Five Steps To Due Diligence For Property Investors

Every successful property investor I know completes a level of due diligence on a potential investment before parting with their money. There are five essential areas that should be the prime focus of your due diligence.

At Axis we complete due diligence on every property that we offer our investor clients. But we still recommend that investors do further work to satisfy themselves about the viability of the proposed investment.

The Five Keys To Due Diligence

Key 1: Market Value

Every potential purchase should start with a careful analysis of it's current market value. Here are the three main ways that this is ascertained:

Other similiar property currently for sale (adjusted for location/size/condition)
Sales achieved (from land registry data)
Formal RICS valuation by a Chartered Surveyor

Sometimes it's easy - get a few recent sales of identical property in the local area and you'll have a good idea of the market value. More often it's a question of best judgement and making allowance for many different factors.

One important point to make is that the 'asking price' for other properties is NOT the market price. Typically most properties are sold 5%-10% below the asking price. To be safe we recommend knocking 5% off any comparable asking price to get a more realistic valuation.

Key 2: Achievable Rental

Assuming you will be renting your buy to let property the second part of due diligence is to check out the achievable rental. Again there are a number of ways to do this:

The ultimate is if you purchase the property already tenanted. Then you know the current rental value, although do be careful because for various reasons this could either be higher or lower than the actual rental value!
Secondly, check comparable asking rents in the area
Talk to local letting agents and see what has actually been achieved. This might be the same, or considerably different, from the asking rents!

Key 3: Location

Location is critical. I've recently been in Detroit, where in a distance of less than a mile you go from a real upper class area with most houses worth considerably more than £1m, to an area of depressed housing full of abandoned homes and burnt out properties. Suppose your unit backed on to a council estate known for drug and drink problems?

Because of the critical nature of understanding the location, the Axis team actually visit virtually all properties that we offer. We can't always do this for an individual property, but we can do a good assessment through the use of Google maps and other data.

Key 4: Condition

For new properties condition is less of an issue. However we recommend that you either visit yourself before purchase or employ a company to do a snagging list prior to completion. Most developers expect small errors and will fix them no problem.

Buying resale properties presents more of a challenge, particularly if the property is tenanted. It can be difficult to gain access. In many cases you may have to make a judgement that the property is in 'average condition' for it's age - which means that for an older property you could anticipate some renovation costs in the future. Some investors will be OK about taking the risk of buying a resale property without an internal inspection, others won't be.

However, if you are obtaining a mortgage on the property you will have to have a valuation. For a small amount extra you can extend this to a full survey, which should reveal any major issues requiring attention.

For most buy to let properties the condition, if there is an existing tenant, is most likely OK. They probably wouldn't want to live there if the place had damp, structural cracks or the electrics didn't work!

Key 5: Finance

The final important part of due diligence, assuming you wish to raise a mortgage, is getting finance arranged. For all properties that Axis offers we have already worked out with our mortgage brokers a preferred finance package and we are confident that the property fits the proposed finance deal.

However there remains three 'wobblies' which can derail the purchase.

Firstly, the valuation can come in too low. Even with a previous RICS valuation we can't be sure if the same surveyor will be appointed to go back, and we frequently have different valuations from different surveyors! Axis has developed specific techniques to overcome this problem and most of the time we succeed, but occassionally the deal fails because of an undervaluation.
Secondly, you might fail approval. The rules have got incredibly difficult and tortuous. We have clients with a good credit history who have been refused although a couple of years ago they would easily have passed.
Finally, the mortgage providers have limited funds and are rejecting applications if their monthly allocation runs out - even though you may meet all their criteria.

There is only so much due diligence you can do in advance; ensure the finance package fits the property purchase and ensure that you meet the criteria (at least on paper) to obtain the borrowing. Axis helps on both counts.

Here's to successful investing!

Rod Thomas

Posted in Successful Investment