Tuesday, November 30, 2021

Step 9: Due Diligence | Street Smart Investor


Due diligence means investigating facts about the physical and financial condition of the property and the area the property is located in.

A good way to think of due diligence is “doing your homework” both before you make an offer and after your contract is accepted. Errors in real estate can be very costly. If you do not exercise proper due diligence, you may set yourself up for massive financial and emotional headaches in the future. Join Lou Brown at Millionaire JumpStart December 3rd -5th, 2021 https://millionairejumpstart.com/ At the "Millionaire Jumpstart" you're going to be trained, schooled, and taught 'till you're smiling from ear to ear! You'll learn the exact system Lou Brown uses to this day to find, target, and profit bigger on real estate deals. You'll hear from experts within the Street Smart® community on how they are making more money than ever with this system, and develop your own action plan for success - that you can literally start using to make more money on every deal the minute you leave the event. Timestamps: 0:01 - Introduction - “Why Due Diligence is Important on your real estate business” 0:45 - Zillow has shut down buying houses 2:29 - The Street Smart way 4:02 - https://www.HouseMonster.com 5:46 - A real estate story about Due Diligence 8:21 - Step 9: Due Diligence - 10 Steps to Buy Your First BIG Real Estate Deal 15:00 - Street Smart Systems 15:57 - How important are lawyers to the due diligence process? 22:21 - What is a non-detail-oriented person to do when doing real estate business? 24:55 - Next week’s topic: Step 10 in buying your first big real estate deal 25:37 - Join Lou Brown at Millionaire JumpStart December 3rd -5th, 2021 https://millionairejumpstart.com/ 28:56 - Lou’s parting message: Get yourself gear-up for 2022! It’s going to be a raucous roaring year for real estate! #DueDiligence #realestateinvesting #realestateforbeginners If you are JUST getting started in real estate investing, you NEED to attend my ONE-DAY virtual training. I teach it LIVE over ZOOM, and it's only $1 (yes, one dollar) for SIX HOURS of solid how-to training! https://www.wealthbuilderworkshop.online If you're ready for a more in-depth experience, then you owe it to yourself to investigate my THREE- DAY Millionaire Jumpstart Event. I host it four times a year in various locations, and you can attend LIVE and in person. I'm your coach all three days. Find out more at https://millionairejumpstart.com/ Need help deciding which power-packed "one-of-a-kind" training on making money in real estate investing is best for you!
Call 1-800-578-8580 or visit us online at https://www.streetsmartinvestor.com

Listen to our Podcast:


Due Diligence | Street Smart Investor

Lou Brown (00:03):

Hi. Due diligence is a very important thing as a real estate investor and I'm going to tell you why.


Lou Brown (00:21):

Hello. Today we are on Chapter 9 of our discussion of what it takes to be a successful real estate investor. And I am so excited to share with you. My name's Lou Brown. I've been buying, holding, and selling property now for over 40 years. And we have some amazing things to share with you right now. We are going into an amazing market. Did you hear the big news that Zillow has shut down buying houses? Well, it's about time. Can you imagine these idiots? Just think about it, they're going and buying $600,000 houses. They're closing on them, putting them right back out on the market for 650, $700,000. Somehow they think there's a greater fool out there than themselves for buying those houses at those prices. Well, maybe they've had success in some realms at some times in some markets, but Zillow, as much as they know about real estate, they don't know about real estate.


Lou Brown (01:22):

I'm going into my fifth real estate cycle. There are things that I have learned over the years. And one of the most important things is to get a good value. When you buy the property, you buy it right, and you buy it cheap. You don't pay retail and then expect it to survive that unless you have unlimited money as they do. And the money costs so little as they have. But right now they've decided, "Hey, hold on, put the brakes on. Maybe it wasn't such a wise thing." So they've got thousands of houses in inventory right now. What I've heard in the last few days is that they are slashing prices. They've stopped buying altogether. They're slashing prices. They're selling like crazy. Now, if you're a conspiracy theorist like me, you can perceive that perhaps what they're doing is creating a new market where they're going to drive prices down, down, down and then be able to come in and scoop up the houses at a windfall price.


Lou Brown (02:27):

Well, maybe, I don't know. But one thing I do know is that we have a way that we invest in real estate and it's a unique and powerful way that we do what we do. And it's important that you as real estate investors think through what's important and what's not important. Now in our world, one of the things we look at is we look at the market that we're in. We're always constantly, carefully evaluating the market. And when we do buy a property, as we did last Friday, that's actually one of the Wins of the Week is that we did buy a property last Friday, that is for one of our buyers. Now I want you to get that key phrase right there. We already have a buyer. We already have someone, we know what they can afford. We know how much payment they have.



Lou Brown (03:20):

We know what they're looking for. We know the area they're looking for and we know what they can afford on a monthly basis. So as a result, we bought a house for them. Now I'm going in right now. We're going to be putting on a new roof tomorrow. We're doing some things to that house before they even see it. And then I'm going to bring them over, already knowing what they're looking for. And I think I have it. And here's what I know. Even if they say no, they don't like that house for whatever reason, am I concerned? Not in the least. Why? Because I have other buyers. I have other buyers already. Now what I'm sharing with you is my House Monster concept, HouseMonster.com. So what happens is that in our world, we teach you that the best thing you can do is to market and find buyers and use a script to determine exactly how much down payment they have, how much they can afford on a monthly basis, evaluate their credit, do some things in advance before you go about buying a property.


Lou Brown (04:26):

Now, this market I've been telling you now for months is getting ready to be topsy-turvy. Exciting, interesting, and for some people scary. They're going to say, "Hold on, let me pull back these reins. I'm concerned that I might make a very big, fat mistake and lose everything." Well, I learned that lesson back in 2008. And so when I had a dozen properties on the market and I couldn't sell them because the market changed and they just stopped financing, that's what they did. They just stopped financing. So I had to be very careful and cautious and I turned and flipped my script on what to do and how to do it in real estate. And it worked out fantastic because now we find the buyer before we buy the real estate. So just keep that in mind, as you're doing your business and know that today, one of the things I wanted to focus on in addition to the crazy market that we're in, is also due diligence that we need to think about the due diligence that's necessary to be successful in real estate.


Lou Brown (05:44):

I'll tell you a quick story. So sure enough, I put a property under contract and we were buying this house, right? We were buying it cheap. I was impressed by the pictures. I said okay, this is a good deal. Definitely want to buy it. And it was only $14,000 is the good news. And so we went ahead and purchased it, closed on it. And then I sent the broker over there that was finding my properties for me. And I said, "Go ahead and put the locks on it and what have you." He knew his routine. And that was the routine, go to close, he got paid, he got $2,500 on every transaction that he finds for me. And so sure enough, he goes about, going to the property. And then he goes to the property and jiggles the door, he can't get in.


Lou Brown (06:35):

They gave him the keys and it's not working. And they said, "I don't understand what's going on here." Well, what had happened was he had gone to the wrong house. On the same street, there was another house for sale and it was a different house. It was an altogether different house than the one that he thought he was buying for me and certainly that I thought we were buying. Sure enough, from now on, due diligence is to check the address to verify that the property that you're purchasing is the property that you're purchasing. So, long story short, I did go ahead and make money off that property. We let it sit there in inventory, and as the neighborhood continued to improve, we put it back out to the marketplace. I ended up selling that house for 10 times what I paid for it.


Lou Brown (07:30):

So it worked out. It worked out. And that's one of the things I love about real estate is that it's very forgiving. If you will be patient, if you will invest the time and energy, then you can be highly successful at this business. Now, the key phrase that I just said is, "Be patient." You must be patient. You must not run off to the next shiny, new thing, but get on board, stay on board, and you can become a multi-millionaire in this business. And I'm not confused about what I've just said because we've helped many people to become multi-millionaires in this business and they have thriving, beautiful businesses there. They're offering the Path To Home Ownership in their local market. It's quite wonderful. All right now, onto due diligence, not only to who we want to check the address and make sure we've got the right house that we're buying.


Lou Brown (08:31):

We also want to not only check the comps for that property, but we want to recheck the comps before we even close because markets go up, markets go down. We have an intern working in our office. And just this week, one of the things she was shocked about is she says, "Well, my gosh, we just checked this house a few days ago and it's now worth $3,000 more." And I said, "That's absolutely right." You have to check the comps ongoing. So before we even put it up for our market, for our buyers, we rechecked the comps and sure enough, the property is actually worth more. So there's good news because constantly houses are being bought, houses are being sold and that is affecting the marketplace. So check and recheck your comps. Now, the other thing I want to mention to you is insurance.


Lou Brown (09:25):

You want to make sure that your property's insurable and you want to make sure that you have the right kind of policy. If that property is going to be vacant for a while, you're not going to be able to put regular insurance on there. You're going to need a special type of insurance. Certainly, at least, vacancy insurance, if not builders risk insurance. And that means that if somebody breaks in, if somebody steals things, you're covered because otherwise you could be losing big time. And if you get a regular policy and you don't inform the insurance company that this is an investment property, and that you're going to be doing repairs on this property, you might have the wrong policy there and may not get paid at all if there's a loss. So be very careful about the insurance that you put on the property. Now, another thing is the day of closing.


Lou Brown (10:20):

You want to go inspect that property and make sure that the condition has not changed because sure enough, maybe you checked it last week. Maybe you checked it a month ago when you first put it under contract. And now it's time to go back and recheck it to make sure that the air conditioning system is still there. The heating system is still there and the ceiling fans and the appliances or whatever you expected to be there. And whatever you bought is still there. So they have at least the day before, but preferably the day of the closing, you're going to go recheck the property. Now, of course, another thing you want to do due diligence, you want to get that title back in time for you to review the title to the property. And that means that your title carrier, whether you're going to be working with a title company, that's going to be closing the transaction.


Lou Brown (11:14):

Are you going to be working with an attorney, whatever the case may be, that's common in your area? You want them to be responsible for having checked that title and to get title insurance. So this is another due diligence item, is that you always get title insurance, but all title insurance is not created equal. So there is a Schedule B on title insurance. This is another due diligence item to look at any exemptions that they may have on the title policy because sure enough, they could actually be giving you insurance, but saying we don't cover all this stuff. So be careful about the exemptions that they might put into that policy. Just because you got title insurance doesn't mean that you're fully covered. So consider all these things. Another thing that we do during the due diligence period before we close is we actually get all our contractors out there.


Lou Brown (12:13):

We get bids and they are good at uncovering things that we may not have even seen on the original inspection. So that's another opportunity for you to check that place out thoroughly and make sure that you've got everything taken care of before you do that. So in due diligence, there is a process and a checklist for that. Now I do have a checklist in our system, whether we're buying a property, whether we're renting a property, whether we're selling a property, whether we're lease optioning a property, owner-financing a property, all those different aspects of what you do and how you do it and renovation, as well. There should be a checklist and you go down your checklist and make sure that you haven't left anything out. And that does take discipline to do that because we're all smart people.


Lou Brown (13:08):

And we all think we've got all of our bases covered, but one of the due diligence items is to check the checklist and make sure that we've covered all items on the checklist. And then the final thing, of course, is that you get the keys to the property and you schedule that those locks are going to be changed. Don't trust the locks that are on the property. You don't know who made a copy of that, of those keys. You don't know who might be watching that vacant property and waiting for the closing to take place so they can come in and steal some things. So just be careful about that, make sure that you're going to schedule it. The locks are going to be changed on the day of closing as well. So hopefully those are some checklist items that you can create to follow up and make sure that you have done your proper due diligence on any kind of real estate deals that you're doing. And by the way, what I've covered here, as I was saying before, is just the buying side of the business. And of course the selling side of the business, the leasing side of the business, the renovation side of the business all should have their own due diligence processes as well.


Lou Brown (14:35):

Now another thing that we like to do and give you an opportunity to do on these great sessions that we do is to give you an opportunity to ask questions because this is such a great business, and there's always questions. And so I like to give everyone an opportunity to think about what is stopping you, what could be an issue for you. And I think about the systems we have that run our business. We have a buying system. We have selling and holding systems. We have negotiations, land trusts, personal property trusts. We have our funding of our transactions. We have business management, property management, lease options, owner-financing, renovations, buy offers, deals structuring, auction profits, and accounting, as well as our $10 house programs. So there's many different things that make up a very successful multi-million dollar business. And so I always encourage you to think about any of those things that you may be faced with so that I can answer any questions you might have. Scott, do we have any?


Scott Paton (15:56):

We do have one question and Mary asked, "How important are lawyers to the due diligence process?"


Lou Brown (16:04):

Well, lawyers can certainly help, lawyers that particularly are going to do the title search. You want to look at the title search that they do. You want to look at the title that they generate. One thing that we do as well is we get the HUD 1 closing statement at least 24 hours in advance of the closing because we want to actually look at the numbers that they've calculated. We want to make sure that things that we had built into the contract, that the other party, the seller was supposed to pay are actually on the seller side of the transaction. And I will tell you in the flurry of getting a closing done, some. Let me say it differently. Almost always, there are mistakes. So when you go into it and make that part of your due diligence list as well, you're going to check that closing statement carefully.


Lou Brown (17:04):

You're going to make sure that all the numbers are calculated correctly and that they have not made a mistake on any of the items, maybe that are in special stipulations of your contract, or maybe that were in your contract. Because for example, my purchase and sale agreement says that the seller will pay all closing costs to include recording fees and tangibles tax, credit report, funding fee, loan origination fee, document preparation fee, all these different things that typically happen inside of a closing. Well, my contract states that the buyer will pay those things, or the seller will pay those things depending on what hat I'm wearing that day. And, of course, that's completely negotiable. And when they don't negotiate, that's another bonus. That's another benefit. That's another profit center to your deal. So sure enough, sometimes the closing agents miss that. They're so used to closing transactions in a certain way.


Lou Brown (18:04):

They just kind of go with that flow, sorta like a record has a groove already cut in that record. They just got to go with that same groove. And then you're going, "Wait a minute, hold on. We negotiated something different because of the condition of the property, the location of the property, the timeframe of the closing." There's many component parts to a deal. And so as a result of that, that can cause certain things to be paid for by the other party. And yes, those attorneys, those closing agents can absolutely make those mistakes. So you always want to check their work and make sure that they do their work, but they're a necessary evil to some degree in closing because we do rely upon them to get to title search. Now again, when they do the title search, they are often the ones selling the title insurance.


Lou Brown (19:00):

And I say selling because they're actually representing several different title insurance companies and many attorneys and title companies write for a number of different agencies. So that means that they are taking the frontline sales job of selling that title insurance. And when they submit that to the title insurance company, that might come back with exceptions. And like I was saying before, you got to make sure that they haven't just slipped you a Mickey, so to speak, and given you some exceptions that would not be palatable to you. Tell you a quick story. I had a house that we had purchased. We got a good deal on it in a very hot area of town. It was going to be perfect. And what some investor I suppose had done is they had taken an old ranch-style house and built on this huge structure on the front of it.


Lou Brown (20:00):

And their plan was to kind of marry the old house with the new house. And they had built this framework and it was going to be great. And when we got the property, we said, "Okay, that's going to work out terrific. And we'll go ahead and complete the build out of that and all of it. It'd be good. Well, when I looked at the title insurance, sure enough, the contract said, "Except for any setbacks that may be required by county code." And I went, "What's that?" And they said, "Well, nothing to worry about, you know?" And I said, "Yeah, I know exactly what's going to happen." I said I'm going to put in $200,000 worth of repairs, whatever it was. And I said, then I'm going to go sell the house. And whatever 's going to happen is they're going to do a title search.


Lou Brown (20:52):

And they're going to say, "Hey, you didn't have the right setbacks on this approved by the county." And all of a sudden I'm going to get stuck with that property. I'm not going to be able to sell it. I said, "No way." I said, "You guys deal with this setback issue. I want a title policy that does not have an exception to it in terms of setbacks." Well, sure enough, that's exactly what happened. They took 8 months. They had to file a variance with the county. They had to wait for that to come up on the county's calendar, and so many different things that were delaying that process. And in the meantime, when they finally did get that done, we closed and purchased the transaction. So just imagine that you went forward, not even knowing that that was an exception in the policy. Sometimes, those attorneys will get you on the other side. Now, another thing I advise is control the closing. Always close at your attorney or title company's office. Don't allow it to be closed at someplace that don't know you. When you can build those relationships, then they will look out for you. And it's less likely that they will slip you a Mickey and give you some risk in the deal that could have been avoided. So lots of advice today. Yay. Anything else, Scott?


Scott Paton (22:19):

Yes. That was a great answer. Tony had a question which was, "As I'm listening to you talk about due diligence, Lou, it occurs to me that a lot of real estate investing is very detail-oriented and I'm not a detail-oriented person. So how do I make sure that I don't run into a problem 6 months, a year, 2 years after I buy my house because I missed something?"


Lou Brown (22:47):

Great. So details are important in real estate. This is a detailed business. Details do matter and details, not properly paid attention to, can cost you a fortune. Ask me how I know. I've learned many, many lessons in developing our Street Smart System to real estate wealth. And one of the things that I've learned along the way is whether I like it or not, I better pay attention to detail and whether I like it or not, I either need to have someone on my team, which I do. I have an assistant, Judy, and that's her job. Her job is to handle closings, whether it's the buy side of the business, where we're acquiring properties, or whether we're funding other people's transactions because we do provide funding for folks, or whether we're selling properties. As a new sale, we have someone to pay attention to those details, a detail-oriented person that can look at the contracts and make sure that all of the paperwork is done correctly, follow up with the closing agents, make sure that their ducks are in a row. 


Lou Brown (23:55):

Make sure that when that HUD 1 closing statement comes in, that those calculations are done. That is a very handy thing. Now we do have an Assist Wiz, and these assistants can help a lot with a lot of the details of the business, such as property management, lease options, insurance, owner-financing, doing a loading onto your website, your buying website, or your selling website, following up with leads. There are a lot of details to this business, Tony, and I encourage you to get some help if that's not your favorite thing to do.


Lou Brown (24:52):

So, 10 steps to your next big real estate deal. And next week, we're going to be doing our final step in this 10-step series and so excited to bring you that detail and that information. And then next week, we're also going to have some big Wins of the Week. I've got a lot of carry-forwards from this week, as well, and some photos and things that we're going to share with you next week. So lots of good stuff to pay attention to. Definitely put it on your calendar and be ready for it. Scott?


Scott Paton (25:26):

Awesome, Lou. And coming up to, in a very short period of time, is one of your favorite events. So maybe we take a few minutes and tell people about the Wealth Builder Workshop.


Lou Brown (25:39):

Well, our Wealth Builder Workshop, we just completed that. Our next one coming up is the Millionaire Jumpstart, the 3-day event that we have coming up on December 3rd, 4th, and 5th. Big, big, opportunity for you to advance your real estate business in a very important way because we focus a lot on the buying side of the business. Buying right, buying cheap. Taking advantage of all the different opportunities that are going to exist in this new market coming up. Big, big, big money is going to be made. I will say that again only because I've been there and done that. And I know going into this fifth real estate cycle for myself, this is going to be big news, and you're going to be along the way with me. So we'll have a lot to say in a month from now at the Millionaire Jumpstart.


Lou Brown (26:41):

Now you can find out more about that at MillionaireJumpstart.com. I encourage you to become a VIP. The VIP's have the most fun, including dinner with me one night and also, a special one-on-one session that you can use anytime you want to. So you have a special consultation with good, ole Lou. So definitely put that on your agenda. Put that on your calendar. We're going to be doing that in Atlanta, Georgia. And again, that's December 3rd, 4th, and 5th. That's a Friday, Saturday, Sunday. And if you can possibly join us live, that is a very important thing because you're going to get to network with some amazing other folks. One of the most interesting things that people do say to me about our events is I'm always surprised by the quality of people you have in the room. Typically I go to real estate investor conferences, and there's just people like me that haven't done any deals there.


Lou Brown (27:43):

And then I come to your conferences and there's all kinds of millionaires in the room and they're learning from you. So, definitely, you want to come live and in person, if you possibly can, if you're just getting started in this business or you're growing your business, you have some properties you'd like to improve on that. I'm going to be talking about some of our profit centers that we have. And I'm also going to be talking about trusts, land trusts and personal property trusts. I'm going to be giving a lot of details about protecting your assets, avoiding probate, and making money using trusts. So it's a powerful event. You're going to get a special manual there, and that's our Millionaire Jumpstart manual that's loaded with documents that we're going to cover during the event that cover my special cost-to-sell worksheet and my presentation process that works so well. So, definitely, if you can get yourself there in Atlanta, we're going to have a great time together and get yourself registered because we do have limited seating. And once that seating has gone, that's all we got. So, definitely, get yourself there and get yourself geared for 2022 because being able to do it in December is going to give you the opportunity to begin your marketing and to begin your cycle into 2022. Get some momentum going because it's going to be our raucous, roaring year. No doubt about it.


Lou Brown (29:29):

Yeah, definitely get involved in our YouTube channel. I got a ton of great information there and like us, love us, and all that good stuff on social media. It really helps others to find us as well and gives you some great opportunities to learn additional things as they come out with new videos. I'm going to be talking a lot about this new market coming up. I'm very excited about what's happened just in the last few days. So get ready, baby. This is going to be awesome. So I'm looking forward to seeing you again soon. If you're one of our regular clients, we'll see you every Sunday night, 9:00 PM Eastern Time. And we always have a great group of folks that show up as well as our whole team is there to support you and teach you, train you and give you answers to your important questions. So definitely join us on those Sunday night calls. If you'd like to know more about us, go to StreetSmartInvestor.com. And I look forward to seeing you again soon. Yeah, baby.



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