Real estate is a volatile market. Any mistake can cause irreparable damage. So before finalizing any transaction, you should always complete financial due diligence.
UAE is a real estate investor’s heaven. The region is widely regarded as the most favorable place for the real estate business. If you can make intelligent decisions, you can change your life. Financial due diligence removes uncertainty and enables you to make an informed decision about your investment. It limits the risk factor and increases the probability of success.
Everyone should know its importance and use financial due diligence for their benefit.
What is Financial Due Diligence?
It is a procedure that involves a complete financial assessment of a real estate property. During financial due diligence, qualified professionals verify and analyze a seller’s financial disclosure, including taxes, liabilities, income, and expenses.
An ideal due diligence model also predicts short-term and long-term ROI for your transaction. Based on these grounds, the investor takes the final call. However, for best results, you should hire a credible financial investigator.
Land Sterling residential valuation team delivers financial due diligence services across the Middle East, North Africa, and beyond. Our valuation team provides residential valuation services through competence, experience, and excellence. Above all, our team delivers a fully-fledged valuation solution package in line with international standards and best practices.
Benefits of Property Financial Due Diligence
A comprehensive FDD analysis provides the following benefits
- It provides a review of an asset’s finances before finalization.
- It gives insight into an asset’s current worth so that you can negotiate with the seller.
- It reduces uncertainty about the transaction and its future implications.
- It assesses property rents, leases, loans, and taxes with the help of documents to confirm the accuracy of provided figures.
- It analyzes the cost of a property management plan, utilities, HVAC systems, and other maintenance activities.
- It determines the cost of business licenses and legal documentation.
- It helps to set up an improvement plan.
- It identifies the red flags capable of putting your investment at risk.
- It predicts future worth and sets up an investment recovery timeframe.
What Are the Key Procedural Steps for Financial Due Diligence?
There are no hard and fast scientific rules for FDD analysis of real estate. It largely depends upon ground realities, agreement type, and real estate investment purpose. However, there are some procedural steps present in every financial due diligence.
Cash Flow Analysis
It evaluates a real estate property based on its future cash flows of the next 5-10 years. Cash flow means the movement of cash in and out of your real estate property. Based on that, you can determine whether the investment is commercially viable or not.
In Any real estate system, the necessary expenses are:
- Capital Cost for acquisition
- Property taxes
- Property management
- HVAC systems
- Business licenses you
- Legal documentation
The FDD allows you to compare this expense with the gross profit from the property. Based on that, you can activate the buying option and adequate financing channel.
Real Estate Financial Assessment
It includes a complete financial assessment of a building. The inspector reviews financial documentation and generates an assessment report to give a clear picture before finalization.
The assessment includes the following aspects:
It estimates a property’s future worth using the capitalization rate.
It is the tax imposed on property holders by the state after accessing its value. However, UAE is quite lenient in property taxation. Dubai and Abu Dhabi charge 4% of property value.
Also called TIV, it is the total insurance value of property, equipment, inventory, and business described in the insurance policy. UAE has about 50 licensed insurance companies. You can learn more about the insurance plan of a property from their website and regional offices.
Collateral value is essential for loan financing. The lender asks a professional appraiser to determine the fair market value of provided assets before approving a loan. It should always be a part of the FDD before calculating the net return.
Real Estate Transaction
It is the actual value you have to pay to buy the property. Once the truncation is complete, the ownership gets transferred to your name.
Once you go through this grind, you can predict what the future of your investment will look like.
Credit rating defines the creditworthiness of a borrower. With your rating score, the lenders determine the loan and its conditions for you. So, for financing your real estate endeavors, you should possess a good credit Rating.
An accurate Financial due diligence should cover all these aspects. It’s a professional job that requires firsthand knowledge and years of experience. With its latest financial models, the Land Sterling team can provide an accurate FDD report based on these fundamentals.
Final Take Away
Financial due diligence is the first step toward an intelligent real estate strategy. It provides a comprehensive analysis of your investment, capital cost, running cost, and liabilities against future profit forecast. With the right FDD services, you can get high profits from UAE’s always-growing real estate sector.
Land Sterling has a cumulative experience of more than 100+ years in the Middle East, Europe, and Africa. The firm is recognized by more than 30 banks and Big 4 Auditing firms in the Middle East. Our team can provide financial due diligence reports of any residential or commercial real estate site as per modern standards. Contact here to maximize your real estate profits.
Frequently Asked Questions
The most important thing is the accuracy of financial statements. It helps set up fair sales prices, appropriate conditions, and representations in the final agreement. That’s why one should always hire a qualified expert for that.
It depends upon the scope of work and investment volume. A typical residential FDD report can be generated in 3-6 weeks.
It is advisable to wait until the completion of the inspection period. If you want to close the deal in a short time, you can negotiate during due diligence.