In simple world the due diligence means you have done your homework and are satisfied with the property investment before you place a bid. In translation called research, research and research.
Good due diligence starts with asking yourself certain questions.
Is a property investment right for you?
What strategy suits to me such as short term let, brrr, flip or just simple buy to let investment?
Does it suit your risk appetite and lifestyle?
Will property appreciate in future?
Freehold or leasehold?
Having made this answers, it’s important to surround yourself with the right people in order to make the right choices going forward, such a solicitor, a mortgage broker or sourcer. Additionally, you might hire a surveyor to check the physical condition of the property.
The timing of due diligence is crucial. It should start as soon as you have a serious interest in a property and certainly before you make a formal offer or exchange contracts.
Investing in property normally involves three distinct stages:
1. The research phase, where you assess the market and analyse the prospects of different possible investment areas;
2. The sourcing phase, where having identified an investment area you search for specific opportunities;
3. The due diligence phase, where you evaluate a potential property in detail with a view to making an offer.
A few hours invested in careful evaluation here might stop you making an expensive mistake. With that in mind, I've put together a list of important things (could be more) to look out for when evaluating potential property investment in the UK. Bear in mind in Auction applying slightly different due diligence as legal pack, special conditions, time for completion, etc.
View the property
The most important part, you need to "smell and feel" the property before you know your numbers. Check its condition, design and whether any remedial works are required. As certain whether it’s in the right location and if it’s suitable for your purposes. Take the opportunity to ask the tenant if they have had any issues with the property, what work they would like to see done in the property, and what the neighbours are like. Who is managing agent if leasehold.
It’s also worth checking out the communal areas during the viewing. These would include the stairwell and communal gardens and can give an idea of any ongoing problems such as obstructions or hygiene issues.
Depending on your plans for the property, carry out similar checks to those you would with a traditional purchase. Also do not forget to check roof, any cracks on walls, windows, any visible leak, drainage, any asbestos, etc. I will write separate article on this.
Building costs
If you are planning on doing building works to the property, do you have a realistic estimate of the construction costs? For a property that requires work, it’s helpful to go with a builder who can advise you on the costs to carry out this work and any other issues that need attention. (I suggest two or three different builders quotes) Consider using objective data to estimate a construction project on a £/sqft basis, based on the region of the UK and whether you are extending or carrying out a light or heavy refurbishment. Have a look at how value can be added to the property. Would it be possible to create another bedroom, extension or bathroom?
Boundaries & ownership
It doesn't get more fundamental than this. Check online that the boundaries of the property are where you think they are, and verify ownership of the official title. For bonus points, consider researching the ownership of neighbouring properties to look for any red flags. You can download online register title for £3. Also you can check the lease information, previous purchase price.
Valuation & comparables
What's a fair price to pay for the property? You should run a comprehensive valuation process, trying several different methods to arrive at a consensus and making sure to look carefully at £/sqft values too. Find nearby, relevant and recent transactions as reference points. Speak with local agent about their expertise.
Rental yield
Assuming you're planning on renting the property to tenants, you should run a similar process for to derive a rental valuation. Look at similar properties on the rental market in the immediate vicinity to help you determine a realistic rental yield.
Safety certificates: The EPC, EICR, gas safety certificates (as landlord needs to have on yearly basis), legionella risk assessment, portable appliance (PAT) test, and EWS1 if applicable. It
’s very important to check that these are up-to-date, not only for safety reasons but to avoid delaying the sale if any renewals are needed.
Finance strategy & issues
How do you plan to finance the property – do you need a buy-to-let mortgage, or specialist development or bridging finance? It's best to get an agreement in principle before making an offer, and be certain that there aren't any issues that would prevent finance being secured against the property, such as subsidence, bowed walls, heavy roof damage or serious damp.
Transaction costs
Have you budgeted correctly for the transaction costs involved? Stamp duty rules are now different in England, Scotland and Wales, and according to whether you are a first-time buyer, second property buyer, or buying non-residential property. Surveyor fees, legal fees (Solicitor) and official search fees among other costs all need to be accounted for.
Planning policy & constraints
If any planned construction work will need planning permission, make sure to check the local planning policies and any relevant constraints, such as whether the property is in a National Park, Area of Outstanding Natural Beauty or within the greenbelt. It's worth looking at the site's own planning history too, and for more complex projects you might want to get an opinion from a planning consultant.
Legal restrictions
This one is boring but important – check online whether the land title has any legal restrictions, such as easements or covenants.
Flood risk
Although this doesn't apply to the vast majority of properties, it's absolutely critical when it is relevant. You should confirm the official flood risk for the property, and whether the property can be insured against flooding if necessary.
Internet speeds & mobile coverage
Likewise, it's worth checking that there is solid mobile coverage from at least one and preferably two or more providers. Also check for transportation links.
Author is Lubomir Trizuliak (Founder of key4you.co.uk)
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