IPW Due Diligence
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IPW Due Diligence
Due DiligenceA successful investment of any type requires a full due diligence procedure. This is a process through which a potential buyer evaluates the investment opportunity, the organizations and people associated with the investment as well as the financial and tax implications that will affect the end result of the investment. IPW is able to assist clients with many aspects of the due diligence procedure primarily in the selection process. Certain aspects of the due diligence procedure will require independent legal advice.
The Investment
The following points need to be considered during the selection process of an investment property.
Location
Property investors today are constantly in search of emerging markets or trying to predict the next big “boom” in the real estate sector. While one particular area may exhibit substantial growth in property values it may not be sustainable. Other locations may already be established markets but simply undervalued offering great investment potential. It is important to thoroughly research the market as a whole past, present and future to ensure that the investment is going to generate the best return.
Value
In order to maximize the profit of any investment it is necessary to purchase at the lowest possible price and sell at the highest possible price. If an excess price is paid on the purchase then the net profit will be affected. A comparison with other properties and developments offered within the same area will give the investor a good idea of what the “actual” market prices are. As well, a comparison based on the square meter price of different developments will provide a good indication of a property’s value.
Marketability
To generate the optimum return on investment, a property must be in demand. Depending on the type of property and the location, factors such as the views, facilities and the proximity to restaurants, beaches and ski slopes can affect the rental potential and the resale value. Investors need to be aware of the possibilities of future developments affecting the value of existing developments.
Liquidity
The ability to sell quickly while still reaching the top market value is important to any investor. It is important to know the length of time that properties take to sell in the chosen market. A strong domestic market as well as foreign investors will ensure a high degree of liquidity.
Rental Income
Many investors will rent properties to generate personal income or to offset the costs of borrowing the funds used to purchase the property. Investors need to carefully consider the rental market of a given area. Tourist destinations typically are seasonal and it is important to be aware of the average annual potential of the area rather than focusing only on the high season. Commercial property as well as permanent residential rentals will generally offer a more stable rental yield but nevertheless it is important to understand the average yield for the particular area.
Resale Value- The success of the investment will finally be determined by the sale price of the property. While no investor can forecast 100% accurately the future sale price of a property it is possible through careful research to have realistic expectations.
The Developer
When purchasing an off-plan property the company responsible for building the property will play a vital role in the success of the investment. It is important to evaluate the credibility and track record of the developer and make sure that all guarantees are in place before committing to any purchase. Independent legal advice is recommended.
Bank Guarantees
A bank guarantee is a guarantee made by a bank on behalf of the developer should it fail to deliver the building. If for any reason the development does not begin or finish then the monies paid to the developer are refundable and backed by the bank if the developer no longer has the capital. In most cases the repayment will include interest and charges. Some countries do not legally require bank guarantees but developers are able to offer similar security backed by insurance companies known as “completion insurance”. As part of the due diligence procedure it should be clear what type of guarantee is in place
Land Title
Every country in the world has some sort of land registry system. It is usually operated at a municipal level and it will outline borders and boundaries between properties located with the municipality. A quick check in the land registry office can confirm that the developer holds title to the land and can then legally transfer title to the purchaser when the building is complete.
Building License
In order for a building project to commence the necessary building license must be in place. The building license will outline the number of units, the overall build size of the project and all of the specific details related to the building. It is advisable to proceed with a purchase only if the license is already in place although some developers do offer pre-release sales prior to the issuance of the building license. Under these circumstances the funds are usually held in escrow or backed by a bank guarantee pending the building license.
Transfer of Private Purchase Contract
Any off-plan property purchase will involve some initial deposit to secure the property followed by additional payments throughout the build process and/or the final balance payable on completion. After the initial payment the purchaser will then sign a Private Purchase Agreement with the developer which effectively is an option to buy the unit once completed. Some investors will use a “buy to flip” strategy which involves making the initial deposit and then selling the option prior to the build completion. Some developers will not allow this activity. To fully understand the viability of such a strategy it is important to make sure that the Private Purchase Contract is transferable and to be aware of what if any administrative expenses are involved.
Build Quality
All of the building specifications should be made available to prospective purchasers prior to signing any purchase agreement. The reputation and prior track record of the developer will also provide a good indication of the build quality to be expected. It is important however, to be aware of the guarantees that are in place and the length of time for which these guarantees exist.
Delivery Time
The purchase agreement of any property purchased off-plan will outline the expected completion time on a project and often the contract will include a penalty clause whereby the developer will incur a financial penalty if any delays are experienced. Some bank guarantees and completion insurance policies include provisions for delays in the build time as well. Investors should be aware of the guarantees in place.
Financial Issues
As with any investment there are financial and tax implications which when assessed in advance can help to maximize the return on the investment and eliminate any surprises.
Mortgages
Prudent investors have always taken advantage of bank financing to purchase property. A careful analysis is required to ensure that rental returns will be substantial enough to offset the costs of maintaining the mortgage payments. It is also advisable to consider finance options through various providers.
Interest Rates
Although no one can predict the future of interest rates, it is important to consider the potential implications of a rise or fall in the rates in both the country where the financing has taken place which can affect mortgage repayment levels and the country where the property is located which can affect market liquidity and resale values.
Taxes
Transfer taxes and stamp duties as well as most other taxes on the front end purchase of the property are outlined in advance of the signing of the private purchase contract. Investors must however, consider the tax implications on the sale of the property. Capital gains taxes apply in most countries although they differ from one to the other. Some countries also have dual taxation agreements. Investors should research all tax implications prior to entering into any property investment to avoid unnecessary surprises and to properly weigh the investment potential of the opportunity.
Stage Payments
An off-plan property purchase always involves a deposit to secure the unit and either the balance of funds are payable on the completion of the unit or stage payments are made throughout the build process. Investors need to be aware of when these payments will be required in order to ensure the availability of funds.
IPW will discuss at length the objectives of its clients and then endeavor to fulfill these objectives whatever they maybe. Most property investors are either interested in capital appreciation or rental income or a combination thereof. It is essential that investors understand the potential of any project to generate capital growth and projected income derived from the rental of the property. Several factors can influence growth rates and income returns and the factors need to be examined with regard to each project to make sure that investors are not at risk.
Prior to the release of any project IPW completes a full due diligence procedure to ensure that the project meets the stringent requirements of both IPW and its clients. This process involves a background check on the developer. A track record for build quality and delivery timing is important to ensure clients get what they are promised when it is promised from the developers. It is of primary importance that the developers past history is taken into consideration prior to the involvement of IPW in offering any of their products. If IPW is satisfied with the developers then an independent law firm in the country of the project is used to provide a report on the following:
Bank guarantees:
Building licenses
Land title confirmation
Transfer of Private Purchase Contract prior to build completion
All tax considerations both prior to purchase and after sale
Finance options and rates
Build guarantees
While IPW makes every effort to ensure the security and best interests of their clients it is also advisable for each client to use their own solicitor when purchasing a property.
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