Definite Deals – Top 10 Tips for Due Diligence
- Check out ‘BMV’ claims. It’s easy to claim a property is 25% below market value, but you need to make sure you’ve checked yourself. If a property in great condition is less than the properties around you may have a great deal, though if it is in poor condition then it will need work doing to it to bring it up to a saleable standard. In this case the percentage below value is only really valid when the work has been done.
- Don’t compare apples with oranges! Make sure you check the sale price of a property at today’s value. On Rightmove or Zoopla you can check when similar properties sold over the last 9 years, and the prices they were sold at. Collect the data using the sold price; the month and the year of sale and put this data into www.lcplc.co.uk to check the value in the current quarter. This means you have a true likeness of price to compare BMV percentage.
- The 1 mile rule. Depending on the town or city in which a house is for sale can make a big difference to your comparables range. If you are in London for instance the distance of 1 mile can provide such a huge range in prices as to make the data useless. In this case you would need to look within ¼ of a mile max. Otherwise you might need to look up to 1 mile to get good comparables.
- The right side of the street. When you are checking similar properties make sure you look on google maps to see if the houses are even numbers or odd numbers (typically houses are numbered like this, but not always). Catchment areas in schools can exclude one side of a street, thus reducing the price of the property, so make sure you are looking at the right side of the street to compare the property you are researching.
- Rental Rates First. Look in the rental sections as though you are going to rent a property to see how much you should expect to pay for a 2 bed, 3 bed or 4 bed house. Use just the first part of the postcode to get more accurate results. You won’t be able to tell if a property will make you any profit unless you know how much it will rent for.
- The £20k:£100 rule. Once you know the rental rates you will be able to tell how much profit you would make at each purchase price point. Keep a little crib-sheet with you at all times so you can do the following calculations.
a. £100,000 borrowed at 6% = £500 per month (6% is the average interest rate)
b. £20,000 borrowed at 6% = £100 per month
c. £5,000 borrowed at 6% = £25 per month
If you were to borrow 100% of the purchase price at 6% how much would it be? If this is more than the rental price there is probably a better deal out there.
- Yes or No in 30 Seconds. Don’t take too long over your decisions. Using the calculation above, if the rent is higher than the cost of the mortgage then investigate further, if not then discard this property and don’t go back to it. Most people take far too long investigating a property before deciding if it works or not.
- The Job Description. Each property is going to do a job for you. It would be pretty difficult to decide if an employee was going to be able to do a particular job without a list of expectations. So, take a few minutes to write down what you need the property to do for you and break that down into desirable or essential before doing any research. That way you will always find what you are looking for.
- Deal or No Deal. Don’t try to make a deal where there is none to make. If you feel the need to play with the numbers to make them work, then you probably haven’t checked out enough properties. Decide your strategy and then decide if a property fits that strategy or not. NOT THE OTHER WAY AROUND. Don’t get distracted trying to make a deal out of a property if you aren’t sure of how that property is related to your strategy.
- It’s a numbers game. Always keep looking. You know what works, so keep looking for it. If you’re not finding it in the town or city where you are currently looking then look somewhere else. How many properties have you found / looked at? If the answer is in double digits then it’s not enough. When you get to over 100 then you are closer to making progress and finding the right deals. If it’s less than 300 then you’ve still got some way to go. Great investors have reviewed, seen and discarded hundreds of properties, so don’t give up before you’ve completely exhausted the processes.