Property Deal Sourcer Due Diligence: Lessons from a Bad Deal
October 1, 2021
A property deal sourcer can introduce you to an opportunity, but the presentation isn’t a substitute for your own due diligence. The more impressive the promised outcome, the more carefully I want to understand the assumptions that produce it.
In my October 2021 video, I discussed an unnamed investor who had been shown a Sheffield HMO conversion described as an “all money out” deal. The plan suggested that refinancing would return the cash invested while leaving an income-producing property behind. According to the account I discussed, the refurbishment cost and final valuation turned out very differently.
The lesson isn’t that every sourcing service is bad or that refinancing can never release capital. It’s that an attractive spreadsheet can hide several dependencies, and the investor needs to know what happens when those dependencies fail.
You can watch my original property-sourcing case study for the figures and concerns I explained at the time.
What the proposed deal looked like
The purchase price presented was £100,000, with £25,000 of the investor’s cash and £75,000 of borrowing. The plan was to convert the property into a five-bedroom HMO.
The initial cash model also included £45,000 for refurbishment, £7,000 in bridging fees, £1,500 for revaluation costs and a £4,000 sourcing fee. Together with the deposit, those figures totalled £82,500.
The expected end value was £210,000. At 75% loan to value, that would support a £157,500 mortgage. After repaying the original £75,000 loan, the simple model showed £82,500 released, matching the initial cash contribution.
That matching number was the appeal. But the calculation only worked if the costs, valuation and lending assumptions all held. It was a proposed outcome, not a guaranteed route to owning a property without money remaining in it.
Why the refurbishment budget worried me
I questioned whether £45,000 was enough for the proposed five-bedroom, en-suite HMO conversion and furnishing. In the video, I said that something closer to £60,000–£70,000 looked more plausible to me for the work being discussed.
Those were historical figures and my judgement about that project, not current quotations for a similar conversion. The broader issue was whether the investor had a complete, agreed scope and a clear understanding of what the quoted amount included.
According to the account I later discussed, the initial £45,000 figure excluded VAT and furniture. That is a material difference. A budget labelled “refurbishment” doesn’t tell you whether every item required to reach a lettable finished property is inside it.
I’d want the written specification, inclusions, exclusions, tax treatment and payment schedule before relying on the total. If somebody says a cost is fixed, I want to know exactly what is fixed and what can still change.
The end valuation was the second major dependency
The other concern was the £210,000 end value. The deal relied on a valuation approach linked to the HMO’s income, rather than simply assuming the property would be compared with ordinary houses nearby.
I thought that estimate looked ambitious against the local comparable evidence I had reviewed. Spending heavily on a conversion doesn’t ensure a lender will recognise an equivalent increase in value or apply the valuation method the investor hopes for.
Different lenders and properties can be assessed differently. The existence of rental income doesn’t make every small HMO eligible for an income-based valuation, and a sourcing presentation cannot promise how an independent valuer will report.
I’d want an experienced broker to explain the realistic financing routes and their conditions. I’d also model the property using a less favourable valuation basis before deciding whether the project remained acceptable.
What I was told happened to the costs
In the outcome described in the video, the refurbishment reached £60,000 plus VAT, or £72,000. That was £27,000 above the original £45,000 line in the presentation.
The bridging fees were reported at about £7,000, the revaluation-related costs at about £2,000 and the sourcing fee at £4,000. With the £25,000 deposit, the cash committed came to roughly £110,000.
Those figures are from the case as it was discussed with me, rather than an independently audited set of accounts. They are still useful for showing how a missing cost or optimistic allowance changes the cash requirement.
The investor needed to find the additional money before the intended refinance could resolve anything. That is why an overspend isn’t merely a disappointing return at the end. It can create an immediate funding problem while the project is still underway.
What the lower valuation did to the refinance
The final valuation reported to me was £140,000, rather than the £210,000 used in the original model. At 75% loan to value, the simple mortgage calculation becomes £105,000.
After repaying the £75,000 original borrowing, that leaves £30,000 released before any further deductions. Against roughly £110,000 committed, about £80,000 would remain in the project.
That is very different from the proposed £82,500 release returning all the initial cash. It also shows why a modest-looking change in assumptions can be misleading: here the end value changed by £70,000, with a substantial effect on the available mortgage.
I would not describe the entire £80,000 as a realised cash loss. It was cash left tied up in the investment on the figures discussed. The property, debt and income remained, and a full assessment of profit or loss would need to account for them correctly.
Rental income didn’t rescue the original promise
The rent discussed was around £2,300 a month, with projected or reported net cash flow around £1,100 a month in the account I gave. The video suggested that the rental side had been broadly in line with expectations.
Even so, the deal no longer delivered the capital-recycling outcome that had made it so attractive. An income-producing property can still be a disappointing use of money if it requires much more cash and risk than the buyer intended.
On the rounded £1,100 monthly figure, annual cash flow is £13,200. Against £110,000 initially committed, that’s 12%; against £80,000 remaining after the illustrated release, it’s 16.5%. Those denominators answer different questions and depend on the completeness of the underlying cost calculation.
I’d keep those calculations separate from any equity gain or loss. Refinanced borrowing isn’t another profit stream, and an appealing percentage shouldn’t hide the amount of capital still required to own and operate the property.
Check the sourcing business as well as the property
Before paying a fee, I’d establish who I am contracting with, what service they provide and what happens if the transaction doesn’t proceed. Refund terms, responsibility for work and any commissions or related-party interests should be clear.
HMRC’s estate agency business guidance includes businesses introducing buyers or investors to property deals within the relevant estate-agency activity. That makes the applicable compliance checks worth understanding when assessing a sourcing business.
Registration or membership of an applicable scheme doesn’t prove that a particular deal is profitable. I’d still check the property, figures, experience and contractual terms. The business checks and deal checks serve different purposes.
I’d also be cautious about testimonials that show only the purchase and predicted refinance. Evidence of a completed project, actual costs and final lender outcome is more informative than a polished description of what should happen.
Ask for evidence behind each important number
For rent, I’d want comparable rooms and a realistic assessment of demand for the finished accommodation. For works, I’d want the scope and a proper quotation. For value and finance, I’d want the relevant professional input and a clear explanation of the assumptions.
I would also check planning, licensing and the permitted occupancy before treating five rooms as five dependable income streams. A layout drawing alone doesn’t establish that the proposed use can be delivered.
The original presentation also included a tax assumption linked to the property’s condition. I wouldn’t copy that into another deal without specialist confirmation. A missing kitchen or an uninhabitable description isn’t, by itself, a reliable tax conclusion.
My article on refurbishment mistakes explores the wider point: spending money on a building and creating recoverable value are different things. The evidence needs to connect the two.
Model the outcome you don’t want
I’d take the proposed deal and deliberately change the uncomfortable assumptions. Increase the refurbishment cost, extend the project duration, reduce the end value and consider what happens if the desired lender won’t accept the property.
The question is whether I can fund and hold the resulting investment, not whether I like the revised return. If I cannot meet the cash requirement, the downside may be more serious than a lower percentage on a spreadsheet.
This is particularly important where another person’s money is involved. I expressed concern in the video about investors taking on commitments they couldn’t cover if the refinance disappointed. A joint venture doesn’t make that funding risk disappear.
My discussion of property debt and guarantees explains why the obligations matter alongside the asset values. I’d want the repayment responsibilities understood before relying on a future refinance to satisfy them.
A good deal should survive proper questioning
The strongest lesson from this case is that “all money out” describes a hoped-for financing outcome, not a separate type of risk-free property. It can depend on ambitious costs and valuations aligning at exactly the right time.
I’d rather ask difficult questions before paying a sourcing fee or committing to purchase. A credible opportunity should become clearer under that scrutiny. If the answer to every concern is simply that the refinance will sort it out, I haven’t seen enough evidence.
If you’d like to discuss how you assess a property opportunity, book a free 30-minute call. You can also explore the Starter Club or find out about Done For You.