The term “due diligence” is a legal term for the steps a person or organization can take to investigate, thoroughly, any prospective business deal or transaction in order to ensure that what they propose to do is legal and commercially viable. You can think of due diligence as the research you conduct to get the best possible outcome for any venture you undertake. When you put it like that, it's clear that you should conduct due diligence into any important decision you take. If someone suggested that you took an exam without researching the subject, or bought a car without viewing it, you'd think they were rather reckless; yet people take far bigger decisions without doing enough research. I'm always stunned when I discover people who have bought property or started a business without doing essential research and planning.
We all have our first taste of doing research at school. We are given tasks and problems that we have to solve, working either in class or for homework. My parents and sister helped me adopt a very healthy attitude towards doing schoolwork. They always impressed upon me that it had a purpose; that it was useful in its own right beyond being a requirement enforced by my teacher. I didn't just do homework because I had to hand it in the next day, I did it to give me the knowledge and tools I needed to get ahead in life. (That is not to say that, like most kids, I didn't resent doing it half the time!) That's something I always impress on my kids: that homework is not just about doing what's required of you, it's about learning the process of research, and storing information for the future. It's a long-term investment in yourself. More knowledge gives you a better platform from which to achieve a better life.
I attribute my early success in my career to my commitment to doing thorough research (my due diligence) on anything I was responsible for. Even if it would take me longer to complete a task, I never cut corners or made reckless assumptions. My managers soon learned that they could rely on me not to make mistakes based on a lack of knowledge. If I didn't know something, I would ask; I would find out the answers before I moved forward. I didn't see everyone doing that, and those who tried to leap ahead without doing all their research often landed flat on their faces.
And young people these days have no idea how easy they have it, with everything digitized and at their fingertips. When I was at school, and during the early years of my career, thorough research was infinitely harder to do than it is now and took much longer to complete. In my day we had to go to far greater lengths to get the information that you can now get at the click of a button.
When I decided to invest in my first rental property in the mid-1990s, I took my due diligence very seriously. I developed a checklist that I stuck to religiously. I looked at different local areas and different types of properties. I evaluated the market and calculated how much it would cost me to update the property if necessary, and whether I would recoup that money if I were to sell it. When I chose the property and made my offer, I read every single word of the contract before I signed it. Yes, this is the work you pay your solicitors to do, but they are there as a safety net, to highlight any issues that may need fixing. It is still your signature on the legal forms and your money on the line, so you should read and understand every word of any contract you sign.
This applies to everything you agree to. How many of us read all the terms and conditions on the myriad websites and online services we sign up to use? And how infuriating is it when we realize we've waived rights to our anonymity or have agreed to share our personal information because we hit that button without reading the contract?
Most people don't read contracts because they are lazy or aren't prepared to make the time. But there is no excuse not to do this. Everyone has a responsibility to know and understand exactly what they are agreeing to when making any kind of deal. Yes, it takes time, but you have to be patient. You can't complain, if and when things do go seriously wrong, if you never did your due diligence. No matter how long it takes, or how boring it seems, if the ultimate responsibility for something falls on your shoulders, you must do your due diligence.
If it's your money and/or legal responsibility, read every word of the contract!
Taking responsibility and doing your due diligence also means paying attention to every aspect of every step and recording whatever transpires when information is given. I get very frustrated with my team when they don't take notes during phone calls. I say to them: “Imagine if you were seriously injured or unwell, and lying in hospital in a critical condition, and the nurses looking after you didn't take notes when the doctor was giving instructions on your care. You wouldn't be too happy if, as a result, the nurses forgot to give you some essential medicine and you died!”
Doing your research – your due diligence – isn't just about getting the best deal, it's also about reducing your risk of something going wrong. We can't control everything, but we must control what we can. Remember the serenity prayer I mentioned in the last chapter? “Grant me… the courage to change the things I can…”
I think I have always instinctively calculated the risk in any situation. Even at a young age, I was doing it. For example, I did my homework because I didn't want to risk getting bad grades. Fortunately, I always had the ability to see into the future and look at the bigger picture. I had the foresight to play the long game and I applied my general attitude, about doing research thoroughly, to any decision I needed to make. I see other people being very inconsistent in this. I see people doing endless research over which iPhone to buy or deliberating for days over purchasing a pair of shoes, and yet when it comes to decisions that could affect the rest of their lives, they often skimp on the research. I've known people go to job interviews without doing their due diligence on the company they have applied to, or start a business without a business plan, or apply for a degree course without knowing all the content of all the modules or doing a comparison with courses at other colleges.
When I started researching properties ahead of my first investment, I walked into each estate agent armed with a ring binder full of my research. In those days, you didn't have a plethora of websites crammed with property details; you got given the particulars on an A4 sheet of paper showing a photo, sometimes a floor plan, and other basic details. I kept all these property details in the binder with my checklist at the back. My questions included things like: Was it leasehold or freehold? What was the expected monthly rental the property could achieve? What was the rental market in that particular location like? Was there a possibility to add value? What was the condition of the various rooms?
Conducting my research gave me a valuable education as I went along, and it also increased my chances of getting a good deal. Once they saw how meticulous, committed and reliable I was, the estate agents began calling me as soon as they took on a property that they considered a good deal, sometimes even before it came onto the market.
However, there are still some aspects of your education that you can only learn the hard way. For me, that was dealing with builders. As I explained before, the first builder I chose to work with (the one I found through a newspaper advert) on my Surrey Quays property turned out to be a bad choice. The second builder was possibly connected to the loss of my prized possessions when my car was broken into. So, I learnt the hard way to be more selective when it came to builders, and these days I have a small pool of trusted tradesmen I use for everything.
Again, remember that I started my property business in the days before we had so much information available online. Now that anyone can share opinions on social media and on sites such as Trustpilot, Yelp and TripAdvisor, you'd have to be exceptionally unlucky to have a particularly bad experience. There is no excuse, these days, for not doing your research. If things go wrong because you didn't do your due diligence, you really have no one to blame but yourself.
I think research can be people's “pain point” – no one minds doing research when it's interesting and fun, such as trying out all the different iPhone models available, or shopping around for the right holiday deal; but when it comes to having to read through the boring fine print of a legal document, people aren't so keen. However, these documents are vital.
Before I put my money into my first investment property, I viewed over 100 properties. By comparison, I knew people in a similar position to me who looked at only three or four properties and then made a snap decision based mostly on aesthetics.
One of the first essential rules I embraced before I invested a penny in property was: you make money when you buy. In other words, you buy a property because of the added value you can get from it (either because you can invest in improvements that will bring you a greater financial return for your investment or because you buy it at a price lower that its market value). But you only know whether you are going to make money if you know all the facts and figures… in other words, if you have done your due diligence.
Some of your due diligence is to know your own “why.” I have seen many people buy property based on the wrong criteria for their situation. For example, you would apply different criteria if you were planning to buy a property to live in than you would if you were buying it to rent out; and different again if you were buying it to flip (i.e., to renovate and sell it on as fast as possible). In all scenarios, if the numbers don't make good financial sense, you need to be strong enough to walk away. I have seen many people lose money because they have made an emotional decision when buying property; or have made a decision based on greed and speculation rather than facts. It's easy to get emotionally attached to a property, whether it is to live in, to rent out or to flip. But every property is a business transaction and you must make a well-considered decision based on the numbers and facts, not on your desire! If you do all the right research, if you ensure you have completed your due diligence, it puts you in a very strong place; you have the best chance of making money.
The timing of your research is also critical, you must do it all up front. I see so many people make the mistake of doing their due diligence after they have made an offer, but you must do it before you make an offer. You should crunch all the numbers before you put down a penny. If the numbers don't work, you must walk away.
How does the old saying go? If it seems too good to be true… it probably is! One of the greatest threats to doing your research is being blinded by the dream. In the last huge property boom, before the 2007/2008 financial crash, many people were buying properties with massively inflated prices because they were wooed by fancy “property clubs” and general hype.
Those property clubs sold such an attractive dream that people skipped doing the painful research. So-called property “experts” with big personalities stood on stages and told a room full of, say, 100 people “you can buy 15 properties at a 15% discount because I can introduce you to the developers of this luxury new build in this up-and-coming area.” No one asked: “A 15% discount on a price determined by whom?” If they had done their due diligence, they would have discovered that the market was hugely inflated and that the “15% discount” was applied to an unrealistic figure in the first place. Some of the people who bought those properties are still in negative equity today, almost 12 years later (at the time of writing, mid-2019). For example, if they bought what they were told was a flat worth £200K for a “discount” of £30K and paid £170K, they probably found that when the market crashed, that property became worth around £150K. Today, it has possibly gone up to around £160K, which means they are still out of pocket and a long way from the huge profit they'd been promised. If they had properly researched the market, they would have discovered that the price tag of £200K was pure speculation, that no one had paid that much for a comparable flat in that area before.
Anyone who bought a flat under those terms is probably still carrying a £10K loss 10 to 12 years later. If they bought 15 flats at one of those property club events, they'd still be down £150K! If they have been lucky, they may have managed to keep properties tenanted at a level that covered their mortgage repayments. Many of these investors were unable to maintain the charges and had to let the properties be repossessed, or had to declare bankruptcy and walk away, cutting their losses.
As I've said before and will say countless times again throughout my life, there are no short cuts to doing due diligence. You use third parties to open up opportunities at the start of the process, and to check the paperwork throughout the process and at the end, but you don't blindly follow everything they tell you without doing your own research.
Due diligence reduces risk.
You rarely make a lot of money by following “herd mentality.” The smartest investors go against the market. Once everyone is doing something (like all those people in the property clubs or those who got into cryptocurrency at the top of that bubble recently) there's no more money to be made. Most of those property clubs went bust just after the market topped out. As soon as everyone is doing it, no one can do it, because the market is saturated.
One reason people avoid due diligence is because it can be so boring, but the other reason is because it is just too uncomfortable or painful. And I don't know many people who would have been able to go through what I did when I decided to view a property in Reading. It was one of the most uncomfortable experiences I have ever had.
I had been investing in property for some time and was focused on certain areas. The estate agents in those areas had got to know me very well. They knew that when they needed a fast sale and there was a good profit to be made, they could rely on me to turn something around. If I said I could complete a sale in 28 days, they knew it would happen.
One day I got a call from one of the estate agents I knew in Reading saying he had a property that had just come onto the market as a result of probate; the beneficiaries just wanted to sell it as soon as possible in order to split the proceeds. He warned me that viewing it was not going to be a pleasant experience.
I had never seen – and have never seen since – anything as bad as the state that this property was in.
The first thing that hit me, as I walked through the door of the two-bedroom mid-terrace house near the canal in Reading, was the stench; I could hardly breathe it was so bad. And the state of the house was horrendous. There were piles of black bin bags everywhere. There was no carpet. Everything was broken, from the furniture to the light fixtures; it looked like a bombsite. I started noticing plastic Coca-Cola bottles everywhere; and soon realized that they were all full of yellow liquid. I was puzzled until it dawned on me that this was urine! The property didn't have an inside toilet, only an outhouse, but clearly the occupant had been unwilling or unable to use it. I would estimate that there were around 80–90 bottles and, judging by the smell, it wouldn't surprise me if there were piles of human faeces festering in corners.
Most people wouldn't have got further than the front door, but I made myself walk through the whole house. I was sure that, if I could pay someone to clean it up, there was a good profit to be made: the beneficiaries were keen to sell it as soon as possible and knew it would be very hard for them to do so in that condition, so I was sure they'd be grateful for a quick sale.
My due diligence uncovered something else that was critical. It wasn't just the inside state of the property that presented a problem – in fact, most of this was cosmetic – there was actually a more serious issue going on outside: the garden was full of Japanese knotweed. Cleaning up the house would be a relatively simple task compared with ridding the garden of Japanese knotweed, which is a highly invasive plant that is so strong it can penetrate brick walls. It is virtually indestructible!
From my research, I discovered that banks would not lend on a property with Japanese knotweed. This was not a direct problem for me as I was buying the property with cash, but it would make it impossible to sell on, if that was what I wanted to do. Before I made an offer, I did my due diligence and researched how this stubborn plant could be removed. I discovered that there were special horticulturists – knotweed experts – who could eliminate the plant, treat the property to ensure it did not return, and provide a certificate that would be accepted by most lenders.
I began to see my way through the difficulties. Where most people would see obstacles and walk away, I saw opportunities. The property was being marketed at £160K, but with the disclosure of the knotweed it would struggle to achieve that – partly because it was un-mortgageable. I made an offer of £115K, which was accepted. I had worked out that I would be able to transform the property by spending around £20–30K on it. I believed that, in good condition, it would fetch around £220K. So even if I ended up selling the property at a lower price, to get a faster sale, I knew that there was a good £50–60K profit in it.
A challenging property can still be a great deal.
Once I'd done all my due diligence and had my offer accepted, the whole process was fairly straightforward. I sent in a team wearing Hazmat suits to clear the whole place out, hired a skip for all the rubbish and then set about doing the renovations. I had the whole place replastered, a new kitchen put in and new double-glazing fitted in the windows. Obviously, I put in a new bathroom with a toilet and got rid of the outhouse.
In about three months, I was putting an unrecognizable property back onto the market and I sold it fairly quickly. My courage (walking into a foul-smelling house of horrors) and careful due diligence paid off and I made a tidy profit. I never took any shortcuts – it was hard work all the way – but it all paid off. Because it was in a great location overlooking the canal, once the property was cleaned up it was highly desirable.
When you do your due diligence on one project, you don't just reduce your risk of failure or loss in that particular scenario, you also acquire valuable information to take with you into your next experience. You always make yourself smarter. Thanks to this property, I learnt all there is to know about the ramifications of finding Japanese knotweed in your property. I discovered that you can get rid of it permanently, but that you need a certificate from an expert if you want a mortgage. If I'd been planning on renting the property out and hadn't wanted to refinance, I wouldn't have needed the certificate. But to sell it on, I needed that certificate for the next buyer, who would undoubtedly have needed a mortgage.
You should decide on your objective, as an investor, for every property deal. Is your objective to create new cash to reinvest, or to create an income stream? Each objective has a slightly different set of criteria to research and follow. The exact nature of your due diligence depends on your needs – there are different criteria depending on whether you want to rent the property out or sell it on.
I knew I wanted to sell the property on, and whoever was buying it would need a mortgage – and thus the certificate – so it was essential that I obtained it. I also discovered exactly which lenders would lend on a property that had a knotweed history (but a certificate to show it had been permanently removed) and which would not (even with a certificate). This information has been valuable information as long as I've been in business in the property sector and associated financial services industry.
The results of your due diligence are always added to your knowledge bank.
Even when you are working for someone else, your own due diligence gives you knowledge that no one can take from you… that knowledge goes into your knowledge bank. The more knowledge you amass, the more of an expert you become. That's why I stuck to investing in property in areas that I knew. I gradually built up a wealth of information about those areas. I had met people – mostly in those property clubs I once went to – who invested in areas they'd never even been to; making offers in places like Manchester and Birmingham, without ever having visited the area. That just racks up the risk, in my opinion. If you thrive on risk, fair enough, but personally I like to moderate my risk.
It's always a risk not to know all the ins and outs of your business. During my time in the investment banking world, I met fund managers in the city who never read the accounts and the reports, they just followed herd mentality; they might have got away with it for the time during which they worked at that institution, but what were they really going to take with them if they didn't know how to conduct the research themselves? I always wondered what they would do if they lost their jobs.
I think we are all a bit inherently lazy and greedy. There's no getting away from that. Who wouldn't like infinite wealth without having to work for it? Why do you think people spend so much on lottery tickets? It's laziness and greed: basic human tendencies. We all have to fight against them. Be wary of anyone who tells you differently. They may be trying to play on your desires, offering you dream deal that, in fact, will only benefit them!
You can't be lazy and greedy and successful. You can be lucky but that's not the same as successful. Success takes hard work and realistic goals.
I watched so many people get burnt by buying into the dream of making easy money on those new-build properties because they didn't do their due diligence and learn that the prices were massively inflated before being offered at a “discount.” In addition, they never factored in the hidden costs, such as maintenance charges and letting costs… plus the cost, in terms of their time, involved with managing the properties. There are so many more costs associated with owning property than just paying the mortgage each month. Some of them hadn't even budgeted for carpets and basic furnishings (which are kind of essential when you are planning to rent the property out for an income!). I watched so many people plunge themselves further and further into debt, often having to take out extra credit cards to buy essentials or even to fund their actual deposits on the properties. Then they didn't factor in that all those properties would be coming onto the rental market at the same time, making it hugely competitive and allowing prospective renters to bargain them down from the premium rents they'd been hoping to get.
Of course, the people who did make money were those who ran the schemes and organized the deals – and thus took a “finder's fee” on every deal!
I didn't wake up one morning knowing all this. It was an ongoing learning process. We all learn about the value of research at school; it's up to us whether we pay attention to what we are being taught. I learnt that there are consequences when you don't do your research. If you don't do the work, you don't get the grades, you don't get the job, and so on. I took that with me into my career in investment banking, and onwards into everything I did.
The learning process never stops. When I set up my business, I did a huge amount of research first. I built my business from the ground up, ensuring every single aspect was done thoroughly and legitimately. When I got to a certain level, another company was interested in investing in my business. So, then I had to watch another business research me. I witnessed how thoroughly they did their due diligence on me and my business!
In the end, the only reason I was able to negotiate a great deal with an investor was because I had all my ducks in a row. I had set up my business properly, so they were able to get all the information they needed. This does not always happen. Many investment deals fall apart because the company being researched has too many cracks in its foundations.
I couldn't believe how much paperwork was involved in setting up a new business when I did it, and how much I had to learn. Because I grew my company from the ground up, organically, I had to do every single job myself in the early days. And I had to keep doing those jobs until I was profitable enough to hire people to delegate to. When you set up a business, it's not just about knowing how to do the thing you are an expert at (in my case, I felt I had a lot of expert knowledge about the financial markets and mortgages), it's about learning all the other requirements of owning and running a business: the financial aspects, the regulations, the marketing, the admin… it's never ending; you literally have to be a “jack of all trades.” And you may need qualifications you didn't know you needed. I discovered I had to become qualified to act as a mortgage broker. No matter how much I thought I knew about negotiating mortgages, there was a whole lot more to learn. There is also only so much you can learn on paper. The lessons you learn from putting something into practice are invaluable too. No matter how much I understood about the whole mortgage business, I still had to develop a good service for my customers. I piloted the project for six months before launching. In other words, I tested my processes, and my desire to do it, before I set up the business formally.
My research involved learning everything I could about the industry. I spoke to many BDMs (Business Development Managers) at all the banks to find out what products they had on offer and what criteria they gave mortgages under. Every lender has its own set of criteria; on average these run to about 100 points and include factors such as the income level they will accept, the age range they will lend to, etc. And there were about 30–40 lenders I had to research, so it was a long, arduous exercise. Obviously the application process is systemized once someone decides to apply for a mortgage, but when you're on the phone to a customer, you have to have these facts at your fingertips so that you can give them immediate answers. You have to demonstrate knowledge in order to gain credibility with people. I impress this upon anyone coming to work for me.
A big part of due diligence is knowing how to apply the knowledge that you've gained. Once I had the knowledge, I had to use it correctly and then pass it on to my clients.
I also make everyone who works for me aware that we do everything by the book and keep our noses clean. When you reach a certain level of success, people will start to do their due diligence on you, either because they are considering investing in you (as was the case recently for me), or because you become of general interest to the public and thus come under media scrutiny. If you become a public company, you are answerable to all your investors who have put their faith in you after doing their due diligence. When that investor was interested in my company, they did a full audit, going through every balance sheet item with a fine toothcomb.
A huge amount of the information you need at any given point in your business journey is readily available to you. But you have to pay attention and do the hard work. How many episodes of Dragons' Den have to be made before people stop overvaluing their companies? Come on! You've seen it all before. The dragons never invest in a company with a wildly inflated valuation, and yet people still come in with unrealistic valuations.
The ones who get the money on Dragons' Den are the ones who did their due diligence, mostly on what criteria the dragons are usually attracted to in order to make an investment. And the figures don't guarantee you get investment. Your due diligence – if you choose to do it – will also show you that the dragons always invest in people over and above anything else; so they want to invest in people with charisma, people they can get along with. And yet you still see some business owners come in with a combative attitude. You know immediately which ones aren't going to get investment, even if they have a great product.
It's okay; if people didn't make the same mistakes over and over again, it wouldn't make for very interesting television – but I do sometimes wonder if some of them have bothered to watch even one previous episode of the show. There are never any guarantees, there is always a risk you won't get investment, but why wouldn't you want to reduce your risk by doing your due diligence?
Doing your thorough research and then being researched by someone else… it's like coming full circle. And it goes even beyond that. I sometimes feel like I've gone the full spectrum of research experience.
Your experience doing due diligence starts when you're at school and you have to do research for your homework. I started with doing homework at school, then I learnt how to research property in order to make the best investments for myself. Next, I got a job in investment banking and learnt how to research all aspects of the banking world in order to become a useful employee. Then I researched how to set up a business from scratch and learnt how to become an effective mortgage broker. Next, I shared the results of a lifelong quest for knowledge with my team in order to grow my company. And all this has led to me being researched and investigated myself by a company that decided to invest in me.