The term 'due diligence' is used a lot in the property industry, and is something that all investors and developers should know - either to know the process that your solicitor will go through when you are purchasing a property, or the types of things solicitors may look into regarding an opportunity you're developing. As an investor, you want to know what you're putting your money into and what you could expect to get out of this to help you decide whether the developer and development itself is a good option for you and your portfolio.
Due diligence consists of a series of reasonable steps that all investors should take before investing in a development - and it doesn't matter whether you're investing in serviced accommodation, student accommodation or residential units, due diligence is an important step of any investment. Due diligence gives you the opportunity, as an investor, to evaluate an opportunity before spending your money through a process that involves determining any risks with the development, any issues that have arisen with the developer in the past, how the development overview compares to the current market, and how the local area is predicted to perform in the future.
Due diligence isn't just for off-plan property, it also includes checks on completed property - whether that's a new build, or something that has been around for years. On a completed property, your solicitor will look at the condition of the property, if there is any remedial work that needs to be done and how this should affect the value, the location, the design and the suitability of the property to your portfolio and what you as an investor want to achieve from it. As part of a due diligence search, you should also look into the legal pack including any documentation and special conditions of sale. Many buyers and investors seek the services of a solicitor for due diligence, however checks can also be done by surveyors, engineers and architects etc.
Making sure the research you do on a property is thorough is essential. While the majority of developers and agents will outline all their conditions, payment processes, purchase options etc. correctly and in detail in their marketing materials, brochures or contracts, it's always best to make sure - after all, it's not small sums of money that are being exchanged.
Keystone Properties outlines four key areas you should be focusing on in your due diligence research:
• "Your Plan - make sure the investment is right for you, and in-line with your goals. Is it a managed property? Is it a HMO? Are you going to maintain the property yourself? Does it fit with your portfolio? Is it a refurbishment?
• The Local Area - how are the local schools performing? Does the area attract business? What investments have been made in the area? Is the postcode area desirable?
• Market - is there rental demand? How high are the rental yields? What are the average house prices and monthly rents in the area?
• The Developers - do they have a track record? How have their previous developments performed?"
The importance of carrying out adequate due diligence could mean the difference between a successful addition to your portfolio, or losing a lot of money. Having a good due diligence report will allow you, as an investor, to make a clear decision on whether to invest in a unit and the potential it holds. "Due diligence is the key to making your property investment a success" (Keystone Property).