While the U.S. housing market remains challenging, there are still plenty of opportunities for money to be made. House prices are expected to rise by 3 percent over the duration of 2025, with inventory levels equally projected to climb to a more sustainable level by the end of the year.
For flippers, this suggests long-term projects might prove fruitful if quality stock can be found at reasonable cost, but that’s easier said than done, at least without a clear plan. With this in mind, here’s how a solid due diligence checklist can protect your investment in fixer-uppers.
The importance of due diligence in real estate
No matter what type of real estate deal you’re entering into, due diligence is a critical aspect.
Undertaking a comprehensive due diligence process enables you to verify every significant element of a potential investment, from legal and financial details to physical considerations.
Research suggests that almost 50 percent of all failed business deals could have been saved with more thorough due diligence, with the importance of this process growing alongside the risk level of the investment. For fixer-uppers, this balance of risk to reward is often uniquely high.
By developing a tailored, intricate due diligence checklist, buyers can best understand the actual value of a home and the associated costs to get that house to market. When performed well, the scales can be shifted notably in your favor, particularly for riskier home investments.
To be clear, the risks still exist, but as with all real estate investments, knowledge is power.
Armed with comprehensive information detailing the legal, financial and physical condition of a property, savvy buyers can boost the value of any deal. The key is knowing what to look for.
What to include in a due diligence checklist?
The more thorough your due diligence process, the more effective it will be, and the greater the degree of protection it will provide over the security and success of your new investment.
All this to say that what to include in a due diligence checklist is every element you can think of, from infrastructural details to purchase and rehab costs. However, from a standpoint of actionable advice, this isn’t massively helpful; let’s explore some specific points of interest.
It can help to divide due diligence requirements across five points of interest, which include:
1. Financial: Uncovering details like property tax records, outstanding debts and/or liens as well as projected purchase costs, including expected fees and commissions.
2. Legal: Information about the property’s title and ownership history, its compliance with state + federal regulations and whether it’s linked to any ongoing legal disputes.
3. Physical: The structural condition of the property, its fixtures and fittings, including plumbing, electrical and heating systems alongside critical physical security features.
4. Market: Data concerning local property values, rental rates and occupancy levels, including insights about development plans for the local area and its growth potential.
5. Environmental: Site assessments to check for things like hazardous materials or areas of contamination, as well as to highlight potential breaches of eco-regulations.
Performing thorough checks and inspections across each of these five categories, with some assistance from certified professionals, will help you to determine the value of an investment.
Due diligence tips for fixer-upper investments
While thorough due diligence is a critical element of all real estate transactions, it becomes even more important when exploring potentially high-risk investments like fixer-upper homes.
Each of the same points of interest discussed above remains critical, though due to the likely advanced age and condition of fixer-uppers, further layers of due diligence will be necessary.
To conduct thorough due diligence over higher-risk properties, investors should focus in on:
- Rehab costs: The fixer in fixer-upper means you’ll likely be contending with water intrusion, pest control, insulation degradation and potentially worse issues such as asbestos removal before hitting the market; costs that make or break an investment.
- Comparable sales: Even if you’re lucky enough to find a home that requires minimal fixing, you’ll still need to ensure it’s marketable. Look at comparable sales in the area to get a good idea of realistic profit potential; the more recent the sale, the better.
- Holding time: Both rehab costs and comparable sales factor into this consideration, with each potentially adding more time and keeping costs in the equation. The more time spent off the market, the lower your investment potential, so don’t overlook this.
- Legalities: Covenants or easements could impact your ability to carry out required work on your property; this is often the reason why seemingly ideal fixer-uppers sit on the market unusually long, so clarify that work can be done before making any offers.
The more you know
The more you know, the safer you are. Fixer-uppers can be great investments, even in challenging real estate markets, but only if you know what to look for. Thorough due diligence helps even those with little experience get the most out of hidden gems, enabling smarter real estate investments.
Andrew Reichek is the President of Bodebuilders.com. Connect with him on LinkedIn.
