Ask any average property investor in Lagos if they’ve conducted their due diligence, what they simply say is “oh, my lawyers did that in Alausa last week.” Due to past experiences especially in the Lagos real estate market, most home buyers are always fixated on the legal aspect of due diligence while ignoring the other yet important aspects of real estate investment due diligence.
Real estate due diligence is much more than land title search, property facade or curb appeal. It’s important to cross the T’s and dot the I’s on all boxes on your due diligence checklist.
Due diligence is an important process when investing in any asset class.
According to Oxford’s English dictionary, “due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.”
Simply put, due diligence is the process of evaluating all relevant information about a product or service to make an informed decision.
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Getting your legal due diligence right doesn’t guarantee overall success in real estate investment, a thorough review of your real estate investment in terms of investment numbers, structural due diligence, legal issues and even exit strategy are important to make sure you don’t stumble into costly post-transaction/investment surprises.
Apart from legal due diligence, here are some important due diligence you should have on your checklist when purchasing your next real estate asset class.
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Local Market Due Diligence:
An often-overlooked step in property acquisition due diligence is a validation of the target’s market environment, known as local market due diligence. This process essentially looks at the local market in which the asset class due for acquisition is situated in, and the due diligence looks at the historic real estate data trends, (Rental Value, Capital Value, Yield, Return on Investment, Price Movements, Share and Positioning, Market Trends, Crime Rate, Future Risks) and opportunities peculiar to that area.
Local market due diligence is often not on the radar, but it’s important especially if you will be holding the property as an investment asset. Another important reason why you should conduct a local market due diligence is to avoid buying an overpriced property. A growing trend in the Nigerian property market is the increase in the number of overpriced houses, this can be easily avoided if you engage a real estate consultant with a good knowledge of the local market. Depending on the outcome of your due diligence, you can revisit your offer price and other terms in negotiations as regards the purchase.
It is not uncommon for the offered price to be revised downward because of the due diligence review and even for the purchase offer letter to be retracted.
Most often, buyers go with what they feel and see, they get easily distracted by the “flashy” details and they tend to easily ignore important details and the overall build quality of a home.
A home inspection is an onsite, in-person examination of a property’s condition and structure by a qualified inspector. Property inspections usually take place after you’ve made an offer, right before payment is done. It is important to point out that home inspections are much more than the curb appeal like faded paint or snag lists, they are about building structures which will ultimately affect the safety, the long-term durability and livability of the building itself. Home inspections are typically carried out by Home Inspectors, and they could be Civil Engineers, Structural Engineers or Building Engineers.
An essential part of due diligence is conducting home inspections, carrying out a credibility check on the developer is also an essential part of home inspections.
Buyers often forget that they’ll most likely sell their home at some point. A real estate exit strategy represents the investor’s plan to divest themselves from an investment. Most often, deciding on your exit strategy before you invest is important, as this will definitely determine the success of your investment in the long run. If you don’t plan on holding the asset forever or pass it down to a family member, it is important to determine your holding period and consider various trends related to your holding period. Using various investment techniques like the discounted cash flow (DCF) for your due diligence, you can reevaluate your buying options.
One of the potential risks of investing in condominiums is that you’re also buying the seller’s problem. It’s important to verify the facility management company in charge, Home Owners Association and prevalent management issues facing the condominium. HOA’s often have some distinct and property-specific rules and covenants that homeowners must follow. These rules are made and enforced in order to protect the appearance and values of the neighbourhood. For instance, the type of use you subject your condo to might be restricted, and pets or animals might be allowed, these rules ultimately affect you and your investment if not properly managed.
Whether you’re purchasing as owner-occupied, for investment purposes or even as a gift, wholesome due diligence should be taken as an in-depth process. It’s important you check off all the above due diligence boxes when going into any real estate investments.
Ayotunde Olabode is a real estate analyst at CW Real Estate Lagos, a high-end advisory and marketing firm, He’s a graduate member of the Nigerian Institution of Estate Surveyors and Valuers (NIESV). He writes articles to help investors grow and manage their real estate portfolios.