My colleagues used to ask me why I bothered drilling this information into my clients’ heads: “We make more money solving their problems after the deals go wrong!”, they would point out.
Well, the answer is because it’s disheartening seeing people come back having made easily avoidable mistakes. It happened again and again. I hope this guide makes sure it doesn’t happen to you.
Essential Due Diligence for Property Investors – Video Guide
Watch this seminar with John Howell (editor & founder of Guides Global) to learn about the essentials of real estate due diligence. Scroll down for his detailed written guide.
The video guide below is a playlist – split into several parts. One part will play right after the other.
What is due diligence?
Due diligence is, basically, making sure that what you’ve been told about a property is true.
In practise, this means:
- Working out if the deal is right for you
- Checking out the seller
- Checking out the property
- Checking out the finance
- Checking that the contract is fair
- Checking that any special local formalities have been complied with
Why is due diligence important when buying a property abroad?
When I talk (or write) about due diligence, I do not wish to generate a sense of fear. Most property transactions do not go wrong.
However, many do go wrong. They can go badly wrong, and they can go expensively wrong.
If things go wrong when you’re buying a property, the best case scenario is that you don’t make as much money as you thought you would. The worst case scenario is that you lose all of your money.
So, due diligence is important whenever and wherever you buy a property. It is even more important when you are buying a property in a country where you may not be familiar with the culture, the language and the legal system.
At this point I will stress that due diligence isn’t an excuse for dithering over a deal, worrying that it’s too complicated. When you (and your lawyer) know what you’re doing the process can be very simple and painless.
This phrase should be tattooed on the foreheads of every property buyer in the world. In every legal system across the globe, ‘buyer beware’ is the basic principle upon which things work.
What this means is that it is your responsibility, as the buyer, to check that what you are buying meets your requirements. It is not the responsibility of the seller to spoon-feed you that information.
The seller will have some obligations in the deal, but you can’t rely on them to fulfil those obligations. It is expensive and time-consuming to sort out any disputes that arise after buying a property. It is much better to discover any problems yourself before the deal happens.
So why don’t people do it?
It’s clear that due diligence is very important. So why do so many people not do it?
I think there are five main reasons:
This is more likely to be a problem in certain cultures (I’m looking at you, England!). If a nice estate agent is telling you how wonderful a property deal is, you don’t want to risk calling him a liar by going off and double-checking everything he says.This is silly. Get over it.
- The estate agent persuades the buyer that it isn’t necessary
You may find that an estate agent will tell you that due diligence simply isn’t necessary in the country/region/development you’re looking to buy in. “It isn’t the done thing here”, “everything is very safe in this region”, “the Notary will take care of everything”.This is never true. Due diligence is always necessary.Whilst many estate agents are lovely, trustworthy people, you have to remember that they stand to make a lot of money if – and only if – you buy the property. They don’t want the transaction delayed, or cancelled altogether, if you find something.
- The estate agent persuades the buyer to let him do the due diligence
Don’t ever agree to this. They are not unbiased. See above.
- The estate agent persuades the buyer to let his friend/neighbour/brother do the due diligence
Again, this is unlikely to be a good solution. The estate agent’s brother may very well be an excellent lawyer, but his loyalty lies with the estate agent and not with you.
Many buyers looking for property in foreign countries are shocked at the cost of due diligence. Why is it so much more expensive than it is in their own country?The short answer is: because it takes longer. In my firm, it took us around 20-25 hours to carry out full, thorough due diligence checks on a property in another country. If the property had been in the UK it would have taken more like 4-5 hours.While due diligence may seem expensive, you have to remember the huge amounts of money at stake if you don’t do the checks. Skipping due diligence to save a bit of money is a foolish gamble.
What’s frustrating is that, even after being told all of this, some of my clients (and readers of this guide) will still decide to skip due diligence.
Some of them will then contact me and ask how to fix the myriad of problems they’ve caused themselves.
Don’t be one of those people.
Estate agents are very persuasive and an astonishing amount of people throw caution to the wind when they’re abroad. An old colleague of mine once told me that there was something in the smell of jet fuel that turned people’s brains off for a fortnight…
Steel yourself and print out a copy of this guide to read in moments of weakness!
Which checks are essential?
I will expand on all of these items below, but here’s your brief checklist:
- Legal checks:
- Building consent
- A legal and fair contract
- Can you make any changes that you need to make?
- Checks on the finances (will you be able to get your mortgage?)
Which checks are a seriously good idea?
I believe that all of the headings below are as close to essential as you can get.
Pay special attention to checks on the seller, your comfort with the deal and the efficiency of the tax structure. Choosing the right ownership structure can save you a lot of money.
What do I need to check before buying a property abroad?
Is the deal right for you?
Is this really the right property, in the right place?
Is the property suitable for what you want to use it for?
If you want to live the property all year round, have you made sure that the climate will suit you in January as well as July? Is the surrounding area one you would be happy to live in?
If you want to let (rent out) the property for part or all of the year, are you confident that you will be able to do so easily?
It’s best to consider all of this before you find a specific property. Once you’ve found a property, you’ll have everybody pressuring you to move onward with the deal – and you may fall in love with a place that is ultimately unsuitable.
Risk and reward
Are you comfortable with the levels of risk and reward? If you are buying with a partner or spouse, are they comfortable? (Get on the same page early on – I have witnessed a lot of matrimonial disputes in my office after one party has already fallen in love with a risky property.)
What is a sensible level of risk for one person may be absolutely insane to another. A young banker who just received a six figure bonus – and can expect another one next year – may be much more comfortable taking risks than a retiring teacher who is spending her life savings on one property.
The continuum of risk and reward
Many people seem to think that risk and reward exist on a continuum: the greater the risk, the greater the return and vice versa.
This is not true. There are places in the world where the level of reward is reasonably high despite quite a low level of risk. There are other places in the world where – to my way of thinking – the levels of risk are so suicidally high that it doesn’t matter how much reward you are being promised, it’s simply not worth putting your money there.
Checking out the seller
The need to check out the seller depends on what kind of property you’ll be buying.
If you’re buying a resale property (a property that somebody has already been living in) then you don’t need to worry too much. The law in the country you’re buying in may stipulate that certain checks have to be made but you don’t have to look very far into a seller’s background if you’re not handing over any money until you’ve got the keys.
New or off-plan property
If, on the other hand, you’re going to buy new or off-plan property (property that hasn’t been built or completed yet), checking out the seller is critically important.
If you are dealing with a crook, you will lose your money.
If you are dealing with somebody incompetent, you are very likely to lose your money.
If you are dealing with somebody inexperienced, you may well lose your money.
Background checks on sellers are rarely straightforward (sadly there is no comprehensive list of ‘bad guys’ that your lawyer can check!) and are often expensive, but they are absolutely necessary if you are buying a new or off-plan property.
Sometimes, checking out a seller can be both cheap and easy. On more than one occasion I have called a colleague abroad (on behalf on a client) and immediately been told that the developer I was enquiring about was a crook. That saved a lot of time.
Checking out the property
Is the property as described?
If the property differs significantly from how it has been described to you, it’s probably dodgy. For example, you may be told that a property is 150 square metres – but it turns out to be 300 square metres. This probably means it has been illegally extended at some point.
Does the property have good legal title?
Does the seller legally own the property they’re trying to sell you? Does he or she have the right to sell it to you? This is a fundamental check – your lawyer will make it for you.
Has the property been constructed legally?
There are millions of illegally built properties in the world.
This is problematic for a few very important reasons:
- You probably won’t be able to sell the illegally built property on to anyone else
- If you do manage to sell an illegally constructed property you probably won’t get a good price for it
- You may find that a bulldozer comes along and knocks your property over. This has happened an alarming number of times, particularly in Spain.
Is the property affected by debt?
In almost every country there are ways of registering debt against a property. If you go ahead and buy such a property then you become not only the proud owner of the house but also of the debt. Make sure it’s free from debt before you buy it.
Is the property in good condition?
In some countries, getting a property surveyed before buying it is the norm. In other countries it is very unusual. It doesn’t matter which category the country you’re buying in falls under – it’s a very good idea to get a survey done. It costs just as much to get a roof replaced in Marbella as it does in Manchester.
Your lawyer will normally be able to introduce you to someone who can carry out a survey.
Will you be (legally) able to use the property for your desired purpose?
If you’re looking to let out a property with short-term rentals, you need to check that it’s legal.
If you want to run a business from the property, you need to check that it’s legal.
Some developments don’t even allow pets or children. If you’ve got any, check that they’ll be able to live with you!
Checking out the finances
Will you be able to get a mortgage?
If you can get a mortgage, on what terms can you get it? How long will it take to get a mortgage?
What are your tax liabilities?
You need to find out what taxes you will have to pay both upon buying the property and upon selling it.
Is the contract legal and fair?
I very rarely find myself dealing with illegal contracts, but blatantly unfair contracts are, sadly, common. These contracts are biased completely in favour of the seller, seriously restricting the buyer’s legal rights.
Your lawyer will help you make sure the contract is legal and fair, but here’s what you need to look out for:
- Does the contract adequately describe the parties?
- Does it adequately describe the property?
- Does it comply with the necessary legal formalities?
- Is it fair?
- Is it tax efficient?This is absolutely vital. You can save a lot of money by making sure your property purchase is made under the most tax-efficient ownership structure. I’m not talking a few hundred dollars/euros/pounds or even a few thousand: I’m saying you can save hundreds of thousands of dollars. This is a seriously important thing to get right.
Was what you were told true?
I have gotten in a lot of trouble for saying this in the past, but I’ll say it again anyway: if a seller or estate agent opens their mouth, the only safe assumption is that they are lying.
This doesn’t mean that they really are lying! There are a great many trustworthy, honest estate agents in this world. But their commissions rely on you thinking that a property is the right one for you. You need to check that anything important to you is true.
- “It’s five minutes to the beach.”Really? By foot or by helicopter?
- “I let it for 28 weeks per year.”Is this true, or even likely? You can check out similar properties in the area online through holiday rental sites and see which weeks are often available and how much they cost.
- “The house next door just sold for $500,000.”This one’s easy. Lots of property portals now have historic sales prices. Or you can ask the neighbours!
- “The roof was replaced five years ago.”
- “You’ll be able to extend the property/build a pool.”Some local authorities are a lot more reasonable than others about property extensions. Ask them!
Every country (and in some countries, every region) has different rules that you need to follow.
For example, in France you need official surveys that show:
- Does the house have termites?
- Is there asbestos in the property?
- Does the paintwork contain lead?
- It is thermally efficient?
- Is the property in an area where there are natural risks?
- Is any septic tank in order?
- Is the electrical and gas supply safe?
What is needed might even depend on what kind of property you’re buying.
Why is all of this important?
I said it before and I’ll say it again. If this goes wrong you could lose all of your money.
In many cases, your lawyer will find minor problems that can quickly be solved. In other cases, your lawyer will come back to you and say that the property has a major problem (a neighbour dispute, problems with the legal title, geological issues) that make the deal a bad idea. Please listen to them.
Which parts of due diligence can I do myself?
Checking out the area
You should never buy property in an area you’ve never been to. It’s very foolish.
So, when you travel to the area, you can make sure it’s the kind of place you’d like to live! Will you be close enough to amenities? What are the travel times like – will you be able to visit family as often as you’d like?
Importantly, what is the area like at all times of the year? I’ve had clients express great surprise and distress when they realise their sunny summer villa in a bustling village will be snow-bound and deserted in January.
The seller and the agent
Your lawyer will obviously make all of the legal background checks, but there’s a lot you can do first.
The internet is a fantastic resource for property buyers. It’s amazing what you can find by Googling “Developer X problems” or “Estate Agent Y customer service”. Look at forums and blogs for stories from previous clients.
This ties into the ‘is what you were told true’ heading above. You can easily check out things like levels of potential rental income, acheivable tourist lettings and travel times to the beach/airport.
You can also check out things like levels of income in a commercial property you’re buying: by the simple method of hanging around and watching. My wife could sit in a bar for a few hours (a great hardship) and come back to tell me that the business could only have taken €150 over the course of the evening – a long way from the €2,000 the sellers had boasted of.
Some sources of information
Some useful resources for doing your own checks are:
- General country information: The CIA World FactbookThis is a fantastic free resource that lists essential facts and figures about every country in the world. Economy, people, geography and politics.
- Currency: XE.comThere are lots of currency sites but I like to use this one as you can view historical charts of a currency’s performance.Looking at a long-term view of a currency is very useful as you can see how volatile it really is. A volatile currency means a more risky investment.
- Climate: www.climate-charts.comEveryone has a different level of comfort when it comes to climate. Make sure the area you’re considering falls within your comfort zone (or is suitable for tenants) all year round.
- Of course, you can also look at our hundreds of written and video guides!
Which bits of due diligence will my lawyer do?
- The legal checks
Some of these will be done by the lawyers themselves – others, in certain countries, may be done by a Notary. Either way your lawyer will coordinate them.
- Introducing you to a surveyor
- Checks about the seller
These aren’t usually part of a lawyer’s standard due diligence service, so be sure to ask for them specifically.
- Advice about the best legal & tax structure for the deal
Again, you will probably have to ask for this service as it won’t be provided as standard.
How long does due diligence take when buying a property?
Due diligence on a property abroad can take much longer than you’d think. It can take weeks for your lawyer to receive the required information from the local authorities.
Typically, allow at least six weeks (eight or ten weeks is better). Don’t commit yourself to a tight timetable. It is stressful and dangerous – and difficult to change once agreed, even if it isn’t legally binding.
In very urgent cases, due diligence can be done more quickly. My firm’s record was four hours – if the checks hadn’t been completed in one afternoon, the client would have lost the deal. However, this cost him a lot of money – and the checks were, obviously, not as thorough as they would have been if we had had a sensible amount of time.
How much does due diligence cost when buying a property abroad?
All of the figures below are ‘typical costs’ – they will vary widely depending on area.
|Assessment of your investment plan||£250 (US$330)|
|Standard legal work||1% of the property price (minimum £1,000/US$1,300) - PLUS fees and taxes|
|Checks on the seller||£500 (US$660)|