The term “due diligence” is one often used in the real estate industry. Those who use it benefit from it and those who avoid it typically end up making costly mistakes. Real estate investors know that the properties they buy aren’t exactly the most liquid of all investments. You can’t exactly take your home to your bank and cash it in.

Once you sign your closing papers, it’s yours. But long before you get there, it’s time to open up a can of your own due diligence. But what, exactly, does “due diligence” entail?

First it means it’s up to you to do your own research. You can have someone do the research for you, but due diligence means you’ve anticipated any and all risks as well as rewards before closing on any property.  Due diligence means doing your homework. Do the math. Run the calculations. Check out the current and future values. Again.

Know the neighborhood and take advantage of your real estate agent partner to make sure you’re buying below market and your ultimate selling price is reasonable. If your agent determines that there are several other properties in the area at a similar price and the market appears to be slowing in that price range, further investigation is needed. In fact, that might be enough to tell you to move on.

Due diligence means a thorough review of the title report. Once you sign a contract and escrow is opened, the seller of the property typically provides a copy of the preliminary title report from the title agency. The title report will show the existence of any unsettled lien. You can expect to see a mortgage on the title report, but property tax liens or judgments requires more information.

True due diligence means a thorough property inspection. Or two if you want to be really sure. When you’re buying a distressed property that needs more than a little work, you’re looking at a higher risk/reward than you normally would.

In other words, if you did everything you could think of to avoid risk and properly evaluate your prospective purchase, even if something goes wrong down the line, at least you know you did your very best.