Being Diligent

Research, research, research. A catch phrase heralded by the Reno Kings for a long time and for good reason. They, along with almost every other experienced investor do not like risk and risk tends to be severely heightened if you have not carried out your research. A well researched deal by a well educated property investor should carry with it minimal risk.

So you need to know how to research, what to research and when to research.

This article looks at the latter: When.

Investigate Property are professional buyer’s agents who specialise in sourcing quality investment property with as much risk taken out of the deal as possible by carrying out extensive research. The number one rule we follow is “to do as much research as possible upfront that can tell you quickly and easily whether you should take the next step on a property, but never let this research delay you from making an offer”.

Within a few hours of coming across what looks to be a good deal, Investigate Property will usually have inspected the property, checked sales and rents, checked zoning and development potential, researched the location of pipes and the effect they may have on the value of the property, checked slope and contours, investigated vegetation or heritage orders and know the likely flooding and overland flow on the property. All this within a few hours. Normally this research is enough to tell us whether we are onto a winner, should walk away or perhaps this research raises further questions that we can’t immediately get answers to.

Be quick!

The good buys will in most cases only last a few days, if not a few hours on the market, so you will always find it difficult to buy well if you can’t get your research done quickly. If a deal looks good based on your initial research then never wait those few crucial days to get more extensive answers to those questions that have been further raised by your initial research: get the property off the market using appropriate 'get out' clauses.

This is where the due diligence clause comes in, but unfortunately it does come at a cost.

The Due Diligence Clause

The due diligence clause would be the third most common contract clause in use behind the finance clause and the building and pest inspection clause and a lot of our clients do ask if they could use it when making an offer. It is an excellent clause to use at the right time, but possibly because of how common it is a lot of people might not realise how ineffective it can be when trying to secure a property.

The due diligence clause can be written in many number of ways, but with each of them the purpose of it is to allow the buyer time to carry out some investigations on the property they are buying. In a lot of cases what exactly is being investigated is not specified, which is what is so wonderful about the clause. If you are a buyer and you have utilised this clause, then you can pull out of the contract for almost any reason whatsoever... how great is that!

There is a downside though.

An uneducated seller may be scared off by the clause and probably worse is an educated agent could be scared off by it because they know how flexible it is. So for this reason actually getting a property under contract while using this clause can be the stumbling block, and that’s quite a stumbling block because there are no more stairs to climb after that if the contract is rejected!

In a normal or hot market the hardest thing is getting a property under contract at the price you want, so we don’t want to make it harder on ourselves by inserting such an open-ended clause. For this reason it may be a good idea, if possible, to specify exactly what it is you are investigating.

Here’s an example where the issue is to find out whether vegetation can be removed from the property. You could use a due diligence clause when buying a house that states loosely ‘5 days due diligence period to the buyer’s satisfaction’. Or, you could say ‘5 days from date of contract to determine and confirm from council that the existing vegetation on the subject property can be removed’.

I know as a seller which one I would prefer.

Typically when buying a property the hardest thing of all is actually getting the property under contract at the price that you want. For this reason we don’t want to be making it any harder than we have to.

Our advice is to do as much research as you can in a timely manner before making your offer. Don’t let that research delay your offer by too long. If there are outstanding questions then consider using a due diligence clause or better yet, a more specific clause that pinpoints exactly what it is you need answers to. Or alternatively be in a position to utilise the more common clauses to pull out of a deal, such as the building and pest or finance clauses.

At Developing for Profit we cover in depth the research that you should be carrying out before buying a development site. In addition we educate you on how to buy property the smart way. Rob Balanda, Lawyer and author of ‘Clauses Made Simple’ also covers some of the pertinent clauses that developers should utilise.

For more information on Developing for Profit click here.

To learn more about Investigate Property click here.

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