What Exactly does Due Dilligence Mean with Regards to Investing in Property?
You will have heard the term 'due diligence' a lot when it comes to property but, what does this actually mean when it comes to buying an investment property? You will want to really understand what your money is going into, you will want to know the area, you will want to know what the potential is for capital growth. The important thing, however, is to be rigorous, exhaustive.
The Question
Today we're going to be looking at a client's question regarding what property due diligence is.
Well, essentially, property due diligence is a series of reasonable steps that investors should take before buying an investment property.
So, whether you're investing in serviced residences or investing in an HMO, your due diligence is simply a way of describing the stages must you go through, if you want everything to be right.
The Question Is:
"Hi Rob, I was wondering if you could give me an example of the due diligence needed for buying an investment property. I keep hearing I should do my due diligence before proceeding but I am not sure what is exactly meant by it. It probably seems like a stupid question.
"But as I am yet to get started in property investment, I thought I would ask.
"Thanks, Trev."
What Is Property Due Diligence?
Property due diligence is the process of properly evaluating an investment property before you buy. Through this process, the potential investor is seeking to understand the property's true commercial potential and any risks involved in the purchase.
A property is always a big investment. There is a lot of money that goes into a property deal. So obviously, you don't want to make mistakes that could have been avoided if you had done your research.
And that is what due diligence means... research.
Price Versus Value
The key thing we consider when buying an investment property is price versus value.
Put simply, you should be buying a property at below market value but certainly, you want to ensure that you never overpay.
So, we check sold prices on other comparable properties. We make market comparisons. We want to know how the property compares to others in its local area.
In order to do this yourself, you have to follow a process.
Understanding the Local Area
The second thing is making sure that there is a ready local market. You need to know that the property is commercially viable.
- If you are looking to sell the property on then you want to make sure that there is going to be someone to sell it to.
- If you are looking to buy a property, refurbish it and sell then you need to know there's an active market.
- If the person you are hoping to sell to is a first-time buyer then you need to make sure that there are first time buyers looking at the area in which you've invested and so on.
Are there sales happening in the area in which you are looking to invest? What kind of property is selling? Who are the buyers?
It is knowing all this that constitutes due diligence.
Calculating Rental Demand
If you're looking to rent the property out you will need to make sure that there is a ready rental demand.
It needs to be on the right street and have the right postcode. It needs to be the right kind of property in terms of size, condition and style. It's very important that when you're looking to build your buy to let portfolio that you consider all these elements.
See Also: Using Rightmove and Zoopla to Calculate Rental Demand
Your Strategy
Your Property due diligence will vary depending on what property investment strategy you're looking to utilise.
You want to make sure that the property is viable and profitable for the strategy you're wanting to follow, whether the aim is to rent it out or flip it on.
Property Due Diligence
But the bottom line is that you need to be asking yourself some key questions before buying an investment property.
Say your target market is families, is the property close to a school?
Or, say you are looking to invest in property as a pension. Does the area have good property growth? Has the area got a history of capital growth? Is there a potential for growth in the future?
There are a lot of things we look for when we practise due diligence. We've touched on a few things here which hopefully gives you a bit of a head start.
Surveys
One crucial aspect of property due diligence that investors should never overlook is conducting a professional survey. A survey provides an in-depth assessment of the property's condition and can uncover potential issues that might not be apparent during a casual viewing. The cost of a survey is typically only a couple of hundred pounds and well worth it.
Types of Surveys
- Condition Report: This is the most basic survey, suitable for newer properties in good condition. It provides a traffic light rating for the condition of different parts of the property.
- HomeBuyer Report: More detailed than a Condition Report, this survey is suitable for conventional properties in reasonable condition. It includes advice on repairs and ongoing maintenance.
- Building Survey: Also known as a Full Structural Survey, this is the most comprehensive option. It's particularly important for older properties or those that have been significantly altered.
Why Surveys Matter in Due Diligence
- Identifying Hidden Problems: Surveys can reveal issues like subsidence, damp, or structural problems that could be costly to repair.
- Negotiation Tool: If the survey uncovers issues, you can use this information to negotiate the price or ask the seller to fix the problems before purchase.
- Future Planning: Understanding the property's condition helps you budget for any necessary repairs or renovations.
- Peace of Mind: A clean survey report gives you confidence in your investment decision.
Cost vs. Benefit
While surveys do add to your upfront costs, they can potentially save you thousands in the long run by identifying issues early. Consider it an insurance policy against nasty surprises after you've committed to the purchase.
Choosing a Surveyor
- Look for a surveyor accredited by RICS (Royal Institution of Chartered Surveyors).
- Choose someone with local knowledge of the area and property type.
- Don't automatically go with the cheapest option; expertise and thoroughness are crucial.
Remember, a home survey is just one part of your due diligence process, but it's an essential one. It provides professional, objective insights into the property's condition, helping you make an informed decision about your investment.