What is ‘due diligence’?
Hey guys,
I was asked the question the other day by one of my newest portfolio clients about what was meant by the term ‘due diligence‘.
He knew in general terms but he really wanted to know specifically what it meant. Now my immediate thoughts were to put on my salesperson hat and tell him it was all the research we do to prove an investment is worthwhile but I soon realised that due diligence in the eyes of most property clubs was purely a sales term and in a lot of cases what constituted a good deal was how big the discount they received.
Little thought was given to things like actual market rent, potential for growth, possible void periods, type of tenant or possible resales.
So this begs the question, what is due diligence? The most important thing to understand is that some aspects of it are always the same and others are very different with each opportunity. To be honest this thing called diligence is a massive part of property.
If we take our two rules for buying property which are buying below value and buy something tenantable we will always make money in property but let’s consider how we might make certain or at least enhance our chances of a return.
I break my due diligence into 4 areas; macroeconomic, microeconomic, development specific then the final relates to portfolio specific. It’s the last one that l have found to be quite unique but let’s look at each it turn.
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Macroeconomic – these are things on a big scale. Airports, roads, regeneration, government incentives, major industry investment, market forces or the property cycle, and supply & demand at a national level.
Microeconomic – these are things on a more local level. Schools, transport, shops, community facilities, local government, surrounding environment, local neighbourhood, tenant demand and resale potential.
Development Specific – this includes build specification, size, design, includes such as parking, flooring, chattels, the builder, workmanship or previous workmanship, location, selling points
Portfolio Specific – this is specifically how the investment relates to an individuals portfolio. In other words how does all of the above relate to your overall portfolio. Some might say that this is sales rather than diligence but l include it here to demonstrate that it is important to linked your portfolio with the individual plot and property.
Due diligence for me is not a separate thing you do as a one size fits all, it’s a personalised process to each investor. Sure in the initial stages you are not personalising it but as the process progresses it must take into account the individual needs of each investor. To truly achieve this you need to have an understanding of each persons portfolio and circumstances rather than just flog them property because you need to sell.
lf you check out my website you will find my simplified checklist for conducting due diligence.
Live with passion,
Brett Wood
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