25 step due diligence process before investing in off plan property

If you are looking to invest in off-plan property then you are signing up for a natural level of risk, simply since the property does not yet exist. In our experience there is no such thing as a 100% safe investment. However, there are many steps and checks we can conduct which help to ensure the risks are as low as possible.

Outlined below are 25 points we typically check before taking on a new investment.

 

  1. Track record of developer

 

The developer’s history of delivering successful products is a quick and easy step. Often a developer will list their portfolio on their own website. Make sure they have developed and completed several developments (the more the better). You can also check on google maps to see if the building is complete or visit the site. Some developers may have lots of developments listed but may all be in construction, which is not ideal as they need proof of delivering completed properties.

 

  1. Check Companies House

Look for the company on Companies House, which is the UKs official government portal for listed businesses. Firstly, you will want to make sure it is a real company. From there you will also want to note the SPV and note other details such as who are the directors, how old the company is etc.

 

  1. Look into directors

Once you have been on Companies House you will be able to research the Directors. You can see all companies they have been part of. Maybe look to see if they have opened and closed a lot of similar development companies, this would be a cause for concern. If they do have other companies investigate the history of those companies with the same steps in this list. You will be able to get a better overview of what the directors have been involved in and if they have an ethical reputation.

 

  1. Google Search

This may be the first thing you ever do as it is the quickest and easiest. The news tab on google will show any negative and/or positive press the company has been featured in. The google reviews will give you a quick idea of how satisfied previous customers have been. You will also be able to quickly find any other reviews from various review sites.

 

  1. Developer credit history

You will also be able to research financials of a company to ensure they are not in debt of any kind or have a reputation of needing to borrow money. A developer with good credit is far safer and more likely to deliver a product.

 

  1. Do Valuation Stacks Up

A good rule of thumb is to be weary of anything that is too good to be true. If the property prices do not add up with local valuations or Rightmove/Zoopla sold listings of similar properties in the same postcode, then you will need to heavily question why you are paying over the market value. With off plan you are looking to buy it below market value.  

 

  1. Check price square foot

Along with the price of the unit, make sure it has a good price per square foot in comparison with other properties in the area like point 7 above.

 

  1. Is rent guarantee backed up

If you are being offered a property with a rent guarantee, then you will want to check this is accurate and not just a marketing line to get you to buy the property. A rent guarantee must be backed up in escrow by some form of bond/fund which guarantees it can pay you the money no matter what and is legally binding from the developer.  Find out what it is backed up by and ensure it is enough to guarantee your rent.

 

  1. Feasibility study on the area

Buying a property in an area which is over saturated with a particular type of property or with no demand for rental property can be a disaster for your occupancy rate. Make sure the area you are investing in need of the type of property you are buying. Are the rental prices and demand there?

 

  1. Any regeneration in area for growth

At Fabrik we love to look at areas that are set for regeneration. This historically has seen great capital growth in properties. Manchester and Liverpool being some prime examples. You want to buy into an area before it is set to grow to maximise your capital growth.

 

  1. Length of leasehold

Ideally, we look at properties which are at least 250 years + leasehold or freehold. Below about 60 may make the property impossible to sell on.

 

  1. 10-year build warranty

New builds should now all come with a 10-year build warranty. This means any architectural defects or issues in the first 10 years from completion are covered and will be repaired/ fixed.

 

  1. Check ground rents

Make sure ground rents are not too high and are within the local councils’ guidelines. As a rule of thumb at Fabrik we do not want to see a ground rent higher than 0.1% of the property price per annum

 

  1. EWS1 for cladding

Since the Grenfell disaster safety certificates are required for any properties bought. This is to ensure a building does not have combustible cladding. You will need this in place for a mortgage to go through.

 

  1. Car Parking

Best case scenario is the property comes with a parking space. However, if it does not then you may want to research what parking is on offer for tenants living at the property. This could affect the occupancy rate.

 

  1. Check Service charge Price

Service charge can vary based on the facilities on offer, but typically we do not want it to go over £2-£3 per square foot.

 

  1. How are returns paid

Are you as the investor paid monthly or quarterly. If it’s not monthly, you should question why.

 

  1. Make sure letting and management fees are fair

Many off plan and new build apartments will come fully managed from the developer’s management company. Check their rates are fair. As the owner of the property, you should have the choice of choosing a different management company, where you can get quotes from for comparison.

 

  1. Check Gross and Net yields

Don’t take the developers or selling agents word for it. Make sure the yields are what you expect them to be. Make sure everything from solicitor fees, mortgage fees etc.. have been calculated so you know with more accuracy what returns to expect. A good developer should have calculated them correctly.

 

  1. See if development is funded

Often an issue with smaller developers, they may be relying on investor funds to complete construction. In this instance you will be taking a huge risk. Bigger developers such as Berkeley Homes will have enough assets to fully fund a development regardless of the fact of selling the properties during construction or not.

 

  1. Reliable construction firm

Don’t’ just do due diligence on the Developer but check the contracting companies to. Ideally do all the same steps you have done so far but again for the construction companies track record and reputation.

 

  1. Check solicitors on all sides

Make sure solicitors on their side as well as yours have carried out all the proper legal work from searches, environmental checks, land ownership documents and sales contracts

 

  1. Land ownership documents

Make sure the developer owns the land they are developing on. Maybe they are in process of buying or there is an owner conflict issue.

 

  1. Make sure planning is approve

Ensure planning permission is fully granted through local council.

 

  1. Check build costs and what happens if something goes wrong

Get reports of how much the build is going to cost and if it is feasible in current climate. If something goes wrong or the construction is significantly delayed ask what mechanisms are in place to protect or compensate you in a worst-case scenario.

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