Why is due diligence so important? Bill’s cautionary tale

sceptical-cautious-questioning-man

The challenge you face when starting out is that everyone everywhere will try and give you the deals that “their best investors turned down”, they will test your knowledge in the hope of getting a deal done where one really didn’t exist.

It is absolutely essential that you always carry out your investment research and due diligence in advance of buying a property. You need to know that the fundamentals are strong – but above all you need to know that you are buying a property that is valued correctly.

One of the two laws of property investment is that you always buy under value. That way you ensure you are making a profit from day 1 of your investment.

In order to do that, you need to be sure that you are not buying a property which has had its value inflated. Too many people I come across have failed to do this – and paid the price as a result. One such person was Bill.

Bill came to us having previously bought property through another property company. They had sold him a property on a “no money down” basis in Swindon in 2005. Two years later he had given up on the company and came to us to help him kick-start his portfolio.

Bill knew a bit about the principles of property investment. He understood the principle of leveraging and told us he was going to re-mortgage on this first property.

“I got it for a snip on a no cash down basis,” he said. “I’m sure it’s grown nicely in value over the past two years.”

Sadly that wasn’t the case. In fact, it was worse than that.

Bill genuinely believed that he had bought his property under value. He’d paid £125,000 for the flat having been told it was worth £140,000.

“What independent research did you do on that Bill?,“ we asked, immediately smelling a rat.

He looked sheepish and admitted, he’d done not very much research at all. He’d basically been “sold” the idea of buying a bargain with no cash down.

Of course, he hadn’t bought anything of the kind. When we researched the property we discovered that Bill had, in fact, paid £125,000 for a property that was worth £115,000. By doing what any professional property investor would have done and looking at all the available comparisons in the area we saw that he’d paid that amount in an area where NO property had sold for that price, apart from – surprise, surprise – on this development! At least, Bill wasn’t alone in being sold a pup.

Bill was crestfallen, naturally. He realised that the original valuation was well and truly inflated and therefore it would be years before the property grew in value enough to make up his loss.

We were able to help him get back on the property ladder, however. But moving on he understood the lesson he had learned.

There’s a reason why some properties are no money down with cash back. It’s because the valuations are fake. You simply have to due your due diligence and research your property in advance. And you have to treat valuations you are given by developers and agents with a very healthy pinch of salt.

How can you avoid inflated valuations?

1. Recognise sales hype

Everyone is a salesperson. From the estate agent, the property company, to your best friend and your best friend’s dog. The world is full of people trying to sell a product, a concept, a point of view, a solution or a belief. Everyone has an agenda and an angle, and if you can see through it you’ll safeguard yourself and your property investment from questionable sales techniques.

The best way to do this is to question every statement until you’re sure it’s pure fact. Do your own research until you’re as knowledgable as the local agents, and don’t proceed until you are 100% certain.

Another good approach is to question what the agent didn’t mention and why. If they’re quick to point out a newly refurbished kitchen but neglect to name-drop the bathroom, you should check it in person. Similarly, if you enquire about the quality of the electrics and the agent side-steps with a wooly answer you should ask to see a certificate.

2. Research comparable properties

You can do plenty of investment research online through sites like Mouseprice and Zoopla, but don’t just look at properties in the same development with the same postcode. What are other properties going for in the same street and the wider area?

Make price comparisons with similar types of properties. If you’re buying new build you need to look at other new builds in the area, the same goes for period properties. There’s no use comparing a 1960s apartment with a Georgian terrace flat, even if they are on the same street! Try to find comparables on the same floor as the plot you’re looking at and if not on the same road, make sure it’s a nearby street that has relatively the same amount of traffic. Do some of the more expensive comparables have better views or allocated parking? One might be overlooking a park and the other a car park. To know that, you’ll need to visit the site. All these variables have a factor on the property price.

3. Talk to local agents

Calling 5 agents is important as it will give you a really good idea of the market in the area and you will see the stark contrast in answers. Get their views on the development, establish contacts.

Ask them:

  • What would it rent for?
  • How many do you have on your books right now?
  • How long do they normally take to rent out?
  • What would be the lowest rent I could expect?
  • Just out of interest, what do you think about the area, or could you suggest a better area?

Delve deep and don’t accept the first answer. Don’t feel like you’re wasting their time, you can always rent the property with them later if they impress you. Shortlist the competent agents in the area and start building the relationship, get their real views on the area and development.

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

>