Due Diligence is a process of investigating the property before purchasing the same. It is carried out by the buyer of the property with the help of a lawyer and an accountant. Bankers are also included if the property needs to be financed through them. The main areas in which the due diligence process is carried out is the legal right of the seller in the property along with his competency to contract. The next main area of inspection is in regards to any damage that is not accounted for by the seller.
The inspectors also check through the financial obligation of the seller in relation to the property in order to protect the buyer from any form of financial loss. The bankers also evaluate the property before deciding on the amount to be given out as a loan. This is also called as the appraisal of the property.
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What are the common errors that may occur in the due diligence process?
The most common mistake that can happen while conducting a due diligence process are:
Improper valuing of the property:
This one of the most common mistakes that happen in the due diligence process. Bankers are responsible for evaluating the property in case of financing through the bank. In cases of a low appraisal, the banks lend out only a lesser amount and the seller can ask the buyer to furnish the remaining. On the failure of the buyer to furnish the same, the seller is in the legal position to terminate the sales agreement.
Trusting the seller to reveal any problems:
One of the main reasons of due diligence is to unveil the hidden. In some cases, the buyers tend to believe the seller with the information in relation to the damage. Unfortunately, this may prove to be costly in some cases as there are chances of irreparable damage in the property or there are chances of a costly repair that may be hidden from the buyer. Thus highlighting the importance of a professional third party to carry out the due diligence process.
Skipping on Research:
This can be one of the common mistakes of the buyer in the due diligence process. Since investing in real estate is a long term financial commitment, buyers tend to do things on their own to avoid any form of extra expense on the property. Sometimes the research works are carried on in a quick manner to avoid the excess cost that he may incur in extending the dates of his due diligence period.
As a result of this, no proper analysis can be made into factors such as the construction plans, layout plans, permission for utility, etc. If the property was agricultural land that has been converted for other purposes, the land clearance and zonal clearance certificates should be checked. Due diligence can cost you a little but it may be costlier to not carry out the process in the right manner.
Title issues, usage, and legal complications on the property:
The professional appointed for the due diligence process should analyze the title deed of the property by checking through the ownership of the property and if there exists any condition of using the property. For example, the buyer may be purchasing an agricultural property with the intention to convert it into a residential property. Thus in such circumstances, the lawyer of the buyer should check if there are conditions that prohibit such activity because if such conditions exist it may lead to legal complications in the future. The lawyer should also review the various easement rights of the property.
The professional should check if there are any obligations on the titleholder of the property such as access to his property by a third party in the exercise of this right of way, the titleholder being responsible to carry out the common area maintenance and expense obligations, etc.
Trusting the third party reports completely:
There are chances wherein a third party report can have some errors. Thus trusting the report completely and not exercising due diligence by the buyer is also one of the common errors of due diligence.
What can be done to avoid the common mistakes in the due diligence process?
Some of the ways to ensure that the common mistakes are not encountered in the due diligence process may include:
Hiring an experienced commercial broker or a real estate agent:
This can help in solving the issues in relation to the valuation of the property. They shall help in checking various factors associated with the price such as the sales competition in the current area and the availability of alternative property matching your taste in the market. They can also help in conducting a good assessment of the value of the property in a particular locality after analyzing the likewise sold properties.
Based on all these reports, a proper valuation or appraisal of the property can be made. In cases of a low appraisal, the sellers normally request the buyers to opt for challenging the report which is in the option of the buyer to go for or not. (read more http://assetscan.in/third-party-due-diligence/ )
Unidentified damages:
As stated earlier, some of the damages done on the property may not be identified easily. Thus this common mistake of not being able to evaluate the actual expense that you may incur in the process to put the property to its full use can be solved to a good level by appointing a professional who you can ask any specific question and receive a professional answer. Such damages hidden by the seller can be used as a tool for negotiating the price of the property before closing the deal.
Appointment of legal practitioner:
A lawyer’s presence in the real estate transaction is important not only to the extent that he drafts the sales deed or that he is responsible to check through the legal capacity of the seller, but he also plays an important role in ensuring and gathering the various documents that need to be checked before the closing of the deed such as the land clearance, zonal clearance, no-objection certificate, etc. A lawyer can also come handy in checking if the building is built in accordance with the legal requirements.
Other practices:
Buying some time for the carrying out of the due diligence process can also help in solving the issues relating to skimping research. Another best way to avoid any form of error in the due diligence process is also inclusive of understanding and verifying the identity of the seller and builder.
Conclusion
Summing up, it is to be stated that there are various errors that may occur in the due diligence process. Engaging professionals may help in the proper evaluation of the property and understanding the various defects associated with the property. 30 days period is always recommended as a standard time while 10 days is considered the minimum time required to carry out the due diligence process. Therefore it is recommended that the buyer prefers 30 days’ time period to conduct the due diligence process as it would give the buyer enough time to calculate the value of the property, examine the documents and check for damages.
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