Real Estate Is Essentially a Game of Hide and Seek

In real estate, you must master the game of hide and seek. Here’s how you play: The seller hides the property’s problems and the purchaser seeks to find them. Unfortunately, it takes much more effort to find a problem than to hide one.  

Once you close, the property’s problems are now your problems and no recourse exists except for a good old-fashioned lawsuit or a match and some lighter fluid. So don’t shortcut your investigation!   

Sellers and brokers will often say, “There’s no time to perform detailed due diligence. You’ll lose the deal.” I say, “So I’ll lose the deal!” 

 The common belief among unseasoned real estate investors is that due diligence simply involves verifying the property’s financial records — rent rolls, service contracts, operating expenses, building systems, etc. In my world that’s just the beginning. You need to find out what’s going on with the property, the seller, and the immediate area in which the property is located.   

Go out and talk to people in the neighborhood. Talk to building residents, building staff, neighbors, police officers and others. It’s unbelievable how much you will learn by doing this.   

Read the local newspapers, watch the local news and look on the city or town’s website. Try to keep your ear to the pavement. Many times, the results I uncover will affect my purchasing decision.  

A real-life example of the importance of seeking out hidden information drives this message home. Some years back my partner and I were on our way to an attorney’s office to sign a contract to purchase 20 acres of undeveloped land on Long Island. We arrived early and decided to take one last look at the property.   

While driving around the neighborhood, we came upon a construction crew working on a new residential development site less than a mile away from the land we were purchasing. We pulled over and started a conversation with the men. I asked how many houses they were building and what the purchase prices were. When I asked why the prices were so high (in fact, they were much higher than the sales prices I projected), one man replied, “Because this is the last half-acre development site the town will approve since the recent up-zoning to one-acre lots.”  

Wow! The new zoning regulations for the land would only permit us to build 20 houses on the site — half the number of houses we were planning to build. Had we signed the contract before learning this, the results would have been disastrous.   

Obviously, we didn’t go through with the purchase, but we nearly lost that game of hide and seek!   

Make the extra effort to uncover what the seller may be hiding using these tactics:  

1. Examine the property’s history.
   An examination of the existing title policy can reveal a good deal of historical information about the property. The title report will reveal, among other things, any suspect environmental uses of the property in the past, such as a gas station or a dry cleaner. Historical information about the interior upgrades will enable you to determine what actions you can take to maximize the property’s value. If possible, interview past owners and occupants of the property to learn the inside story of the property. 
2. Learn what makes the seller tick.
   In any real estate transaction, perform an in-depth investigation of not just the property, but the property owneras well. Is real estate the owner’s primary profession? What is the owner’s reputation as a landlord and property owner? Is the owner in financial trouble? How flexible has the seller been in past dealings? A great way to learn about the owner is to establish a network of professionals, such as attorneys, accountants, appraisers, brokers, bankers, etc. Understanding the owner’s characteristics may prove beneficial to the negotiation. 
3. Find out why the property is for sale.
   Again, tap your network to uncover important information. Does the owner want to cash out? Is the property value maxed out? Is the market for the property expected to decrease? Are there problems with the property? Is the seller planning to upgrade to a higher class of property?  
4. Do extra due diligence.
   If you believe a certain property is a good investment because it’s in a great location, looks like it’s in great shape, rents are at below-market rates, and it’s selling for only $50,000 per unit, you won’t last very long in real estate. You must do extensive research and have diagnostic tests performed by third-party experts to discover whether the property is a good investment. Go beyond conducting the analytical due diligence to verify records and root out hidden information.

Shyness and a laissez faire attitude can cost you money. Always do what it takes to win the game of hide and seek. 

Written by Sam Liebman.

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