What is property due diligence?
When you consider the cost of property across the UK, and the potential level of debt taken on in the form of a mortgage, property due diligence is vital. Purchasers need to be sure there are no hidden surprises which may lead to additional costs. Unfortunately, taking everything at face value is a mistake that many inexperienced property investors make.
Due diligence of the neighbourhood
It is very important that you are fully aware of the neighbourhood in which the proposed property investment is located. On occasion we have seen instances where properties looked “good value” only for antisocial behaviour to impact the safety of residents and the value of property going forward. When carrying out due diligence on the neighbourhood there are many things to take into consideration.
• One of the easiest ways to tell whether a neighbourhood is in vogue is by the number of sale signs – if a number of properties are for sale on the street, or in the immediate neighbourhood, find out why
• It is strongly advisable to visit a proposed property investment during the daytime and the evening. Activity in areas can change dramatically between daytime and night time and you need to be fully aware of any issues
• Something as simple as problems with parking can reduce the attractions of a property if you are looking to rent or sell in the future
• Traffic congestion during peak hours can be a major problem for potential buyers/tenants
• Far-reaching infrastructure such as transport networks can widen the pool of potential tenants to those commuting to nearby towns and cities
When investing in a buy-to-let property you are not only investing in the bricks and mortar but also the area. Take nothing for granted and ensure that you carry out due diligence of the neighbourhood, during daylight hours and the evening.
Due diligence of the property
There are many issues to take into consideration when looking at acquiring a home, whether for buy-to-let, HMO or owner occupier. The vast majority of the information is readily available if you take the time to look and speak to those with knowledge of the area.
• It is advisable to undertake an in-depth survey to check for issues such as damp, structural damage and subsidence – which can have an impact when applying for mortgage finance
• Check for covenants on the property or the adjoining land as they could be detrimental to your plans
• If you have plans to convert to an HMO, check for properties on the same street that may already have undergone similar changes. This should help when applying for planning permission
• Historic rights-of-way across land that you own may impact your privacy and the long-term value of the property
• Check the inside and the outside of the property for signs of general wear and tear as you may be to use this as a means of reducing the price
In some cases due diligence can throw-up issues which are insurmountable which mean you cannot go ahead with an investment. More likely, your research will find issues which can be solved but which can be used to reduce the asking price. If a seller is made aware of potential issues as a consequence of your due diligence this may soften their stance on the asking price.
Due diligence of property prices and rental values
If you are looking to acquire buy-to-let investments then you need to maximise your rental income and minimise the cost of acquiring the property. Many investors make the mistake of assuming that an area unknown to them will be priced on the same basis as their neighbourhood. There is often a marked difference between not only towns and cities but adjacent neighbourhoods.
• Make contact with local estate agents/letting agents and triple check the price of similar properties within a 1 mile radius
• Carry out the same exercise to determine the rental values of similar properties within a one-mile radius
• Check out the trend in local property prices over the last five years as this may indicate increased or reduced interest
• Compare and contrast data from the Land Registry showing the value of neighbouring properties sold over the last six months
• You will find that some areas have not only a property value but also a rental value ceiling which can be difficult to break
• If a property has been on sale for some time without success, the seller may eventually be susceptible to a reduced offer – don’t be embarrassed to ask the question, business is business
When applying for mortgage finance to acquire buy-to-let property the finance company will generally request significant due diligence beforehand. They will need to know that the assets on which your borrowings are secured are safe and sound and the price you are paying is fair. If due diligence shows up any major flaws or issues with the property then simply walk away. If the issues discovered can be addressed, they may still be useful in trying to negotiate a reduced price.