Why Due Diligence Matters

How do potential investors know if what appears to be a great deal is indeed something that’s going to boost their offers as well as their standing as a successful local property investor? The way they can tell is to present them with the facts, having yourself undertaken a lengthy exercise known as ‘due diligence.’

This isn’t something that’s unique to the property sector – but it is essential to carry it out since it’s all about doing your homework in order to find out whether or not the figures you are presenting to your investor add up – not just at the present time, but so that their investment will pay dividends in the long term too. You’ll want to find out, for instance, what sort of price they can expect when they come to sell or rent, whether there are any risks involved and what type of buyer or tenant they can expect to be interested in the property.

 

What you need to get answers to

In other words, ‘due diligence’ is thorough research. And, when it comes to property due diligence, there are questions you should be asking yourself for every deal you present to a potential investor. These include factors such as:

  • Is this property really Below Market Value (BMV) considering its condition?
  • Is it the right type of area for the type of tenants my client is hoping to attract i.e. are there parks and a good school nearby to interest families?
  • Are there plenty of potential buyers/tenants or is the market pretty saturated in that quarter right now, and for the foreseeable future?
  • What kind of yield or profit can your client expect?
  • Who is buying or renting in the area your client is currently interested in?
  • Does the local council have any plans for the area in terms of regeneration, including new social housing in the pipeline?
  • What’s the history of the area?
  • What’s the best case/worst case scenario your client can expect?

 

The research itself shouldn’t take too long – especially when you do it for every possible deal you’re about to present, because you’ll obviously get much quicker the more due diligence you do.

It’s essential that you carry it out though. No potential investor – unless they trust you implicitly – is going to listen to you otherwise. And why should they, if you don’t respect them enough to do some homework beforehand?

 

Where to get your information

  • A local estate agent will be able to let you know the popular areas in the location your client is interested in, so that you can better predict future growth potential or rental yield;
  • Look up the local authority planning minutes online to see if there are any up-and-coming plans for the area. If there is, have a chat with a planning official and/or the local councillor;
  • Check what properties are currently going for in that location via Rightmove, Zoopla, the ONS and local estate agents;
  • The Land Registry will give you historic house price values;
  • The Council website or ONS statistics will also be able to provide you with demographics of the area i.e. how many owner-occupied homes in the area there are, residents unemployed, ages, crime statistics etc.

 

Find out what else you need to know before embarking on a property investing career by reading through other areas of our website: www.sourcedcapital.co/

P2P: What to look for in a P2P platform

In 2017 the Financial Times newspaper described P2P lending as “arguably the fastest growing retail investment product of the past 10 years”. That’s quite a claim, but there is certainly plenty of investment in the sector to back it up.

Its popularity is mainly down to the fact that over the past few years it has shown that as an asset class it can provide much higher returns than those of banks and other traditional high street financial lenders. To the extent, in fact, that it has become a common contributor to many a UK investment portfolio these days.

But as an investor who has perhaps never used a P2P investment scheme in the past, what do you need to be aware of when deciding which particular platform to choose?

 

What is the particular model the platform is using?

It could be one of three different P2P platforms, such as:

Conduit: investors choose which loans they want to fund. They then negotiate interest with the borrower directly.

Pricing: investors also pick which loans they want to fund, but the platform does the rate negotiating.

Discretionary: the platform allocates the investor’s money into a portfolio of loans and does the pricing for him or her.

 

What have past net returns looked like?

In other words, what has the performance to date been like? Don’t just look at the net returns though, how often has a loan been repaid late? Then again, what do the default rates tell you? Often loans can run from 1.5 to three and five years and any loan which remains outstanding will always be at risk of default.

 

How much investment diversification does it offer?

When investing passively in a P2P platform the investment is split between a number of different borrowers. This makes the investment automatically less at risk if one borrower defaults. All platforms divide the cash differently though – one platform gives each borrower just £10, meaning an investor could be lending to thousands of individuals.

 

Does the platform lend to a sector where loans can be underpinned?

A classic example of this would be a P2P platform which invested in property. It means that if a borrower were to default, the property in question could be sold and the investor compensated in that way. This is an important issue since, unlike unit trusts, cash and some other investments, P2P platforms don’t qualify for the Financial Services Compensation Scheme and your capital is at risk.

 

What are the charges to join the platform?

Some platforms charge the borrowers to join, others take a percentage of the loan interest (which could entice them to put investor’s money on more riskier loans!).

 

What is the minimum amount you can invest?

This can vary from platform to platform – some ask for as little as £10, while many want a minimum of £1000 per investor.

Find out about our own Sourced Peer2Peer lending platform here.