Step 4: Performing Due Diligence

"Due diligence" is a fancy way of saying "find all possible risks before buying a property." Here's the central rule of this article: Always perform due diligence!

It's one of the most important actions you can perform to prevent yourself from buying a dog of a property that will come back to bite you right in the wallet. Remember, a majority of properties don't come without some problems. Most have minor problems that are obvious at a glance. However, other properties can look great and still have hidden, major problems (plumbing, electrical, etc.) that can cost you major cash for repairs.

So, once you've identified a pre-foreclosure property, your work is only beginning! You'll need to use various tools to find out information about that property-the phone, letters, etc. One of the best tools is the Internet. It's made the whole search process much easier and faster than in the past. It's a wonderful real estate search tool, so if you don't have an Internet connection now, definitely get one! It will dramatically reduce the legwork you have to do in terms of due diligence. Be sure to get a high-speed cable or DSL connection. Cheap dial-up connections are infuriatingly slow, tie up a phone line, and can cause you much frustration, particularly when trying to download large documents or materials.

This article will show you how to find and examine public records to determine if a pre-foreclosure property is worth your time. In fact, all the information in this article is handy and essential for researching any type of property. So, if you decide to move from the pre-foreclosure market to, say, the multi-unit or commercial markets, you'll be ready to do due diligence in those areas as well.

In terms of public records, I want you to keep a central fact in mind-the records are not always accurate. That's why you need to review them closely and verify the information contained in them. You want to make sure there are no unpleasant surprises that crop up after you take on a pre-foreclosure property.

Now, let's look take a specific look at methods of researching properties of interest.

The Internet

The first step in using the Internet is to use the Google search engine. In many people's opinion, it's the best search engine available. To find out information on a property, it's as simple as entering the property owner's name into the Google window. If they've broken the law in some fashion, then their name may pop up in court records, and, thus, on your computer screen.

However, most often, it's a matter of accessing local records and digging into the information available there. So, once you're on the Internet, where do you go to find information about a specific property?

County Property Appraiser/Assessor Sites

Your first stop on the Internet should be local county property appraiser/assessor site and other appropriate sites. On these sites, look for the following information:

Code violations-search for code violations cited for the pre-foreclosure property by your local code enforcement agency.

Comparable sales-usually, the county property records will show sales of comparable properties during the past six months. This information gives you an idea of current worth of the property.

Crime search- check with your local law enforcement agencies to determine the crime risk rating for the property's address. Obviously, the worse the crime rating, the more risk you take by buying a property in the defined area.

Demographic information-check all demographic data to see what the makeup of the neighborhood is, trends, etc.

Flood zone map search-there should be federal flood maps available. If the property is in or near a flood-prone area, check the maps carefully.

Hazardous waste search-avoid any property with hazardous waste issues! Clean-up of this waste can be extremely expensive, and you could end up with the bill. So, examine the records carefully for any evidence of environmental hazards. Any violations could be on local, state or federal agency sites.

Property records-search and examine the county property assessor/appraiser's property records to find out information on ownership, sale, tax assessment information, etc.

Property tax records-search the country tax collector's property tax records for information on tax payments.

Don't forget there are many other Internet sites you can visit to check for more specific information on topics. Here are several:

Crime Statistics

The Disaster Center http://www.disastercenter.com/crime/

NeighborhoodScout -subscription site http://www.neighborhoodscout.com/neighborhoods/crime-rates.jsp

These are just two examples. Many other sites on crime are available on the Internet. Use Google to find them for you.

Demographic Information

ESRI-business information solutions http://www.esri.com/data/index.html

Federal Financial Institutions Examination Council (FFIEC) Geocoding System http://www.ffiec.gov/Geocode/default.aspx

U. S. Census Bureau http://quickfacts.census.gov/qfd/index.html http://www.census.gov/cgi-bin/gazetteer

Environmental Hazardous Waste

Department of Housing and Urban Development (HUD)-HUD has environmental maps available http://egis.hud.gov/egis/

Environmental Protection Agency (EPA) http://www.epa.gov/superfund/

Enviromapper (EPA)-allows you to search by zip code http://www.epa.gov/enviro/sf/

Scorecard.org-information on pollution and environmental hazards http://scorecard.org/

Property Records

National Association of Counties http://www.naco.org/

Property Reports (Intelius) http://find.intelius.com/property-check.html

PublicRecordFinder.com http://www.publicrecordfinder.com/

searchsystems.net http://www.searchsystems.net/

Many more such sites are available online. Do a Google search to find them. As a precaution, I advise that you double-check information with your local government offices to ensure there are no code violations, tax liens, environmental hazards, etc. Sometimes, these agencies may have up-to-date information that hasn't yet made it to their web sites.

So, if you live in an area where the county property records aren't available on the Internet, how do you find the necessary information? If this is the case, then you'll need to call the customer service department at your property appraiser/assessor's office and provide them the property's street address. With that information, they should be able to tell you these facts:

The parcel or folio number

The owner's name and mailing address (if it's different from the property address)

When and how much the property last sold for

Current tax-assessed value

Of course, if you're a person who likes to deal directly and in person with your county offices, then visit them and tell them politely you want to do a title search to determine if there are liens, etc. They'll direct you to the record books and/or microfiche files. Also, at some point in your career, you may want to locate owners of vacant properties, and, often, you can find this information in the records. However, if this information is missing or incorrect (as sometimes happens), then you can check the following governmental sources:

County

Business license records

Jail inmate records

Public library patron records

Voter registration records

State

Bar association records

Department of Motor Vehicles records

Fishing/hunting licenses

Professional license records

Prison inmate records

Vital statistic records

Federal

Prison inmate records

Social Security Administration (death index)

Property Owner Names

Check with your county property appraiser/assessor to find out the names of property owners. Tax rolls normally contain nearly all names and list every parcel of land within a given county. The tax identification numbers will vary according to the office's regulations. In some cases, they can be an assessor's parcel number (APN); in others, they have appraiser's folio number. To find out if your county's tax roll is online, use the Google search engine. Type "tax rolls" and the county and state information into the search engine window.

As part of your property records search, you'll need to examine closely two areas to make sure there are no problems-liens and titles. Let's look at these areas next.

Liens

A lien has many different definitions, but it all boils down to this in terms of real estate: A lien is legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. Why are liens important to you?

For one very crucial reason--a lien affects the ability to transfer ownership! In other words, if there's a lien on a pre-foreclosure property you want to buy, the ownership can't be transferred until that lien is paid. So, if you buy a "liened" property, you can't do anything with it until that issue is resolved. You're stuck not making any money and, possibly, losing it.

Liens can be voluntary (mortgage or trust of deed lien) or involuntary (the result of legal action). If you need to find information on liens, here are common sources to check:

Circuit court office-check for tax liens on state income, state inheritance, state franchise taxes, etc. Also, check for liens against estates of deceased persons, guardianship of minors and incompetents, termination of joint tenancies, etc.

County clerk's office-same as above.

Country recorder's office-search for judgment liens (mechanic's liens, etc.), property tax liens, federal tax liens, etc. Also, check for conditional sales contracts (contracts for deed, land sales contracts, etc.) In addition, look for notices of "lis pendens." This Latin term means "suit pending." Notices of lis pendens should be red flags since they indicate that the title or right to the possession of the property is in litigation.

Municipal clerk's records-examine the records for any liens for failure to pay for municipal services like water, sewer and trash removal services. Also, determine if there are any code enforcement fines.

United States Courts-search for any federal judgments against the title holder. These could include federal tax liens and liens resulting from defaults on FHA, Department of Veterans Affairs (DVA), Small Business Administration (SBA), and student loans.

A final note on liens: If there are several liens on a property, they are generally treated by the law according to chronological order. In other words, a lien recorded on February 1 would have priority over a lien recorded on March 1 of the same year. However, liens for unpaid government services may have priority over other liens in several states. It's best to check with your local and state governments to determine what the rules and regulations are

Titles

Obviously, you want clear and free titles to any pre-foreclosure properties you're considering to avoid legal entanglements and expenses. So, a title search is extremely important. There are two common types:

Current owner-this is a search of public records from the date the property's title was transferred to the present owner to the current date.

Full title search-this is a very thorough search of the property's title from the date the current owner gained the title back into the past (up to a maximum search of 60 days).

You can do a title search yourself, but I don't recommend it!It's a tricky and very complicated area, so you'll need to hire a professional title abstractor or title examiner to carry out the task. The cost of professional services is cheap compared to the cost of getting tangled up in the handling of a lien problem. To find title companies in your area, check the Yellow Pages. Or go online to The National Association of Land Title Examiners and Abstractors (http://www.naltea.org/) and use their directory.

Insurance Claims

Always check the casualty and property insurance claims history of a pre-foreclosure property (or any other kind of property) before you buy it. It does you no good to buy a property only to find it's uninsurable or insurance is only available at an exorbitant rate.

There's a good source on the Internet. It's called CLUE (Comprehensive Loss Underwriting Exchange), and it's a database of consumer claims created by ChoicePoint, "a leading provider of decision-making information and technology that helps reduce fraud and mitigate risk." (http://www.choicepoint.com/business/pc_ins/us_3.html). CLUE's database is used by insurance companies (and your insurance agent) to determine a basis for underwriting or rating an insurance policy. A CLUE report includes the following information:

"...consumer claim information provided by the insurance companies. It includes policy information such as name, date of birth, and policy number, claim information such as date of loss, type of loss and amounts paid, and a description of the property covered. For homeowner coverage, the report includes the property address and for auto coverage, it includes specific vehicle information."

Ask your insurance agent to use CLUE to check this information to make sure the property is insurable and insurable at prevailing rates for similar area properties.

Property Disclosure Agreements

Make sure you're doubly protected by having the property owner sign a property disclosure agreement (usually at the time of the signing of the purchase agreement). The agreement should be one approved for use by your state. Have the owner sign the statement in the presence of a notary public. Agreements vary by state, but, generally speaking, they ask questions in the following areas:

Environmental hazards

Legal problems (unpaid taxes, liens, etc.)

Pest control problems (termites, etc.)

Property defects (leaky roofs, etc.)

Title

Zoning problems

If such questions aren't asked on your state form, be sure to ask them!

Of course, all of the above efforts need to be backed up with a physical inspection of the property. In general, you (or an inspector) should be looking at the following areas:

Code enforcement (good enforcement)

Condition of properties within the neighborhood

Crime rates

Good availability of municipal services.

Public nuisances (sewer treatment smells, etc.)

Public perception of the area

Storm water drainage

Traffic patterns (easy access to main roads)

Physical inspection of the pre-foreclosure property is treated in detail in the next article.