If you’re reading this, I assume you already know how to assess a property and determine whether it’s a good deal. Instead, I would like to focus on something equally important: how to conduct due diligence on the people and companies you may want to work with.
Verifying individuals before collaborating with them is essential. You must confirm that they are who they claim to be, that their experience matches what they say, and ultimately, that they are the right fit for you.
It's all too easy for someone to craft an image on social media that doesn't reflect reality. This can lead to people investing in or partnering with the wrong individuals, which may result in financial losses and considerable stress. To help you avoid such situations, I will guide you through the process of properly vetting people before you work with them, ensuring you don't fall victim to a false image.
Anyone you plan to work with, whether financially or professionally, should undergo proper vetting. This includes service providers like accountants, solicitors, builders, and training companies. It also applies to anyone you are lending money to, borrowing from, or considering for a joint venture in any capacity.
You can check Companies House to find out who owns a company, who the directors are, whether their accounts are up to date, and what their financial situation looks like.
However, be cautious not to misinterpret the information. Many people don’t fully understand what they are seeing. For example, entrepreneurs and property developers often have dissolved or inactive companies, which isn’t necessarily a red flag. If something seems unusual, don't hesitate to ask questions.
It’s also important to note that personally owned property will not appear on Companies House. If someone has been investing for a long time and holds property in their name, those assets will not be visible there. To verify ownership, you would need to check each property individually through the Land Registry.
This includes professionals such as accountants, solicitors, and mortgage brokers.
How long have they been in business?
Do they work with other property investors?
Are they property investors themselves?
Do they have the right experience for your needs?
Ideally, your power team should consist of individuals who also invest in property. I’ve encountered many accountants who are excellent at general business accounting but have limited knowledge of property investing. As a result, they may be unaware of key tax benefits that could benefit investors.
Are they a company, or do they operate independently? Who actually delivers the training?
Many trainers act as the face of a brand but do not provide the training themselves. Instead, you may end up being taught by someone who was trained by someone else, which can result in diluted knowledge.
How long have the trainers been landlords themselves? It's common for people to claim they’ve ‘been in property for years’, but that might only refer to their time as homeowners. Their actual experience as landlords or investors could be much shorter. It’s important to clarify this, so don’t hesitate to ask.
Additionally, how long have they been training others? In theory, the longer someone has been training, the better they should be. If they weren’t effective, they likely wouldn’t still be in business. Experience also enhances teaching skills over time. A strong indicator of a good trainer is the success of their clients. Some individuals may be highly successful investors but struggle to impart that knowledge effectively. Therefore, check whether they have a track record of helping others succeed.
I recommend researching them online, reading reviews, and speaking with people at networking events. Ask around—has anyone heard of them? Has anyone really trained with them? Be cautious of who you listen to. It’s best to rely on opinions from those who have paid for and experienced their training, rather than those offering opinions from the sidelines.
The first question to ask is whether they are the right fit for the job. Do they have the necessary experience, not just in the type of work required, but also in the scale you need?
For example, someone skilled in fitting kitchens and bathrooms may not be capable of handling a full back-to-bricks refurbishment. Similarly, a builder experienced in refurbishments may not have the expertise to construct a small block of apartments.
Do they have a reliable team? Do they have the capacity to take on your project?
A reputable builder should have previous clients who are willing to provide references. Ask around at your local property investor network meetings to see if others have worked with them. Be aware that bad builders often move from one job to the next, and some people may be reluctant to share negative experiences out of embarrassment.
One common mistake is paying large upfront fees. There's typically no reason to do this. A good builder should have trade accounts that enable them to source materials on credit. Instead, pay their team weekly as the work progresses.
Always get written quotes before work begins. If you decide to make changes during the project—which is best avoided—ensure any adjustments are quoted in writing before approving them.
Be cautious about paying builders on a day rate. A fixed price for the job is generally safer, as day rates can lead to unnecessary delays and inflated costs. Also, ensure that work is being completed correctly throughout the project.
Finally, never pay the full amount until everything is complete. This includes not only snagging the property properly but also ensuring you have all the necessary certificates and documentation. Until you receive essential documents such as FENSA certificates for windows or electrical safety certificates, the job is not truly finished. A good approach is to retain 5% of the final payment and only release it once all work is completed to the agreed standard.
Many individuals have lost money simply because they failed to conduct proper due diligence before lending. The first question you need to ask yourself is whether you know, like, and trust the borrower. If you cannot answer "yes" to all of these, then you should not lend to them.
Consider whether you are lending to them personally or through their company. If you lend to an individual who owns assets, you may have a way to recover your money if they fail to repay. However, lending to a limited company gives you fewer options, unless you secure a personal guarantee, which would allow you to pursue the individual personally if the company defaults.
It’s also important to understand the purpose for which they need the money. Do they have the experience necessary to execute their plans successfully? Most importantly, how will they repay you, and when?
Always ensure that you have a written and signed agreement in place. If possible, seek some form of security, depending on your level of trust in the borrower. Some options include:
Second Charges: This places you behind the bank in the order of repayment. While useful, many lenders prohibit owners from granting second charges.
RX1 Restrictions: A strong alternative, as this is registered with the Land Registry and prevents the owner from selling or refinancing the property without your consent.
Personal Guarantees: These can offer security, provided the borrower has sufficient assets that could be pursued in case of default.
The security available depends on the person and the deal. A first charge is the most secure option if you are the primary lender. Second charges can also work well if there is plenty of equity in the property. You can also secure a debenture on a company, which acts as a charge over all its assets, giving you priority as a creditor if the business encounters financial trouble. Additionally, consider whether there are other assets you can secure against the loan. Regardless of the situation, always have a written loan agreement in place.
When it comes to property ownership, verify that they own the property. Is it in their name, or is it held under a company? Ask for a schedule of property assets and cross-check this by doing a random search on landregistry.gov.uk. Make sure they own the properties they claim to own. Look into how much equity they have in those assets and whether the portfolio is generating positive cash flow.
Also, consider their liabilities. It may be worth asking for a copy of their credit score and credit report. If someone has a very poor credit score, you should seriously question whether you want to work with them.
It might surprise you, but you should also perform due diligence on the people you're borrowing from. Do they have the money they claim to have? Often, people say they have funds and express interest in deals, but they may not actually have the money. They are just wasting your time. If someone is going to lend you money, it is completely reasonable to ask for proof of funds.
You also need to understand whether the money is available for immediate use. Someone might have funds tied up in the sale of a property, a refinance, an inheritance, or money coming back from another loan. However, you need to clarify the timescale for when those funds will be accessible. When accepting money from people, make sure to perform your Anti-Money Laundering (AML) checks. This means obtaining a copy of their passport, proof of their home address, and ideally, a bank statement showing the source of the money.
You should also understand when they expect their money back. If possible, always borrow money for a longer period than you think you need, as property projects often take longer than expected.
When joint venturing with someone, it is vital that you know them very well. It’s easy to get along with someone when everything is going well, but how will they handle things when problems arise? Always have a written agreement in place that clearly outlines who is responsible for what and when. Additionally, agree on the exit strategy.
How long do you plan to hold the property? Is it a short-term flip or a long-term buy-and-hold? Make sure you have contingency plans in place in case things don’t go as expected. Lastly, I believe it’s a good idea to have life insurance to ensure that all partners are covered, just in case something happens to anyone involved.
We have covered a lot of ground here. I hope this has helped you to understand how to conduct due diligence. We offer an online training course all about Due Diligence, which we typically sell for £997. However, as a Blue Bricks reader, you can access the full training for just £1. Scan the QR code for this one-time offer.
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