Property Investing Due Diligence

Pin It

Property Investing Due Diligence

Or – How can I secure a property without committing to buy!

Well, there is a way. It’s called a ‘due diligence’ clause.

Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

Now, the purpose of the Due Diligence clause is to allow you to present a written offer to the sales agent in order to allow you to negotiate a sales price for a property.

There’s nothing worse than spinning your wheels on a deal and wasting time and possibly money. I’m not talking about making ‘low ball offers’. That’s not how I operate!

What I’m talking about is using the investment property calculator and Real Estate Investar to value a potential investment and putting in a fail-safe written offer right then and there to the agent.

Here’s what I mean:

property investing due diligence

Property Investing Due Diligence Example

This property was brought to me by the same agent I’d purchased with on my very first trip to New Zealand. She’d contacted me because the sale of a 3 bedroom home that was under contract was in danger of falling through.

If I moved quickly I could have the property at the price that had been negotiated by the current purchaser. I decided it would be prudent to out in an offer immediately. Agents love investors who are willing to put pen to paper and write offers!

So what exactly does putting in an offer mean. Well in reality it simply means signing a contract of sale.

That sounds pretty serious. Couldn’t I get caught out if I act in haste!

So how could i do do this without taking a big risk?

I simply added a Due DIligence clause to my offer.

Here an example of one of my contracts with a Due Diligence clause added

 

property investing due diligence

 

property investing due diligence

 

Note Clause 19. This basically says the contract is conditional on the purchaser (me!) approving of all matters concerning the purchase. If I don’t confirm within a stated period – usually 14,21 or 28 days then the contract is voided and any deposit paid is to be refunded to me.

So what does this all mean?

Now this sounds pretty open-ended right! Well – it is It’s not designed to be abused, but the idea is that I want to find out of the vendor will sell to me. If the vendor is willing, then, and only then, will I start spending my own time and possibly money on the deal.

If the vendor doesn’t like to due diligence clause they can simply reject it. That is their right!

I could re-write my offer with separate more specific clauses like:

  • subject to finance
  • subject to satisfactory building report
  • subject to valuation etc

But where at all possible I use a due diligence clause to cover all my bases!

When can I actually use it?

The due diligence clause would not work in a sellers market. The vendor would tell me to take a hike and go with one the other offers.

In this example however the vendor would most likely be happy that his property is still going to be sold and for the same price as he’d originally agreed.

Please note – In any state or territory you will need to have a solicitor advise you as to the exact wording and application of such a clause. The above example did work for me, but it might not work where you’re looking. Local laws are like local rules at the nearest golf club. You need to take them into account and get the right advice.

What do I do next?

It is now up to me to go ahead and double check all my assumptions, crunch my numbers again and have my team on the ground run their eye over the property for me.

In the end with this property I was happy with the negotiated price and I was happy with the location and physical condition of the house. It has rented out for the past 18 months with only a single change in tenancy and after some minor remedial work it is now producing more in rental income than it costs to keep on an annual basis.

So another cashflow positive property !

The thing is – I wouldn’t have even known about property investing due diligence clauses until Simon from RESULTS mentoring showed me. This little piece of practical advice has helped me to put in over a dozen written offer over the past 24 months -, with confidence that I could sort the wheat from the chaff at my leisure once I’d secured the property at the right price.

In my next article I’ll take you through my own Property Investing Due Diligence Checklist!

Until next time,

property investing due diligence

property investing due diligence

 

 

InvestarNew

1 Comment

  • I have just bought an investment house in south australia which was sold to me with a 12 month tenancy lease on the property, however 1 day after settlement I received a notice of termination from the agent who sold me the property. Now I have repayments on a house with a tenancy lease that was terminated conveniently after settlement. Is this legal? I feel I was sold a property under false pretences

Leave a comment