Underwriting is the cornerstone of successful real estate investing. However, even the most experienced investors can fall into traps that jeopardize their returns. In this series, we’re highlighting the seven critical red flags that can derail your underwriting process and, ultimately, your investments.

Let’s kick off the series with the first and perhaps most overlooked red flag.

Red Flag #1: Trusting but Not Verifying

One of the most frequent and costly mistakes I’ve seen in underwriting is taking information from brokers or sellers at face value without independent verification. While brokers and sellers are essential in the real estate process, their primary goal is to sell the property. This means that the data they provide, although possibly accurate, is often presented in the best possible light.

Why This is a Red Flag

When you rely solely on the information provided by those with a vested interest in the transaction, you leave yourself vulnerable to several risks:

1. Objective Accuracy: The information might be accurate, but it’s often tailored to emphasize the property’s positives while downplaying or omitting potential issues.
2. Hidden Issues: Without verification, you may overlook critical details such as undisclosed maintenance problems, inflated income figures, or understated expenses. These hidden issues can lead to financial surprises that impact your investment’s profitability.
3. Third-Party Validation: Utilizing third-party sources like independent appraisers, inspectors, or financial auditors ensures that the information you base your decisions on is accurate and unbiased. This validation is crucial in making informed and sound investment decisions.

Best Practices to Avoid This Red Flag

• Always Verify: Never take information at face value. Cross-check data from the Offering Memorandum (OM) with third-party sources to ensure accuracy.

• Use Trusted Third Parties: Hire independent professionals, such as appraisers and inspectors, to provide an objective assessment of the property’s condition and financials.

• Question the Data: Be inquisitive. Look for inconsistencies in the data provided, and don’t hesitate to ask for supporting documentation when something doesn’t add up.

By adopting these practices, you can avoid the pitfalls of trusting without verifying, leading to more successful and profitable underwriting decisions.