What is Due Diligence

Due diligence is all about qualifying the property based on the numbers, i.e. purchase price, renovation costs and the end result. Making your contract conditional on due diligence means you can do most of your investigations into a property after the contract of sale has been signed. The due diligence condition usually has a time limit (about 15 working days is normal), at the end of which you have the choice to go unconditional, walk away, or renegotiate.

In order to go unconditional as soon as possible, ideally before the date in the agreement, I do my due diligence quickly. By doing this the agents involved quickly learn that I am a serious investor who means business and who can act fast. Once they are aware of this, they know it will be worth their while to pass on the hot deals to me before anyone else.

Utilising the due diligence clause has allowed me to do many successful deals. But I have occasionally encountered a bit of resistance from agents here and there who haven’t wanted to present an offer containing a due diligence clause to the vendor. This is generally due to inexperience on their part. Interestingly, though, none of my top agents has a problem with this clause; in fact they encourage me to include it.They know that if they keep me happy by making it easier for me to purchase wisely so I can move forward faster, they will get repeat business from me.

However, should you encounter reluctance from an agent, you have a few options:

  • Explain what the clause means and make it clear that because it covers everything it will actually make your contract more appealing to a vendor than adding a whole page or more of separate clauses, e.g. being subject to valuation, subject to building inspection, conditional on obtaining finance etc, etc.
  • Find an agent who is happy to present your offer along with its due diligence clause.
  • Offer to put in an escape clause, also known as a cash-out clause, i.e. if a better offer comes along during your due diligence period, the vendor can give you three days to go unconditional, and if you don’t the other offer will take over.

Due diligence can involve a lot of different processes – some of which cost money (e.g. valuations and building inspections) and some that don’t. Make it a rule to leave the processes that will cost money until the end of the due diligence period. For example, if you have a 10-day due diligence period, contact the valuer or the building inspector on day 1, but make the booking for day 9. Then do all your non-cost due diligence, i.e. arranging for the property management company to have a look at the property to tell you what the rental will be, getting quotes for renovations, etc. Once this has been done, and if you see that the rent or the equity is not going to increase enough to be in accordance with your buying rules, you can stop the process and cancel the valuation and inspection before you have to pay for them.

The above post is based on the book “The 15 Million Dollar Man” by Sean Wood, to read more click Property Investment and download 2 free chapters.