My Approach to Due Diligence: Ready, Fire, Aim

Date: 05/11/2007

International Living Postcards-- Saturday Edition

Saturday, May 12, 2007

Ready, fire, aim. That phrase used by entrepreneurs highlights my philosophy for doing due diligence. You must be ready to "pull the trigger" when a real estate opportunity (or any opportunity) presents itself. Prepare by educating yourself on the markets in which you are interested and learning the risks specific to that market…then watch the market for opportunities.

It's true that spending time analyzing a market is time well spent. But spend too much time researching and investigating and your opportunity will disappear. The best deals don't stay on the market long.

That doesn't mean you should be hasty or foolish--looking before you leap simply makes sense. But you should weigh the level of due diligence against the level of investment. A multi-million dollar development deserves more time and money spent on due diligence than a $25,000 investment. In fact, if you can't make a decision about the $25,000 investment within a few seconds of reviewing the data, you probably shouldn't make the investment. You either haven't properly prepared yourself on the market and the type of deal in front of you…or it isn't a good opportunity for you.

Over-analysis will keep you out of the market. A man who was interested in investing in Honduras spent four years trying to figure out that market to find the perfect deal. He took research trips, spent thousands of dollars, and eventually gave up--he thought that he was too late for that market by the time he was done with his four-year investigation. He repositioned his sights on the Dominican Republic and began searching for the perfect deal again--in the two years he spent on that research, prices increased 20% the first year and 30% the second. He should have bought a good deal once he had a general understanding of the market in Honduras--he would have doubled his money in the four years he was looking for the perfect deal there. Spend too much time "aiming" before you pull the trigger and the target will move on.

The level of risk inherent in a deal will determine the amount of due diligence you should put in…but you can prepare in advance. Get to know your market, understand the legal issues specific to the country, and scout properties to discover local prices. That will equip you with most of the knowledge you'll need when a good deal crosses your path. Your due diligence time to analyze the specific opportunity will be relatively minimal--in markets I know well, it takes me but a few seconds.

The key is to focus on the critical factors. For every investment type, some features are necessary…while others are merely desirable. When faced with a list of potential properties, eliminate immediately the ones that don't have what's necessary for your planned investment. On site, you can work your way through a dozen prospective rental apartments in a morning and go back in the afternoon to the two or three units that have the features you deem necessary--that's when the real choice begins. Off site, you can review maps and photos of land to pick out the lots with the features you need for development.

You'll rarely find the "prefect deal"--one with minimal risk and maximum return. But that doesn't matter. You don't need to hit the bull's-eye every time. As long as you hit the target before it moves, you'll do well with your investment.

Lief Simon
For International Living

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