Whether your current involvement in real estate involves buying, selling or lending, it is vital to take time to perform due diligence. Multiple purposes are served by ensuring that your involvement is based on true understanding of the facts as they really are.
Due diligence helps you establish whether the title to the property is sound to buy, sell or use as collateral. It also helps you determine that the financial projections used are sensible ones, identify areas of risk, and ensure compliance with regulations.
Due diligence is about more than deciding whether to go ahead with a project. It is also about determining the value of the asset.
The due diligence process touches multiple areas
Each party involved in a real estate transaction — buyer, seller and lender — is required to perform due diligence in several areas.
- Complying with the law — Compliance with the Money Laundering Regulations Act, 2000, the Proceeds of Crime Act, 2002, the Terrorism Act, 2000 and the Money-Laundering Directive, among others is mandatory in any real estate deal. Should the authorities discover a breach after the deal goes through, it could result in prosecution. It’s important to engage the services of a qualified real estate attorney to work the compliance angle.
- KYC — Know Your Customer recommendations usually apply to lenders, but can be a good idea for buyers and sellers, as well. Due diligence in this area involves verification of the identity of the parties involved through documents and through a credit check.
- Checking out the seller — It’s important to perform basic checks on the seller’s ownership of the asset, both legal and financial. There need to be checks on the documents involved, clearance with lenders , tenants, developers. If the seller or any other party to the deal is not a British citizen, it needs to be determined how the deal can be made compatible with English law.
- Taxes — If there are UK taxes owed on the property, and if the buyer does not settle this debt prior to buying, the British government could gain lien on all income from the property. It’s important to make clear that there are no back taxes owed on the property.
Due diligence on the business angle
If you’re buying property as an investment, there is considerable due diligence to perform to make sure that the property does deliver as an investment. The following are the most important areas to do research in.
What is the local population like? Not long ago, Liverpool and Sheffield possessed nothing but depressed economies. Both cities had diverse populations, and high levels of education, however. Investors who picked up property at the bottom of the market then, found that the economy, along with the value of their investment did pick up. An educated and diverse population is an excellent sign of future growth.
What does the employment scene look like? The potential for growth of industries that offer jobs with above-median pay can point to improved demand on the property market. Areas with employment curves presenting a bulge toward the blue collar end of the spectrum would be a challenge.
What are the amenities like? The presence of quality amenities — transportation, education, shopping and communal — point to a possible upward trend in the market.
Look at the following areas
- If you’re only starting out investing in property, you should consider investing in residential units. They tend to have a lower bar for entry, and to come with a larger range of financing options.
- Check the rental unit occupancy rates for the area, and average rental income.
- You cannot get rich on no-money-down financing offers. If you don’t have a deposit, the deal is likely to be too expensive to actually allow you to make money in the end. You need to save.
- Hire a chartered accountant to evaluate the income potential of the property. Do not go with the seller’s numbers.
- Build an exit strategy. You don’t want to invest in multiple units in the same neighborhood. If the neighborhood tanks, so will your entire portfolio. You should attempt to invest in multiple neighborhoods.
- Do as much research as possible on hidden future trends — plans by the government to lay down new transportation routes, of businesses to build new factories and so on.
Finally, it’s important to go with motivated sellers
Finding sellers who need to unload quickly is the foundation of any savvy property investors plan. Such sellers tend to be receptive to negotiations. The more homework you are able to put into finding such sellers, the more successful you will be.
Marcella Rivera has recently entered the world of real estate investment. She enjoys sharing her advice with others and occasionally writes articles offering helpful first-step tips for others looking to get into the game.