What is due diligence in real estate? Due diligence is part of a process in acquiring property. Each of the stakeholders will conduct their own due diligence. For example the solicitor will conduct due diligence (when the solicitor is representing us) on the vendor when we are buying the property. Solicitor will usually check if the owner is the rightful owner, any pending bankruptcy, any bank loan attached the property etc.
The above is after we decided to buy the property. But the real due diligence in real estate is way BEFORE you signing the offer to purchase form.
I mentioned countless times in my YouTube, blog and Facebook posts that conducting research is very important before committing to buy a property. Good property with positive cash flow is an asset while bad property is a liability.
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Recommended Top 5 Due Diligence When Acquiring Property
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- Market Value
Check the market value for the property that you desire. The information can be obtained from property listing websites, agents, mortgage brokers etc. Use all information received and get the average market value. - Market Rental
If you are buying for own use, then market rental would not be relevant. However, if you are buying for investment, then this is the second most important due diligence of all. How investors are able to grow their wealth is through accumulating properties along the years. The key on how they are able to keep the property over long period of time is rental income. Property investors are good in finding properties that give positive cash flow. You can find out the market rental by checking on property listing websites, agents, owners etc. You can even do one step ahead by going to the JMB (Joint Management Body) and find out what is the rental in any particular building. - Bank Value
Checking on bank value is the most important step of all for your due diligence when acquiring property. This is due to the fact that not many of us can actually acquire property using cash. Thus leveraging on the banks is a norm in real estate investment. For bank value, you need to check with any bankers that you have good relationship with, mortgage broker and finally the estate agents. The reason I put the agent in the last priority is because they cannot dictate how much bank value to the property. They can only give you rough estimates as an indicator only. - Mortgage Loan
For mortgage loans, there are two areas you need to pay attention to;- Financing on the property – Not all banks will finance all properties. To avoid wasting time, you have to make sure that the property that you are going to invest has banks to give financing. You’ll be surprised how many properties out there in the market that no banks would finance!
- Your own financing – I hope that this is obvious to everyone. Never hunt for a property first before you know that you can be absolutely sure that you can get a mortgage loan from the banks. Many people fall into this trap when they sign offer to purchase, paid all deposit and then unable to secure any mortgage loan. When this happens, people will lose money and then said that property investment never work.
- See also: Real Estate Vocabulary – Jargon You Need to Know in Property
- Inspection
The older the property, the more maintenance is needed. Thus, during your viewings make sure to inspect the property properly. If you have contractors with you, is better.
What to look for during inspection?- Plumbing – Water leakage is common for old properties. Owner don’t usually fix the piping by hacking the walls. Thus, you will see many bypasses pipes attached to the wall. Water leaking can be from the ceiling, walls, toilets etc.
- Electrical Wiring – The bigger the property, the more complex the wiring. How to tell if the property has complex wiring or extension wiring. To find the answer, you have to inspect the distribution box (DB or fuse box). The more MCB (miniature circuit breaker) in the DB, the more complex the wiring in the property.
Though there are time where less MCB but many wirings can be seen. If that’s the case, the likelihood to have electrical issue in the future is relatively high. This is especially true when you could see many wirings casing attached on the walls.
- Market Value
Conclusion
There are many other things that you need to consider before investing in real estate. Of course, the above is just a part of the overall acquisition process. The initial stage is fixing your personal finance so that you will have disposable income and contributing to your loan being approved by the banks. The second stage would be finding good properties with rental income. All these are processes that you should be learning if you are serious in growing your long term wealth. You can start learning today with my Best Time To Invest in Property eBook here.
