Due diligence is generally defined as thorough research before signing a contract, especially one involving a purchase or sale.
Within a real estate context, it usually refers to a stipulated period within a real estate contract for a buyer to investigate the property in question to ensure that they are satisfied with it before the purchase is finalized.
However, before any initial offer is made to the seller, any properties considered for real estate investment should be assessed as thoroughly as possible using all publicly available information.
This process is known as preliminary due diligence, and can involve property visits or inspection, and discussions with the seller with your advisers, it may be your your attorney or financial advisor or real estate consultant.
A Proper due diligence is necessary before laying your hands on any real estate project will save you a lot of considerable headaches.
Your due diligence period includes review of the seller’s documents and your own personal or independent investigation.
In this article, we will explore the due diligence period in real estate contracts, including 1) due diligence when buying commercial and residential real estate, 2) title review, 3) real estate surveying, 4) property inspections, 5) environmental inspections, and 6) real estate appraisals.
DUE DILIGENCE WHEN BUYING COMMERCIAL & RESIDENTIAL REAL ESTATE
One of the main reasons for preliminary due diligence is important in commercial and residential real estate transactions is so that the buyer can properly assess the property’s value to formulate an offer strategically.
The primary reason critical reason due diligence for commercial real estate is so important is to ensure that the buyer knows exactly what he/she is purchasing.
The stipulated period usually begins after the prospective purchaser has made an offer, the seller has accepted the offer pending the due diligence period.
Buyers’ due diligence should involve physical inspections of the real estate, an assessment of related-environmental conditions, a review of the title, zoning requirements, contracts, leases, and surveys, partially through a review of documents the seller provides.
These should include copies of:
- Certificate of Occupant
- The deed;
- Information on current tenants;
- Existing, actual uses of the property;
- Land and improvement surveys;
- Current title insurance;
- Other insurance;
- Any notice of pending legal and/or government action;
- Environmental assessments;
- Any special assessments or taxes;
- Copies of any property bills;
- Any service contracts;
- All construction plans in the seller’s possession; and
- Warranties for any construction.
Beyond this, the buyer should conduct an independent investigation on every document.
Residential real estate
Just like with commercial real estate, you should thoroughly assess the value of and market for a residential real estate property before making an offer.
With residential real estate, there are fewer objective measures of valuation of property, especially single-family residences.
If the family is a multifamily unit, review the income the property generated in tandem with property taxes, and utilities. With single-family residences, comps, real estate appraisals, and local real estate trends are your best bet for valuing the property.
- The deed and title review
- Surveying documents;
- Zoning documents;
- Property inspections;
- Property appraisals;
- Environmental assessments; and
- Insurance documents, and any other available documents.
Understanding Real Estate Investments: Due Diligence
The first thing is to review the titles, which should be – unless you are buying a distressed property – clear of any liens or other claims against it.
The title is the transferable right to the property, which you must ensure the seller actually has (and often mistaken with the deed, which is the document used to transfer the property to another).
Typically, the seller makes sure they can convey a clear title before they put the property on the market.
The title review period for commercial real estate purchases are similar, and involve reviewing all claims against the property – what is known as a title search.
To protect yourself in case the title search misses a claim against the property, which then reveals itself after you’ve purchased the property, you will want to purchase title insurance, which makes the policyholder liable for such claims.
REAL ESTATE SURVEYING
Whatever property you plan to purchase, surveying allows you to see exactly what the land underlying the property is. You should know whether any nearby entity has an easement – a right pass through to any part of the land you plan to purchase, or whether there is an encroachment – a portion of someone else’s property intruding on what you plan to buy.
There may also be other covenants – conditions or restrictions tied to the land, all of which are essential to know before making a purchase.
Most residential real estate purchasers obtain house location surveys, which are cheaper and not advisable to use.
All building inspections should be done by a certified third-party to ensure that the property is up to code, and structurally sound.
These inspections includes real estate properties to determine if necessary for pest infestation, chimney inspections, water quality, exteriors and interiors, and other areas.
Its good to attend the home inspection with the inspector to ask questions and learn to spot issues with other properties you may purchase in the future.
Environmental inspections are critical, for properties whose owners and/or tenants may be purchasing environmentally harmful waste products. The property you intend to buy may have suffered environmental damage from previous use, which may affect your intended use.
On real estate properties, environmental appraisals is good to be put in place, checking during the raining season to be sure it is not a water log area.
Environmental investigation will indicate whether there are serious problems requiring remediation.
REAL ESTATE APPRAISALS
One of the most critical aspects of the real estate purchasing process, real estate appraisals will be a key determinant in any assessment of the property’s value. This is what the seller used to determine their price.
Trying to buy or invest in real estate, with this 6 tips you are sure to find out any loop holes any one is trying to sell to you. Good Luck.