Understanding Property Due Diligence: What Is It & Why Is It Important?

Good property due diligence and research will provide investors with a solid overview of the positive and the negative associated with a given property and offer. This is very helpful when you are looking for the right investment that meet your goals which will be based on several factors including yield, potential appreciation in value, are you paying cash or need a mortgage and when and how you will exit the investment.

In this blog post, we will provide an overview of: 

  • What property due diligence is.
  • Why it is important and what investors should consider.

What Is Property Due Diligence? 

Property due diligence is the process of researching, analysing, and verifying information on an investment property before buying it. This will include the location, figures, the developer, and the legalities associated with the purchase and title transfer, and mortgage requirements if you are using bank finance. Looking into all aspects of a potential purchase will make sure that you have all the information to make an informed decision.

Investing in property can be a big investment and it not without risks. It is important that you understand fully the risks and potential returns involved. Carrying out thorough research and due diligence will achieve this and ultimately help you decide if you should go ahead with the investment. 

In doing this and before signing off on an agreement, investors can reassure themselves that they've done their homework while maximizing return on investments. 

Why is Property Due Diligence Important & What Should You Consider?

Although there are different property strategies – holding property short-term or long-term, buying property off-plan or already built, buying for cash flow or capital growth – property investors generally all have the same one thing in common – they are investing to create a return on their money. Due diligence makes sure the money you’re investing is do so based on good information as safely as possible also. 

Property investors should consider the following:  

  1. Location: The location plays most integral role in determining how much capital growth your property is likely to see over time, but in evaluating the location where you are thinking of investing will allow you to understand the; property demand, tenant demographic, average house prices and yields as well as its transport links and future growth plans – all of which are incredibly important in determining how well your investment will perform.  

  2. Figures: Once you’ve established if the area is good fo property investment you will need to look at the figures. There are four main figures to analyse for a property, this includes purchase price, the potential rent, associated costs such as ground rent/service charges and what the projected gross and net yields will be for the property. It’s important to compare the property’s price & rental demand against others within a ½ mile radius to make sure the numbers are realistic. There are goof websites for comparisons, such as www.rightmove.co.uk www.zoopla.co.uk to check property sales prices, rents and historical actual property transactions and prices. Predictions for potential capital growth are constantly being updated by research departments of companies like Knight Frank and JLL (are easy to google to get the latest information).

  3. The Developer: if you are investing in off-plan property it is important to investigate the developer, their experience/track record as well as understanding if the development is fully or partly funded. Taking it further, looking into the construction company (Developers use contractors for construction in many instances) is an additional step that will make your research more comprehensive. Ultimately these are the that will be turning your investment into reality and background checks can essential.  

  4. Deposit Protection: Most developments will have a non-refundable reservation fee to secure the property, and by this point, your due diligence should be complete. The deposit or otherwise known as the exchange amount can be as low as 5-10% or as much as 30% and some even higher. Building warranties in place should ensure that 10% of your deposit is protected under the warranty, so check that the development does have one in place. 

In the UK you will need to use a Conveyancer (A lawyer who specialises in property purchases and sales) and they have a duty to advise you accordingly and review all the contracts that the developer/seller’s Conveyancer will provide and make you fully aware of any risk or potential losses.

Want more advice? Book a meeting here or drop an email to info@magnateassets.com.

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