Real Estate Investing Real Estate Due Diligence 1 β Questions and Answers
Question 1: What is the primary purpose of due diligence in real estate investing?
- To negotiate a lower purchase price
- To verify all material facts and assess risks before closing (Correct answer)
- To secure financing from a lender
- To market the property to future tenants
Correct answer: To verify all material facts and assess risks before closing
Due diligence allows investors to verify all material facts, uncover hidden risks, and make an informed purchase decision before committing to a closing.
Question 2: Which document provides a chronological history of all ownership transfers for a property?
- Title commitment
- Property survey
- Chain of title (Correct answer)
- Deed of trust
Correct answer: Chain of title
The chain of title documents every transfer of ownership in sequence, allowing investors to identify gaps, defects, or competing claims on the property.
Question 3: What does a Phase I Environmental Site Assessment (ESA) primarily evaluate?
- Structural integrity of the building
- Potential environmental contamination on or near the property (Correct answer)
- Zoning compliance and land use restrictions
- Accuracy of the property's financial statements
Correct answer: Potential environmental contamination on or near the property
A Phase I ESA identifies recognized environmental conditions through records review, site inspection, and interviews to reveal contamination liabilities.
Question 4: An investor discovers an unpermitted addition during due diligence. What is the primary concern?
- The addition increases the property's assessed value automatically
- The buyer may be liable for costly code compliance retrofits after closing (Correct answer)
- The lender will increase the loan amount to cover the addition
- The property's insurance premium will decrease due to the added square footage
Correct answer: The buyer may be liable for costly code compliance retrofits after closing
Unpermitted additions can require expensive retrofitting to meet current building codes, creating a financial liability that transfers to the new owner at closing.
Question 5: Which of the following is NOT typically part of the physical due diligence process?
- Roof inspection
- HVAC system evaluation
- Title search (Correct answer)
- Foundation assessment
Correct answer: Title search
A title search is part of legal due diligence; physical due diligence focuses on the property's structural and mechanical condition.
Question 6: What is an estoppel certificate in the context of real estate due diligence?
- A legal process to remove squatters from a property
- A document signed by tenants confirming their lease terms and current status (Correct answer)
- A zoning variance that allows a non-conforming use to continue
- A type of insurance policy protecting against title defects
Correct answer: A document signed by tenants confirming their lease terms and current status
An estoppel certificate is signed by existing tenants to confirm lease terms, current rent, any outstanding disputes, and concessions, binding them to those statements.
Question 7: What does ALTA stand for in the context of real estate title insurance?
- American Land Title Association (Correct answer)
- Alternative Lender Title Approval
- Assessed Land Transfer Agreement
- Automated Lien Transfer Analysis
Correct answer: American Land Title Association
The American Land Title Association (ALTA) sets industry standards for title insurance policies and surveys used in real estate transactions across the United States.
Real Estate Investing Real Estate Due Diligence 1
What is the primary purpose of due diligence in real estate investing?