When you say the term “due diligence”, most investors will naturally think about the basic checks anyone undertakes before buying a property. In fact, most investors will probably think of due diligence as being something they do after they have agreed terms to buy a property – having a valuation and survey, appointing a solicitor to undertake searches or to check the HIPS pack. Of course, for visitors to The Property Teacher it would also include all pre-action activity including checking the pre-auction legal pack and arranging finance and survey.
It’s true that those things are all part of doing one’s due diligence, but I think for a successful investor due diligence goes deeper than this. I would suggest that the most valuable due diligence you can do is before you make an offer.
By now, if you have read any of my other articles or books, you won’t be surprised if I say that the starting point is to check the property and the consequences of owning the property against your strategy.
For me, the starting point of due diligence isn’t to find out if the legal title is ok (important though that is), but it is to ask three questions:
- Why am I buying this type of property?
- Why am I thinking of buying this particular property?
- Will this property fit my goals and strategy?
Space and time do not allow me to repeat here my views on the importance of knowing your overall property strategy. But suffice to say that if you cannot answer the first two questions or if the answer to question three is “no”, then you know you have problems and probably need to clarify what you are doing and why, or to pull out of this deal, or both.
If your property makes it through this first basic test, there is an additional series of questions that you need to ask yourself; questions that will work in line with your overall goals.
If your strategy is to “buy and hold property for income”, you should also be asking yourself the following:
- Am I paying too much for the property?
- Will I be able to let it once I’ve bought it?
- Will I be able to obtain the rent I need/have budgeted for?
- Will there be a positive cash flow?
- Will capital values rise in this location, or could they fall?
- What happens to cash flow if interest rates go up?
- What if voids are more frequent or longer than I budgeted for?
If your strategy is to “buy and hold” for equity”, you need to question the following:
- Am I paying too much for the property?
- Am I buying in an area where capital values will rise?
- Will I be able to let it once I’ve bought it?
- Will I be able to obtain the rent I need/have budgeted for?
- Will there be a positive cash flow?
- What happens to cash flow if interest rates go up?
- What if voids are more frequent or longer than I’m budgeting for?
At first glance the questions for buying and holding for income and equity look very similar, but they will have a different emphasis; for buy and hold for income the principle concern will be cash flow; for buy and hold for equity it will be the prospect and likely rate of capital growth.
However, when it comes to buying and selling property for quick cash, the questions are slightly different. To conduct comprehensive due diligence for this strategy, you should instead ask yourself:
- Am I paying too much for the property?
- Am I confident that I can refurbish within budget or are there problems I don’t yet know about?
- Will I be able to sell it quickly and easily when I have finished?
- Will it achieve the price needed to make a good profit?
Last week we considered the aspects that contribute towards making a good deal or poor deal, and asking the right questions such as those above will help to ensure you do chose the deal that is right for you. In other words, a deal that not only fits with your goals, but which has minimum associated risks for your peace of mind and success.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to thepropertyteacher.co.uk/PSStrat
