Tuesday 21 March 2023
Property investors need to understand that the key to a successful property investment is getting the right details in order.
Property due diligence provides investors with an extensive overview of both positive and negative information associated with a given asset or deal. This can be extremely helpful when trying to preserve capital while still achieving desired goals in property investing.
In this blog post, we will provide an overview of:
- What property due diligence is
- Why it is important and what investors should consider
- The ERE due diligence process
What Is Property Due Diligence?
Property due diligence is the process of researching, analysing, and verifying information on an investment property before committing to a particular property. This includes examining the location, figures, the developer, and the legal documents associated with the sale and title transfer, such as mortgages. Looking into all aspects of a potential purchase will ensure that an informed decision can be made.
Investing in property is a big investment and you want to properly understand the risks and rewards involved. Thorough property due diligence will do this for you and ultimately inform you if you should go ahead with the investment.
By undertaking this intensive review before signing off on an agreement, investors can gain peace of mind knowing 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 is important to make sure the money you’re investing is invested wisely and as safely as possible also.
Property investors should consider the following:
- Location: Not only does location play an integral role in determining how much capital growth your property is likely to see over time, but evaluating the location of the property you are investing in 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.
- Figures: Once you’ve established the area is a good area to invest in, you need to look at the figures. There are four main figures to analyse a deal, this includes property purchase price, the rent that can be achieved, associated costs such as ground rent/service charges as well as the projected gross and net yields for the property. It’s important to benchmark your properties price & rental demand against others within a 0.5mile radius to ensure what’s being predicted is achievable.
- The Developer: When investing in off-plan apartments it is especially important to look into who the developer is and their experience/track record as well as understanding if the development is fully or partly funded. Taking it further, looking into the construction company is an additional step that will make your due diligence more comprehensive. Ultimately these are the people that will be turning your investment into fruition & so background checks are essential.
Although when investing with ERE Property we do this extensive research for you it’s always encouraged that investors do also do their own further independent research.
- 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.
Your 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.
Our Due Diligence Process:
At ERE Property, we have a dedicated team of due diligence professionals who carries out thorough due diligence checks on all the developments we bring to investors. We have a very comprehensive 3 stage due diligence process. Being in the industry since 2004 we like to think we’ve come across all of the questions we need to ask to cross the T’s and dot the I’s on due diligence of a property.
Our process involves an initial 5-page developer questionnaire, followed by background checks that aren’t just limited to the developer but also the construction company, all directors and anyone else involved in the build. We assess many documents we require for sign-off to check that everything is as stated and there are no unforeseen disputes.
We only partner with our network of trusted developers and turn away over 30 developments a month that do not pass our due diligence to ensure we bring investors only the very best possible property investment opportunities.
Once the sales process is in motion, we’ll guide you through relevant legal matters from exchange to completion to ensure a smooth and stress-free process.
If you have any questions regarding property due diligence or investing in a UK property, please do get in touch we would love to assist!
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