The purpose of this article is to outline the process of due diligence, and the importance of this process in property investment.
Comprehensive due diligence in property investment is a risk management strategy that should be undertaken by all serious real estate investors.
It is not only the most prudent property investors who engage in thorough due diligence before making an offer on a property, but business-minded and serious real estate investors who can appreciate the risk that a bad investment could have on their entire portfolio.
Due diligence for the acquisition of an investment property can be broken down into a few major categories.
Don't sign anything without your lawyer.
This includes offers, sale contracts of any other piece of paperwork thrown at you. Take the time to make a call to your lawyer first.
If there is not time for that, you probably don't want to sign the paper in the first place.
Obtain pre-approval from your lender before you start searching for an investment property.
Ensure you have enough money put aside to cover any cash deposits necessary and immediate maintenance or renovations that will need to occur on the property.
For a free, no-obligation consultation, contact the team at Property Investor Mortgages, who have expert knowledge and experience in tailoring a wide variety of property investment finance options specifically for property investors.
Structurally sound properties make good investments, sure they may not be very cosmetically attractive, but don't buy something that is crumbling down around you.
Obtain a building and structural assessment from a qualified professional -- use someone who can be trusted.
Are there any government infrastructure changes or zoning changes imminent in the area that could
affect capital growth?
Go over and above when researching everything you can about the market, and how the property you're interested in fits into the general scheme of things.
Due diligence is a means for the property investor to identify the risks associated with purchasing a particular property.
Without due diligence, the investor is potentially opening themselves up to a bad investment choice. Always do your homework.
Researching the deal: Use facts not irrational claims
Using facts, not irrational claims, when negotiating a property purchase deal can help you with your negotiation.
Doing your homework into a real estate investment opportunity is imperative, but doing it properly is the key.
With a bit of research, you can uncover information that will strengthen your hand during negotiations.
You can use these factors to assist discounting your offer to the vendor.
However, only ever research and collect facts and figures, and possible some anecdotal evidence you may have uncovered.
If you attempt to use irrational claims or false piece of information to negotiate a property deal you will ultimately shut yourself out of the market before you even get a look in - alienating yourself from unimpressed real estate agents and offended sellers.
It is useful to find as many negotiating points as possible when making a deal with a seller to purchase their property. You may have a list of physical defects that you believe should discount the price.
You may have done research into some government infrastructure that could increase traffic in the area or decrease land value.
These facts are okay to be used as part of your negotiation strategy, but be careful not to sensationalize them - this will not impress the seller or real estate agent and will ensure they very quickly lose trust in you as a viable buyer for the property.
Using irrational claims or untrue information to negotiate a sale is likely to cause the seller's to become upset, angry or frustrated - emotions that you do not want to induce in someone you're trying to convince to do business with you.
Similarly, ensure you do not display these emotions yourself while negotiating; these indicate a professional breakdown on your behalf and will affect your bargaining position.
Always stick to the facts to strengthen your point of view and disprove a seller's point of view, but don't be tempted to stretch the truth or lie to give yourself the upper hand.
If your lies are ever believed it will probably only be in the short term and this won't help things along in terms of a negotiating process for purchasing the property.
What costs can you line up to help discount the price?
When you are in negotiations to purchase a property, your goal as the buyer is to get the best possible price for the property, of course. The seller on the other hand, wants their best possible profit from the sale, so you are in a sense opposing parties in a dual.
Tallying up the defects of a property or negative selling points is a good way to help in convincing a buyer to drop their price while you're trying to negotiate. To use this bargaining strategy it is important to do your homework and have attention to detail.
You can gather information that will be useful in the negotiation phase from your local council about the age of the property, demographics of the area, unemployment and crime rates and the location of the home in terms of flood plains.
When considering defects on the property itself that you can query the seller about while trying to lower the purchase price can include noticeable issue such as:
- Maintenance issues that have caused rust, leaks, collapses etc
- Title issues such as issues with title name, ownership and boundary fence issues
- Cosmetic issue such as peeling paint, drab furnishings and window coverings, old
and tired flooring, indicators of mould or leaks, cracks in brickwork, unclean or poorly
- Structural issues - these can be noticed if the floor or ceiling is sagging or appears
damp, if larger-than-superficial cracks are noted in walls or brickwork both inside or
While it is unwise to go to the seller or agent armed with a list of things you hate about the property, you can approach your "discount spiel" up in a more professional way.
Explain to the seller or agent all of the things you like about the property, and why it suits your buying profile, but explain that these issues or defects (listed above) mean you cannot offer full price for the property and would consider purchasing at a discount.
It is best to go in to such a negotiation discussion with a discount value in mind, so that you ensure you know why and how you want to bargain on the property. Be confident and be prepared to walk away.
Find out the seller's motivationAs a buyer, you can research the facts behind real estate sales to assist with their purchase negotiation.
Real estate agents can be an asset to the savvy buyer, especially when they're willing to provide you with some background information about the seller.
Knowing the sellers motivation for selling the property can give the buyer some great leverage when negotiating on the price and conditions of sale.
To begin simply, it is a normal question when seeking a real estate purchase to ask the agent "why is the seller selling?". In order to pass off a property as a good deal, the estate agent must have a reason why the current owners no longer want to own it.
The answer can reveal a lot about the seller's motivations, and give the buyer a few ideas about ways in which the sale could be negotiated. To start with, buyers are looking for motivated sellers - it's a good idea to find sellers who actually do need to sell their property and are therefore willing to enter into some negotiations about price or conditions of sale in order to close a deal.
Sellers who couldn't care less whether the property sold or not usually want a very specific price and won't come to the party where negotiations are concerned.
Sellers who are motivated by a relationship breakdown, death in the family or divorces are usually keen to sell their property as soon as possible.
While this does not mean taking advantage of the vulnerability of others, it can assist the buyer to be aware of ensuring they are calm and patient buyers, but also ready to put their money on the table to ensure a quick sale also. Motivated sellers meet very well in the middle with motivated buyers.
But beware, while finding out the seller's motivations can give buyers great leverage is it unwise to ever disclose too much about yourself as a buyer.
Real estate agents will always be trying to get as much information out of buyers as possible, but will only use it against them to give their seller negotiating leverage of their own.
Looking to take action with your property investing?
Real Estate Investar is Australia's leading solution for property investors. We can help you build and manage your property portfolio more successfully. Book in your complimentary, personalised demo today and learn how we can help you invest better.