Initial Filtering
In this phase I’m quickly filtering the tape to weed out the assets that don’t fit my high level criteria. These criteria include things like: key states, whether the property is occupied, the property type, and range of BPO values. It takes me only a couple of minutes for this step.
Collect Online Property Information
In this phase I’m collecting some more detailed information about the assets that met my initial filters. I’m doing things like checking Zillow, looking at the Trulia crime map, and pulling up the asset on Google Maps to see how it looks. This takes a bit more time than the first phase, so I also save the links to the various websites so that if I end up being serious about the assets I don’t have to look them up again. I’m eliminating assets that have high crime, look ugly, or have other issues.
Pricing Analysis
This step isn’t technically due diligence, but at this point I like to take an initial look at how I might price the assets that have survived so far. I do this to get an idea of how much money in total bids I might be putting out there.
Phone Calls
At this point I’m calling to verify taxes and also calling utilities to make sure they are on. In my business model I want the asset to be occupied and if the utilities are off that’s a tip off that its probably not occupied. I also like to call code enforcement as that’s an area where liens may pop up. Code enforcement folks can also sometimes give me information on the property or on the neighborhood. At this point I’m ready to submit bids.
Post Bid Acceptance
The due diligence steps that happen between when a bid is accepted and when I fund are the most critical ones in the process. I will always get current photos of the property. Ideally these come from a realtor who is doing a BPO. In some cases if I am buying a performing note with significant equity I may not need a BPO. In these cases I’ll hire someone from Craiglist to send me pictures of the property. I’ll also get an O&E report, or ownership and encumbrance report, from ProTitle. This will give information on the chain of title, open mortgages, open liens, and other information on the property. I’ll also have an attorney do a document review of the collateral provided by the seller and the O&E report. All of these steps are vital and if you skip any you risk making an expensive mistake. Sometimes I have to fade or cancel a bid based on what I find in my post bid due diligence. That’s just the way it goes sometimes and spending money on BPO’s and O&E’s on deals that don’t work out can be part of life as a note investor.
Again, this isn’t an exhaustive list of all the things I look at in my due diligence process. But hopefully it gives you some ideas for how you can improve your own systems.