What exactly is Due Diligence?

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From: Dan D


Hi all,

I keep reading about "due diligence". What exactly does it entail within the IP context?

I have my own understanding of it, but what is the commonly understood process involved in 'due diligence'?

Dan.
 
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Reply: 1
From: Nigel W


in a nutshell it's the research you do to inform your purchase decision.

As such it encompasses anything and everything you look at and consider when making an offer and if so, how much?
 
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Reply: 1.1
From: Kellie Dutton


Dan

I certainly can't give you the answer to what the common understood meaning of what due diligence is, other than to say I believe it means different things to different investors.

Some spend weeks doing research on a proposed investment, others look at the numbers and if they stack up then simply buy it.

Some common due diligence (assumption here) would be:

Research:
Prices on properties for sale in the area
Recent sales in the area
Vacancy rates for tenancy in previous 12 mths
Pest & Building Insp (without exception)
Cap. growth in area over past years
Developments pending with Council in the area

etc etc etc, the list goes on depending on how far you want to go.

Input from all out there who do this regularly I am sure would be useful

Kellie
 
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Reply: 1.1.1
From: Les .



In a nutshell, it's probably "Question Everything" - even when you think you know the answer.

E.g. an RE agent will tell you all of the good things about a property. YOU must chase down the (possibly bad) things that will not be offered voluntarily.....

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1.1
From: Mike .


Hi,

If you bought a house and soon after moving in:

you discovered a plague of rats in the house, or
a white ant infestation, or
neighbours with noisy dogs, or
a nearby creek flooded your property after heavy rains, or
your clothes washing turned brown when hung out to dry because of atmospheric pollution, or
your beach view was blocked by a new high-rise development, or
your windows rattled when a train went by, or
you find that nothing grows in your backyard because the property is on reclaimed toxic landfill, or
the local school is closed due to government cost-cutting, or
crowds walk down your street on a weekend afternoon to and from the local football ground, or
the house is haunted, or
your street is jammed with traffic during peak hours because it is used as a shortcut by cars avoiding the traffic lights, or
your house is burgled and the local Servo is robbed, or
you discover that your bank doesn't have a branch in the area...
the house next door, sold at auction for $30,000 less than yours and your house is older.
there is a nuclear power station upwind from you.

then chances are you didn't do your Due Diligence thoroughly enough. If you had, any one of the above nasties may have been a deal breaker.

Due Diligence means getting or checking the following:

Pest Inspection
Building Inspection
Water Board plan
Local council planning applications.
Crime statistics in the area.
Geographical and environmental surveys of area for reclaimed land or likelihood of flooding.
Walk and drive your street and area at different times of the day and week to gauge noise and traffic levels.
Property prices in area to avoid overspending on purchase.
Talk to local shopkeepers and neighbours.
Try the food and service at the local pub and cafes.
How good is the public transport?
How good is the TV reception?
How good is the local school? Is it well funded? How high are the fees?

The key to doing good due diligence is to be dispassionate. Avoid falling in love with the property. If you can build up a warts-and-all portrait of the property you may find a nasty deal breaker or something which you can bargain the price down with.

Regards, Mike
 
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Reply: 1.1.1.1.1
From: Tibor Bode


Mike,

What you prescribed i s definitely sounds full due diligence. I am personally purchasing properties in another city than I am living in, several of them without seeing them or listening to the traffic noise, etc.
I am falling in love with the deals in a pre researched area, in my specific case is Logan in Brissy. I have to admit the best buys up until now were the ones I have discovered on the internet and seen them after actually purchasing or negotiating the deal. I have to be much more prudent as I do not see the property (to me it is no advantage to see it as the only thing I am interested how much value can I add to it and how quickly, which the R/E agent can advise). I know some people will shake their head is disbelief, but to me it works. No, I am not so smart, I learnt it from Dolf de Roos and John Burley (as well as some other things). I fall in love with the deal, not with the property, if it makes sense. Just a bit contradictory, maybe to spark some opinions about the subject.

Tibor
 
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Reply: 1.1.1.1.1.1
From: Nigel W


I like your approach Tibor, but I don't rely upon the agent to give me the full impression of what can and can't be done via a renovation. You can certainly glean a lot from what agents say - sometimes its just best to let them ramble on about a property and "listen" to what they don't say.

I'm happy to make offers sight unseen, based on the numbers, but I like to either see it myself or have someone I trust have a look at it and report back before I go unconditional.

Maybe this is where Rob Forward's due dili reports come in? I understand you can get heaps of digital photos emailed to you along with a comprehensive report. For those who like to outsource part of their due diligence this could be a useful service. Of course the ultimate investing decision will still be up to you having reviewed all the info.

N.
 
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Reply: 1.1.1.1.1.1.1
From: Mike .


Hi Tibor,

Due Diligence could also include researching the forum archives or posting for opinions about Logan. I found a few comments about Logan in the archives. Where exactly are your IP's?

I guess it's my gamble, that's where stepping out for the first time is so scary for the average investor...where to buy? But after I'd written my first note I read from someone else who was asking advice a couple of months ago on buying in Logan and they were told that it had high vacancy rates so that scared the pants off me!It seems that all these 'tiered helpers 'are concentrating in the same areas. I would be very interested to see if I ring this woman back she would recommend a house in exactly the same area as my friend! - Novice Housewife 03 Feb 2001

I wouldn't buy in Logan at the moment, its a dog, too many vacancies, however I'm sure someone might pop up and say they are doing fine there, but it's not for me at the moment, there are some much better suburbs in QLD. May I suggest novice Housewife, that your friend who bought in Logan would not be a good source of information, most people try and upbeat their buys by saying how wonderful it is, even if its not doing well. Nobody likes to look like they made a mistake. - The Wife 03 Feb 2001

I had property in Logan Shire back in the early 80's. (There were some nice little pockets) Bought low but after a few years I became concerned at the mass of townhouse being built. I got a bit twitchy on the area and sold out at a bit of a profit. A bit before the market went higher though. [But you never go broke taking a profit ah.] - Gee Cee 03 Feb 2001

The down side to this is...and where to be cautious is...somewhere like Logan right now, its got so many vacancies, its scary. - The Wife 12 Feb 2001

The only thing i noticed was these areas had huge vacancies. - The Wife 31 Oct 2000

I agree, far far too many rental properties, so not a good area to achieve capital growth. In fact property prices having been falling in this area for some years now. (Rental ghetto) BE CAREFUL!! - Steve N 31 Oct 2000

What I've recently learned is that often the higher returns are to offset the LACK of Capital Growth over time. Thus, in some areas of Brisbane (some parts of Logan City) you can buy for $60,000, and rent for $120 per week - and that's 10% return. - Les 21 Nov 1999

I made a residential property investment just under 5 yrs ago after reading Jan's book. I paid $119,000 for a 3-bedroom townhouse in Logan, Qld. About 18 months ago I learned that its value was about $85,000 and it seems it hasn't changed much from that since. I don't know if I paid too much or the value decreased after sale. - Michael S 14 Mar 2000

I know the area first hand - I bought our first home there in 1984 ($44000), then watched as it peaked at around $95,000 in the early 90's. Today it shows as $75000 ....

I'm fairly sure it was Jan (have lent the book, so can't check) that said "an area South of Brisbane" was over developed from 1990 thru 92 (rental shortage initially, followed by a rental glut after they had built hundreds of units). With first hand knowledge, it "stuck out" (to me) that she was referring to Logan City.

And check the rents being received - I have a rental in Logan that is receiving $150/wk - which is around $645 per month - and mine is a 15 year old house, not a new town house. Maybe you could be doing better with the rents (or maybe you need a new RE agent????).

At the end of the day, it is difficult to get a negative return in Logan - so take a close look at how things are structured in your case (above points). At least you can them minimise the pain while you wait for the value to grow. - Les 15 Mar 2000

The ONLY caveat I have on the whole scenario is the ACTUAL area - there are SOME areas of Logan that might reflect Adam's "proportional difference" story. Some areas of Logan won't come right in the next 10 years (in my opinion) but they are small in number. But meantime, the cashflow SHOULD be positive, even with a $120k purchase price.

And even though the purchase price sounds high, some parts of Logan are potentially VERY GOOD areas. If his purchase is in one of those, he could end up selling out (with associated costs) JUST IN TIME to see the whole area jump in value. - Les 17 Mar 2000

One of my favorite ideas from the seminar (and there were many). Robert suggested that the opposite of financial intelligence was financial insanity. It is insanity was to confuse opinions with facts. He said Rich Dad taught him that everything in a liability column was a fact and everything in the asset column was an opinion. So if your IP is "worth" $200K but it drops in value the fact is that you still owe your original debt to the bank (as many people discovered in Logan). It is financial insanity to take an opinion and believe it is a fact. - Andrew G 15 April 2000

In short any time that I have dumped a DOG of a property some other better property has come up. I had two houses in Kingston (Logan Shire) in the mid 80's. After noting the amount of houses and units being built in the area I dumped them both and came out with a slight overall loss. - Gee Cee 16 Apr 2000

I know of Logan City (South of Brisbane) houses able to be purchased for around $60k, with rents of $120 - $130; how does that sound? - Les 2 May 2000

Now suppose I have leapt to an enormous assumption here and David HAS found a bargain house on a detached block within 10 k's from the city (of Brisbane- not Beenleigh or Logan!!) then I will apologise profusely. Please dont tell me its a townhouse in that centre of capital gain - Woodridge - (lie, if you have to, David so I can still respect you tomorrow) - Will 3 June 2000

Crestmead is one of the half-decent suburbs of Logan City. I believe there is more sub-division going on around there (mainly because one "mob" wanted to sell me a "brand-spanker" for some outrageous price). There is NO shortage of land in/around that area - heaps of farming land and acreage blocks just a Km or two South (and North, around 3rd Ave).

I own one IP in Crestmead - 700 sq. m. and land value around $35,000 (I think - need to check the Rates notice). My property is an older hi-set in a quiet street - around 9% rental return. No trains within Cooee, so buses only. Some light industry close by (for jobs) but not too close. No major shopping in Crestmead - although I saw some evidence of possible future growth in retail outlets right on the Southern end (before you start driving by cows) - so maybe in the future? Schools, yeah - graffiti, not much (if at all) - vacancy rate ?? (I had mine rented from day one) - new prices, I don't know, but with so much land nearby, and with the Rateable values so low, I wouldn't want to pay too much. I haven't checked new prices, because, like cars, I don't want to buy new.

There are certainly far worse areas of Logan - this is generally pleasant - but I can't see huge Capital Growth in that area for some time (especially if buying new !!! the developer grabs a chunk of your future growth typically, doesn't he??). If buying, for pete's sake make it at least a decent hunk of land - it seems developers are building on 400 sq. m. these days - so at least buy an average block (700 sqm) so it has SOME chance of Capital Growth into the future.

Helen, keep in mind that I am currently working in Sydney, but lived near (3Km) Crestmead for the last 16 years (even before Crestmead existed!!!). So, I'm NOT up to date with the area (in Sydney 18 months so far). Even if sketchy, I hope it helps. - Les 7 Jun 2000

Helen, Keep looking. You can do better than Crestmead. The Logan area is the Tasmania of Qld. Sorry again Tassie. - Will 7 Jun 2000

If you want to try around the Logan area without living dangerously, look at the suburbs to the east of the SE Freeway / Gateway Arterial Freeway. Try Shailer Park or other suburbs close-ish to the Logan Hyperdome. Steer well clear of the suburbs to the West of the freeway. - Pierre 7 Jun 2000
 
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Reply: 1.1.1.1.1.1.1.1
From: Tibor Bode


Mike,

I agree this is one more place to get OPINONS. While I am interested in OPINIONS, I am fully aware that this is what they are (including mine) and trying to get FACTS right.
Also, being a bit contrary, I don't mind getting into dog's breakfast area. Just think about Sydney Redfern 1991. I wish I had the guts at the time to buy there when it was all doom and gloom!
Regarding to Logan, my local friend had the same opinion about it. So, after doing a bit of legwork (QLD statistics, population trends, about 20 web sites, RESIDEX, PRD Realty report, talking over the phone and personally to about 30 R/E agents, etc), I went in and bought Daisy Hill(1), Logan Central(1.5), Kingston(2), Loganlea (2), Slacks creek(1). Daisy Hill is a bit of a dog (no real cap gain in 6 months, but some planned development will help it in another year's time or so) the others show between 20% to 38% cap increase on purchase price (take of 5% to 10% due to reno cost) ALL but one 10% plus rental yield (highest is 13.59%) in 7 months or less AND the vast majority were bought well under median, average, current rebuilding, etc cost. So for all the knockers, here I provided some facts. As the Logan shire has limited residential land (page 125 under 6.4 Accommodating the projected population increase, Population trends and prospects fro Queensland 2001 edition), which is again contradictory to popular belief, my other OPINION that prices will go further!
Regarding to the visual inspection it, I actually saw 2 prior to purchase, some were seen by my local friend, others by no one as I gained more confidence in the process. Would I be local, I would have picked deal with at least 20% better parameters. I bought one myself from a flipper for 71K which was sold 7 months ago for 45.5K! It still made sense to me and now I am enjoying the benefit. I could go on about it for a while, but do not wish to bore anyone else with details. If anyone is interested in more specifics, very much welcome to email me.

I hope it is sufficiently explains my previous comments.

Tibor
 
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Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Hi Tibor,

Thanks for adding some more forum knowledge about Logan. I don't know why Logan gets mentioned more than any other area in Brisbane. Perhaps the 2-tier marketing stigma is wearing off now that good deals are to be had. Good luck with your investments there.

Regarding Redfern, I think it's not too late to get in. You couldn't say that Redfern has much character appeal or trendy cafe/shopping but you can't beat the location. Check Sydney City Planning and see if Redfern is earmarked for improvement in the short to mid term. If so, get in quickly.

Regards, Mike
 
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