What is the Due Diligence Process in Real Estate Transactions?

What is due diligence, what is it for, and what difficulties will this procedure help to warn you about when concluding real estate transactions? In this article, we will try to answer these questions.

Legal aspects of preparing due diligence when purchasing real estate

If you decide to buy or invest in a real estate object to create a business or purchase a ready-made business, you should order due diligence of the object you like before making a purchase. This will help to avoid unforeseen circumstances and make the transaction safe and profitable for you.

The purpose of due diligence is to identify legal risks and potential problems that may arise if an investor purchases specific property or corporate rights, as well as to determine ways to minimize them. Due diligence is a comprehensive check of the object before the transaction. The procedure includes several examinations:

  • legal
  • financial
  • tax
  • technical
  • and, of course, conducting an investment risk assessment.

As a rule, due-deal is carried out after the conclusion of a preliminary agreement or before signing a contract of sale. If the inspection reveals defects not specified by the seller, the buyer can take the deposit and withdraw from the transaction.

Before concluding transactions for the sale and purchase of single property complexes, including real estate and land, and vacant land plots of a significant area for development, it is necessary to conduct full due diligence of real estate rights. If the rights to land and real estate are acquired by purchasing the corporate rights of the seller's legal entity, a full audit of its activities is carried out.

What are the risks involved in buying real estate?

Any seller, since he is parting with his property, is interested in selling it quickly and as profitably as possible. Therefore, in the announcement of the sale, he will focus on the advantages of the object and possibly hush up many of the "nuances". An unscrupulous seller may remain silent about them until the conclusion and registration of the contract.

As a result, after some time, a new property may present you with difficulties that you did not even know about. For example, it might turn out that:

  • the object is claimed by third parties who are ready to challenge your rights in court;
  • the transaction was concluded without the consent of the person whose signature on the sales contract is required by law;
  • the object was built in violation of the law or illegal redevelopment took place;
  • the purchased property has encumbrances or restrictions on the rights of use;
  • a huge debt on utility bills, taxes, or other debts "hangs" at the facility;
  • the business is far from being as promising in terms of income and payback as the former owner claimed;
  • the seller had no rights to the property at all, which he managed to sell.

Each of these facts is a good reason to refuse a deal, and for adventurers – a reason to significantly bring down the price. Therefore, you should not rely on the honesty of the seller, it is better to check the object for the presence of all these "nuances".

Besides, in practice, it is difficult to independently understand the legal, financial, technical documentation of an unfamiliar enterprise. Therefore, prudent buyers involve professionals: appraisers, notaries, lawyers, tax consultants, and other highly specialized experts.