There is so much advocacy these days for doing lots of due diligence prior to investing in property, that it almost squeezes out the notion of gut-instinct. But does it have a role to play?
Due Diligence on a property purchase
Before you part with any money, or sign any legal contract requiring future payments, then it is key that some due diligence has been carried out on your potential investment.
Whether that be visiting the local area and checking comparable prices, rental returns, taking stock of the infrastructure, transport links, schools and health care.
Research would usually include checking out the vendor. So if you are buying a new build or off plan, this might mean checking the builder’s reputation, as well as legalities like land-ownership and whether the relevant licences have been granted.
You would normally want to get a picture of your likely return on investment and be clear whether it is likely to meet expectations. After all a property purchase is only an investment if it is legal and purchased at the correct price, allowing for its value to appreciate and generate solid rental returns in proportion to its cost.
Using gut instinct to invest in property?
When you make decisions you think things through and tend to have a ‘gut instinct’ about whether the decision is right. Sometimes a decision might be based on instinct, rather than what the logic of our brain tells us.
‘Gut instinct’ or intuition accesses accumulated experiences in a synthesised way, so that we can form judgements and take action without any logical, conscious consideration.
Think about when you’ve gone to view a property, you might instantly take a like, or dislike, to it from the outside. It may look old fashioned and run down from the outside and you may know from past experience that this is a good indicator, that the inside is likely to be in bad shape. So your ‘gut’ or intuition, tells you that, based on previously seeing neglected properties this won’t be for you if you don’t want to do any renovation work.
This situation would create an ‘emotional tag’ linked to this experience or memory which in turn can influence decision-making, perhaps more so than objective analysis of the pros and cons of the property. This means that to protect decisions against bias, you first need to know when you can trust your gut feelings, confident that they are drawing on appropriate experiences and emotions.
Buying Investment Property: Four Tests for when to trust your Gut
1. Familiarity test: experienced similar situations?
If you have plenty of appropriate memories to review, your judgement is more likely to be sound.
An experienced property investor may be able to cast an eye over an investment property and reach an initial decision in minutes. A novice might need to do a lot more groundwork, or seek greater levels of input from additional experts or a property agency.
2. Feedback test: past reliable feedback?
Previous experience is useful to you only if you learned the right lessons. At the time you make a decision, your brain tags it with a positive emotion—recording it as a good judgement. So if you checked out the local transport connections to your chosen property and it turned out the facts were different, you would know next time that it was a good thing to double check the facts or be more sceptical of that specific source of information.
3. Measured-emotions test
All memories come with emotional tags, but some are more highly charged than others and these can unbalance your judgement. Knowing someone who invested in a property a long distance away, which did not work as expected, may influence you to not want to venture into a different geography, even if you have much better researching, scenario-planning, financial analytical skills and more experienced judgement.
4. Independence test: influenced by personal interests?
If you are buying from a vendor you know, you still need to check things out. The vendor’s motivations and criteria for buying the property before you, may have been very different to your chosen investment strategy.
There is a place for both Gut-Instinct in property and due diligence desk or field research and analysis. If a situation fails one of these four tests, you might need to investigate further to reduce the risk of buying an inappropriate property.
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Louise Reynolds, Director of award-winning, European property investment firm Property Venture® who helps busy business people enrich their lives through property. The focus is mainly: Buy-to-let homes in the UK, Poland and German investment property, Managed Leaseback in France and Spanish city property.
On the Advisory Board and a Member of the Association of International Property Professionals (AIPP) the business has been vetted, approved and voluntarily commits to Industry Regulation and the Professional Code of Conduct. We are known for our quality customer service and non-pressurised approach to sales. Take a look at what our clients say
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Tags: investment property, new build, off-plan, Risk & Reward