 18:02
yet, but the lenders that we will point you to, to contact for our network, they are used to writing loans for less than $100,000. So you don’t need to have $100,000 loan size to buy an investment property. That’s right. I remember cuz I had a client asked me said, so if I go under, do I have to pay cash? No, no, you do not.
Jason Hartman 18:21
Right, right. But if you go for a really cheap property, which is a problem you’re not going to have because we don’t have any really cheap properties. You know, those properties that just don’t really work and bombed out Detroit, okay? Or something like that. You could get lenders that will turn those down to really low prices, but with the market appreciating so much over the last several years, that’s this is a problem that is happening less and less, so don’t worry too terribly much about it.
Adam 18:51
Yeah. And if you’re getting a cheap property as well, even if they’ll give you the loan, a lot of times they give it at a higher slightly higher interest rate, so that they can actually make some money. On the deal,
Jason Hartman 19:00
right, right, you know, it’s not worth it to them to bother with really small deals, you have to understand that pain, they want to, you know, the loan size needs to be worth it for the lender to make the loan. Okay, go ahead. Oh, one more thing I want to say on that, though, is remember something, even with any lender with the entire financing environment, and with the lenders in our network, where you might receive a couple of referrals from one of our investment counselors, like Adam or the others, just understand that if you know many of our clients are buying multiple properties, repeat clients buying over and over, which is great, thank you for your business. We, we appreciate that, of course. And understand that. If you went through one lender that we recommended to you six months ago, and then you’re purchasing a property today, six months later, another property. Maybe that lender doesn’t have as good a deal for you. This is a dynamic thing. They move in and out of certain markets. And I don’t just mean geographical markets, I mean, market segmentations, mortgage product types, price ranges, all sorts of things just know it’s a dynamic market. And the same is true with our local market specialists in the network. Some of them are, are very good for a while they’ve got very good inventory, they’re giving very good customer service, and then they go bad. And you know, we’re just not that hot to work with him, you know, and we’re more interested in working with a different local market specialist. So understand that, like any marketplace, all of these things are dynamic, they’re constantly changing. And that’s why you have a human to help you you have our investment counselor team, who will help you and guide you to the right resources that you need.
Adam 20:51
Yeah, because we are lenders are constantly re evaluating their fees as well to see you know, they need to compete better with their fees. So one property they might have higher fees. And then they realized, Oh, wait, we’re not getting any loans. They’re going to everybody else. And so we’ve had several of our lenders reevaluate their fees and adjust accordingly. So, you know, that’s always a thing to look at. So next, why don’t we move on to home inspections, you wanna move on there? Alright, sounds good to me. Alright, so the first thing you’re going to want to do is check the state that you’re purchasing in and see if they’re required to be licensed, because that can root out a whole lot of people with your Google search. So there are multiple states that have licensing boards. Mississippi has a licensing board Arkansas has licensing board, I’m sure others do. Those are just the two that I know of off the top of my head. So you can go on to the website for the licensing board, and just look up the county that you’re purchasing in and it’ll give you a huge list of home inspectors that you can call and then just pick 3456 of them however many you want to call and call around and get pricing and see you know, who’s willing to do what and if they can do it in the timeline that you need and make your plans off there. What I like to do whenever I call him and talk to him, is I’ll say, how much does it cost? How much is your inspection fee if you have one? And also, are you willing to go around and take a video of the property for me, so that I can get a walk through idea? and willing to do that? Because some of them, no offense to ageism? some of the older ones have no interest in doing that. Like, I don’t know how to do it. I don’t want to do it. And then sometimes they’ll talk to a slightly younger person, and they’ll say, Oh, yeah, no problem. I’ll have my phone there. Anyway, I’ll record a video for you upload it, no problem here is millennial Adam saying, hey, Boomer age discrimination. Boy, that’s mean, I tell you, but it’s not completely that stereotype is not completely without truth. And I mean, some of the older ones, they’ll tell you yes, because they understand. It’s just it depends on if they’re afraid of technology or not young or old. Yeah, they’re just some people who don’t, they don’t want to deal with Google Drive or Dropbox or something. Like that. So sometimes they’ll do it. Sometimes they won’t. Yeah. And then another thing you can do outside
Jason Hartman 23:06
and hang on a second, I want to say a couple things about what you said. So first of all, let’s talk about what a real inspection is and when you need it. Okay, so Adam said, first of all, check and see if they’re licensed. There is a home inspector Association. We did a show on it. We had two great home inspector speakers at the last meet the Masters last spring of 2019, in Newport Beach, California. And one of them was on stage with all his gear on, you know, he looked like a paramilitary Commando. commando operation, right. So they later came on the podcast, we did an episode with him. You can go to Jason Hartman calm and just use our search engine there type home inspection. You’ll see all kinds of episodes on that. But that one particular episode, they gave a resource and I forgive me I don’t have a link off hand to the national homeless. inspectors Association don’t quote me on the name. But you know, the Association for home inspectors. And it has a map of all the states that require licensing versus the ones who don’t write in. And some states don’t require licensing for contractors also. So keep that in mind to the licensing laws vary from state to state, of course, and maybe even from county to county or city to city, sometimes on a more micro level. And then you have a home inspection. They go out, they do the detailed inspection probably takes somewhere in the neighborhood of three hours, give or take, and they give you this report. And if the report calls out a bunch of items are issues with the property and need to be fixed. If you’re buying a renovated property. You want to make sure the seller or the local market specialist has done that work. So you need to have a re inspection. So you might pay one fee for the home inspection. You know, maybe you’ll pay $350 just as an example, prices vary greatly to, okay, so understand that. And then you might pay $75 for a re inspection or $50 for re inspection or whatever it is, where they’ll go out and they’ll look again, at those particular issues and make sure they have been resolved. So you want to make sure you don’t close on the property before those re inspection items have been checked off that they’re done, and they’re to your satisfaction. Now, what if you’re under pressure to close and say you have a interest rate lock on your loan, and that interest rate lock is expiring, and the rates are higher if you don’t close the deal in a certain amount of time. This is the real world this happens. You want to have the seller give you a credit, in other words, money, okay, where you get a comfortable estimate of the cost of those items, and they look Literally at closing as part of the instructions before the deal come close, they have to credit you $1,000 or $2,000, or whatever that number is before closing. Now, if they don’t want to credit it to you, they at least have to leave that money in the escrow account so that they don’t get it from their proceeds of the sale. And you don’t get it either. It stays with a neutral third party, the title or escrow company or closing attorney in their trust account, pending resolution of that issue. And then joint instructions will be required to release those funds. For example, say there’s $1,000 that’s held in that trust account, and the seller fixes the item. Well, then you would sign instructions just releasing the thousand back to them. Okay, so they don’t fix the item, then you would demand from that account. They release the money to you. Well, what if the seller doesn’t cooperate and says, No, I don’t have to release it to you, I fixed it. Right? Well, then you have a dispute, obviously, right. And usually, it’ll get worked out, at least they don’t have the money, right, it’s harder to get it from them than it is to get it out of that account of a neutral third party. So just understand that, but the best thing is not even go there. It’s to get it fixed before closing.
Adam 27:27
And one thing you can also do is if your, you know, your rate lock is coming up to expire, you can tell them, hey, if you can’t get all of this fixed before closing, you’re going to pay for a rate lock extension. And they’re willing to do that, then they can pay the hundred or 200 or $300 to get that rate long extension, then they can get the property fixed in that amount of time, as well. So that’s another thing you can come back with.
Jason Hartman 27:51
Good, good, Adam. We have covered a lot of stuff today, and I think we are running a little bit long. So why don’t we continue this conversation Tomorrow so that we’re not rushed, and we can really make sure we give enough time to cover this all important subject of due diligence listeners. We will be back tomorrow with more on this subject of due diligence, very important subject until tomorrow. Thanks for listening and happy investing car in part two tomorrow. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. Be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.