Appendix C
Due Diligence Checklist

This list isn't comprehensive. Specific markets and types of properties require specific due diligence, but these are must-ask questions when buying anywhere in the world. Put them to both your attorney and your real estate agent and pay special attention when their responses differ (as they sometimes will).

What Is Your Budget?

We've discussed transfer taxes and other closing costs and the importance of including them when setting your budget for buying. Having $100,000 in your pocket doesn't mean you can buy a $100,000 property. Factor in all expenses and leave a little room in your budget for unforeseen costs that might come up.

What Comes with the Property?

Whether buying from a developer or a private seller, confirm what is included with the purchase. If you're investing in a short-term rental, maybe all furniture and appliances are included in the sale but maybe not. In many markets, it's common for the seller to take everything with him, down to the lighting fixtures. This can be a negotiating point when deciding how much to offer. Some developers in some markets don't include air conditioners, kitchen cabinetry, or even the kitchen sink and countertops when delivering new-built properties. In this case, adjust your budget to allow for the cost of their installation.

What Are the Zoning Rules?

If you're investing in a gated community, rules probably exist about what owners can and can't build. If you're buying in a mountain town in Ecuador, you could wake up one morning to find that the house next door has been converted to a disco. Should that happen, you'd have no recourse, as Ecuador doesn't impose zoning regulations. Find out before committing what your neighbors are prohibited from doing with their properties.

What Is Your Access?

This is a more critical question when buying in the countryside than in the city. The route a real estate agent follows when taking you to view a piece of land you're considering buying may or may not be the legal access to the property. You don't want to buy only to find out that the actual right of way is over two rivers and through the woods where there's no road.

Is There an HOA?

In the United States, we take for granted that any apartment building or housing development operates according to the rules of a Home Owners' Association (HOA). Don't assume this when buying an apartment or in a private community overseas, not even if the developer assures you that an HOA is in place. Ask to see the HOA documentation, including recent financial statements showing ongoing expenses and cash on hand, and have your attorney review it all, especially in Latin America. If the HOA isn't properly registered, the HOA rules, including those to do with the required payment of annual fees, are unenforceable. That can put your property value at risk.

How Much Is the HOA Fee?

You don't want to pay any more than you have to, but you also want to make sure the HOA fee is high enough to cover HOA expenses. If it isn't, property maintenance will be deferred, putting your investment at risk.

Are You Allowed to Rent Short Term?

Don't assume, even if you're buying from an investor who has been renting short term, that the property can legally be rented short term. Check relevant municipality legislation and the rules of the HOA. Short-term rentals can be restricted or disallowed by the local government or by building management.

How Far Away Are Day-to-Day Services?

As part of your property search process, take time to walk the neighborhood and explore the surrounding area to confirm services and amenities nearby. Where is the nearest grocery store, pharmacy, medical center, public transportation, bank, hardware store, and so forth? Depending on the market, these things can be as important to your occupancy rate as the property itself, especially when renting short term.

What Are the Total Carrying Costs?

Put pen to paper to calculate the total carrying costs, including property taxes, utility costs, Internet and cable, property management fees, and HOA expenses. You'll have these costs regardless of whether the property is rented. You should feel comfortable that you can cover them even without any rental income, and you should remember all of them when calculating your projected net rental yield.

If You're Buying a Second Home without Intending to Rent It, Who Will Watch the Property When You're Not There?

You'll probably need property-management services even if you don't plan to rent your property. You could engage a professional property manager to pay the bills, check on the property once in a while to make sure everything is okay, supervise cleaning (even if a property is unused, it should be cleaned regularly, especially in the tropics), and to oversee maintenance and repair work. Or you could enlist help from a neighbor-friend you trust, although this is probably more responsibility than most neighbors are up for.

Whatever strategy you employ, you need someone on the ground paying attention to your investment when you're elsewhere.

Does the Development Company Have a Track Record?

This is an especially important question when buying preconstruction. The greatest risk, even with an established developer, is that either the entire building or your particular unit won't be completed. More common is not completing construction on time. Research the developer's previous projects to see if he's met his promises in the past.

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