Property Investment Due Diligence
Definition: Due diligence is a thorough investigation of an investment property before purchasing it. This process allows the potential investor to ascertain the property’s true commercial potential and any risks associated with the purchase.
What is the meaning of due diligence?
No one wants to make an investment decision that will hurt them in the long run and cost them time and money. In order to prevent this from happening, due diligence is conducted. The equivalent of this would be ‘doing your homework’ prior to entering into an agreement or financial contract, for example, an asset purchase such as a commercial property. This entails doing some additional investigation, fact-checking and possibly even audits. A lack of due diligence may significantly harm the outcomes of such asset acquisition transactions and may also have legal implications.
Whatever your situation, we can provide you with a reliable business valuation to suit your needs.
The process involved in property investment due diligence
We bring expertise as financial and investigative experts to perform the due diligence of a property portfolio or individual property investment. When considering a real estate investment, our clients can be assured that the due diligence will be performed by real financial experts. We carry out a collective due diligence on the entire property portfolio, each individual property’s cash flow, each individual lessee and each individual property’s purchase price.
Four main areas are covered in property investment due diligence:
1. Due diligence of the entire property portfolio. We determine, in simple terms, that for your X investment into a portfolio, you will get Y return over Z years. This involves determining the collective cash flows of each property, the internal rate of return, yield, present value, stress testing with multiple discount rates, and the taxes involved in the acquisition of the property portfolio.
2. Due diligence of each individual property investment. We determine the profit each property in the portfolio makes from rental, after all expenses i.e. we evaluate the cash flows of each property investment.
3. Due diligence of each individual property’s purchase price. We determine whether each property is worth the value the client is purchasing it for and what the potential capital growth is. As such, we determine market value vs. actual value and identify red flags, further lease opportunities, and area and market value comparisons, along with building and legislative requirements for certificates, among others.
4. Due diligence of each property’s lessee. This entails determining how strong each property’s lease is to ensure there is continued income and profit. We evaluate lease contracts, highlight red flags and perform credit checks, litigation checks, default registry checks, tenant profile status checks and provide business continuity reports.
The cost of property investment due diligence
Fees may vary depending on the complexity of the client’s situation, the amount of documentation required for assessment and the extent of any relevant investigations.
Because everyone’s needs and situations are so different, it is not possible to provide an exact costing. We can, however, assist by reviewing the prospective client’s information at our obligation-free initial consultation and provide an estimated cost at their request. No charge will be made for this review should they not continue with our services.