"Due Diligence" - exactly what is it?

[ExpatNick]

Hello everyone,

I am new to this forum and new to buying overseas property as an investment tool.

I seek guidance on what you all consider "Due Diligence" to be, i.e. what checks need to be made before delving further into the suitability of a property for purchase.

Any info will be gratefully received, and (without being partonising!!) please reply as if I were a complete novice (which I am, actually).

Thanks to all,

Nick.

[andyk2]

Hi Nick,

Welcome to the forum. Due diligence has been a vogue phrase since many investors got screwed in Bulgaria, Spain, Brazil, and probably in the UK and elsewhere too. It relates to checks that the developer/marketing agent has got permission to build what he says he is going to build and actually owns the land to build it on.

One would expect that ones lawyer would do it for you, but in these days of "recommended" lawyers, some turn a blind eye to the fact that the developer selling the project is banking on getting sufficient reservations on a project before actually purchasing the land on which to build it.

Have a look at the threads about Gran Natal Golf (GNG) to see how it can backfire. However, most developers are honest and wouldn´t even consider Due Diligence an issue and have it to hand if anybody asks for it.

Simple advice is always use an independent lawyer, even if it slows the purchasing procedure down (your agent wont like it), but at least you will be safe.

Be lucky - make money

Regards,

Andy

[The Soup Dragon]

I don’t know when the phrase “Due diligence” became fashionable to use, but your due diligence should involve a lot more than checking who owns the land and what permissions are in place for building. (Also note that most early off-plans won’t have full planning permission to build what they say they will.)

I could type for some time on this subject, but instead will get the ball rolling – I’m sure others will come in with useful tips / checks you should be performing.

1) Make your own checks; don’t assume what an agent tells you is true.
2) What track record has developer got? If they have completed builds then find out what quality they have been. To do that you could visit the area, have someone check it out or search on the internet to identify those that have invested there. Are those that invested happy with the developer? If not, why not?
3) Are the developers financially secure? Credit crunch is making it harder to get loans and increasing the cost of borrowing. Remember, if developer goes bankrupt you could be left with nothing.
4) Is a bank guarantee in place if you are buying off-plan? A good bank guarantee will give you some peace of mind that work should be completed if something happens to the developer.
5) Check what bank guarantee covers. Some won’t be worth the paper they are written on. Others are more comprehensive.
6) Examine the building permissions. It is common in places like Turkey for developers to build more properties that they have permission for. This creates a big problem for you if you buy on that development.
7) Look at where the development is. You don’t want it to be somewhere that is prone to flooding or on the edge of a retreating cliff!
8) Along the lines of (7), think about hurricanes, tsunamis, global warming, volcanoes, fault lines, etc.
9) If you will have sea views from property then check that land in front can not be built on.
10) Make sure your contract includes clauses that will help protect your investment. The developer drew up the contract, so it’s going to favour them rather than the buyer. Think about late clauses, keeping last 5%/10% back till you have snagging list addressed. Get as much of the more important detail that the agent / developer told you into the contract as possible. For instance, if your property comes with a pool then state minimum dimensions pool should take – you don’t want to end up with little more than a paddling pool. If property is to come with kitchen units and appliances provided by X then get it into the contract. The contract is king. With very few exceptions, if it isn’t in the contract you aren’t getting it.

There’s so much more to due diligence than I’ve touched on above. Always question what you are told, think of the motives of the person providing the information and where possible check what they have told you. Try to identify all the risks associated with an investment you are considering and evaluate them. Some you will be able to mitigate for.

These tips in no way guarantee you will find a sound investment, but they should help you eliminate a few howlers.

[Lysos]

Just to add,

check comparable prices in the area and if expecting rental returns, check supply and demand.
In view of rising fuel costs check access e.g. how many airlines/flights seasonal variations.

You should have enough to be going on with, Nick.

[LisaE]

Hi,

I actually work for a Property Investment Company in the North East of Engalnd where we source under market value properties and sell to investors we don't actually buy the properties ourselves although we are investors ourselves. You buy directly from the vendor. Most of our investors until they actually get to know a bit about us like to carry out their Due Diligence on the property i.e getting someone local whom they know to look at the property on their behalf. It's just a measure as I know there are alot of investment companies out there that have taken ripped people off. We get alot of investors come to us from other investment companies to do re-furbs, lettings, construction work etc.

[camel with three humps]

Lisa: Can you please explain
".......... where we source under market value properties and sell to investors we don't actually buy the properties ourselves although we are investors ourselves".

[David howe]

Originally Posted by LisaE

Hi,

I actually work for a Property Investment Company in the North East of Engalnd where we source under market value properties and sell to investors we don't actually buy the properties ourselves although we are investors ourselves. You buy directly from the vendor. Most of our investors until they actually get to know a bit about us like to carry out their Due Diligence on the property i.e getting someone local whom they know to look at the property on their behalf. It's just a measure as I know there are alot of investment companies out there that have taken ripped people off. We get alot of investors come to us from other investment companies to do re-furbs, lettings, construction work etc.

Dear Lisa

I am curious how in a market that is in free fall you can say you source Under Market Value properties when no one can actually value them with accuracy at present. to me under market value would have to be 50% of what the original value was, this is the dire crisses facing th UK property market where there is an over supply of properties.

[agentkhoo]

Due dilligence becomes more complicated when dealing with overseas property because you may not have many sources for or connections and networks to do due diligences. That is why as a result many people got conned. Which is very sad. (but enuff said about that - its stories for another thread)

One great way to do due dilligence is to get in touch with your country's embassy in that country - that is if you are in that country. It might sound easy but it isn't. Unlike in Singapore where all the embassies are pretty much located in one area - well at least within 5 mins drive.

So find out exactly where the embassy is located and go speak to the trade diplomat who might have loads of connections and networks of expats or ask to speak to a few other expats that live in that country.

Things to look out for
- tax structure for foreigners
- standard commission paid to agents for marketing your property
- track record of developer (which was mentioned earlier) that's a must
- number of units in that development (I will elaborate in seperate post)

Many people says buying off plan is a bad idea, but this situation is okay in Singapore. Few off-plan projects go sour, but still stick to the big developers for such purchases.

[camel with three humps]

"............. go speak to the trade diplomat who might have loads of connections and networks "

Agentkhoo: what world do you live in. These so called trade diplomat are God's, they will not see individuals, you will be lucky to be put through to him/her on the phone. The benefit of their presence is only for large government/multinational projects. Where the kick back or a back to back agreement has already been made on a very high level. These are jobs for the boys who had the same neck tie.

[Polycarp Ambe-Niba]

I have learnt a lot from the above advice. I recently bought two studios at International City Dubai with a view to putting them on rent. I am now seriously considering selling them to buy upmarket. Could someone advise me on where to buy.