One of the major factors considered by the buyer while purchasing a property includes various benefits they may receive from the property and the profit that they would make while selling the property. Sometimes the purchase process is carried out in a rush which leads to a lot of issues such as fraud, misrepresentation, over or underestimation, and manipulations. Thus it is recommended that the buyers should conduct physical due diligence by analyzing various factors such as cash flow, occupied place, profitability, and the physical condition of the building that you are purchasing and its impact on your financial position.
While considering the physical appearance of the building, it is also important that you consider the age of the building and the current performance along with the locality and accessibility to the public services and other basic requirements such as access to roads, etc. Being informed of all these conditions and factors will help you to formulate an informed decision about the purchase transaction.
Physical due diligence is something that most of the buyers turn a blind spot towards. The reason for this could be that it is a lengthy procedure or maybe because it can cost you an amount. However, the physical due diligence must be carried out to avoid any form of a legal dispute in the future.
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Why is it important to carry out physical due diligence?
Many of the buyers carry out the physical inspections for the formalities sake and do not generally engage in them with great care and caution. The process of physical due diligence or physical inspection includes reviewing your selected property and the various specific factors attached to the same.
Physical due diligence can be exercised to check if the property suffers from any form of defect which could be a physical or legal defect such as a defect in title. The various amenities and their functioning can also be checked and ensure that there is no retrain in availing these benefits. If there is any form of defect in the property, you may also want to consider the amount that you may incur in repairing the same.
The information that is collected in the process can be used to plan and calculate the long-term maintenance of the property. It also has the power to impact the purchase price of the property. Thus it is to be concluded that the conducting of the physical due diligence can help in making an informed decision regarding the transaction.
How do you carry out the physical due diligence process?
You may carry out the due diligence process in the following manner:
It is important to engage a professional inspector or a consultant who will be able to provide you a professional and unbiased opinion of the property’s condition. They will help you in evaluating the expenditure you will incur in the maintenance of the physical structure, the changes or improvements that need to be brought in, etc. the third-party inspectors also assist as they also ensure that the improvements that are made in property are satisfactory.
The third-party engaged in conducting the physical due diligence process includes the real estate agents, lawyers, professional inspectors, etc. Apart from checking for damages in the property and its effect on the cost, the third party is also responsible to ensure that there are no liabilities on the property such a tax liabilities or utility bill that requires to be paid. A thorough building inspection including, Structural, Mechanical, Electrical, Architectural or Interiors, Building Envelope & Roof Condition needs to be considered.
Acquiring a title report is a very important factor in the carrying out of physical due diligence as it provides the person with the list of past ownerships along with the various encumbrances that are levied against the property. Acquiring a title report is to ensure that the seller has a clear and marketable title in the property and that he can carry out the sales transaction.
The documents should be cross-checked and verified with the registering authorities to avoid engaging in any fraudulent or illegal transfer. It also includes all access rights, setbacks, zoning designations, liens, zoning restrictions, encroachments, and deed. The title report will also enable the buyer to know if anybody is having elementary rights in the property or if there are restrictions to the full enjoyment of the property. The third-party should also ensure that there is a conversion certificate if the property has been historically used for agricultural purposes.
Appraisal and Property Condition Report:
The appraisal report is an important document that is required to be obtained for availing financing through a financial institution such as banks. One of the major factors that affect the valuation of the property is the physical condition of the property and also the past operations of the property. The banks inspect the property to determine the amount that can be provided as a loan.
The inspection report along with your financial position is then compared to check your ability to repay the loan amount before approval of your loan. However the appraisal and valuation of the property must be done properly as on the failure to do, it can affect your transaction. The person can also apply for a revaluation of the property with the inspector if he thinks that the valuation of the property is not carried out diligently.
Thus it is to be concluded that physical due diligence is the process of physically analyzing the various drawbacks of the property and comparing it to the price quoted on the property. The physical due diligence needs to carry out in Structural, Mechanical, Electrical, Architectural, or Interiors aspects of the property along with the Roof Condition and other financial aspects such as tax burden, encumbrances, utility bills, etc. It is advised in the best interest of the buyer that they engage an unbiased professional person such as a real estate agent or lawyer to carry out the due diligence process to ensure the best results are obtained.