The third-party due diligence is the investigation that is carried out on the property, before the signing of the contract by the professionals hired by each of the parties. The third-party due diligence is generally carried out by the auditor, lawyer, or any private individual employed to do so takes necessary precautions, reviews, and analyzes the various documents performing calculations, purchasing insurance, performing inspections, walking the property, etc. It can also be called as the homework you do before entering into a real estate agreement.
A person will be looking for any form of damage in the property, any dues remaining on the property, the title deed, the competence of the person, law and regulations in relation to the construction, etc. during the due diligence period. Third-party due diligence is recommended as the professional is needed to identify hidden damages on the property.
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What are third party due diligence services?
Third-party Due diligence is a process undertaken by the parties by enabling professionals to carry out an investigation to discover any damage on the property. The damage can be physician, legal, or financial in nature. The various third party due diligence services that are made available are:
- The due diligence process can be a coordinated effort of multi-disciplinary bodies such as attorneys, accountants, financial advisors, realtors, etc. It is important that each of these members conduct a thorough investigation into the property before purchasing the same. The legal attorney can help in the analysis of the title of the property, the legal capacity of the person to transfer the property, and other legal matters concerning the transfer.
- Financial advisors and accountants play a great role in financing the property. Realtors can provide the buyer with the appraisal of the property which can help the buyer in deciding if the offer price is reasonable or not.
- Analysis of the property’s condition and the capital that needed to be invested in conducting the repairs. Private personnel that provides investigating services in real estate should enquire and check various damages in the property and their cost should also be evaluated.
- A lawyer is also important in reviewing the purchase, sale, and lease agreements that the buyer may enter into to avoid any form of fraud or misrepresentation from happening. He is also responsible to review the operating agreements, construction plans, and other contractual obligations that the buyer may enter into.
- An Auditors help may be sought to check if there is any form of dues pending on the property.
How do you conduct third party due diligence?
Third party due diligence can be done with the help of a professional as stated earlier. Due diligence needs to be conducted in a proper manner. Some of the main factors wherein third party due diligence should be exercised are:
- The title of the property.
- The legal capacity of the seller
- Nature of the owner’s right in the property, i.e if he has transferable rights vested in him.
- Ensure that all the tax dues are paid and there are no arrears at the time of purchase.
- Make sure that all the documents are intact and verified.
- Obtain an occupancy certificate and completion certificate without which the complete ownership of the property cannot be obtained. You may also be evicted in the absence of an occupancy certificate.
- Verify the name of the seller and buyer in the sales deed and that the property is not being mortgaged elsewhere.
- The various records of land and mutation.
All these things need to be considered during the due diligence period by the person or people appointed to do so.
What do you look for during third party due diligence?
The buyer while conducting third party due diligence, will be looking forward to analyzing various legal, financial, and other related details. A due diligence period shall last for a period of 10-30 days in which the buyer will be given enough time to collect and analyze the various documents. The appointment of a lawyer and accountant will be useful as it can help eliminate misinterpretation and overlooking.
Some of the major lookouts while conducting third party due diligence are:
- The legal and financial records of the property.
- If the property is a commercial property, then the record of income that could be generated from the property.
- The details of the seller such as his means of possession such as inheritance purchased, or other. This is to avoid any further dispute in the property.
- The condition of the property, the amount of damage, the chances of appraisal, and the cost of doing both.
- The dues on the property such as property tax, rent mortgage loan, etc. are paid in full by the seller before the possession of the property is handed over and the deal is finalized.
- In cases of financing through financial institutions, their appraisal of the property will also help you determine if the offer price is reasonable or not.
What is the third party due diligence fee?
Due diligence is a process wherein the buyer is afforded an opportunity to evaluate the property. The offer and purchase deed will contain a period mentioned within which the investigation and reviewing procedures need to be made. Apart from the time period, there is also a due diligence fee that is fixed. Due diligence fee is a fee that is negotiable and non-refundable that is made by the buyer to the seller in exchange for the negotiated due diligence period.
The buyer can terminate the right to contract any time during the due diligence period and on account of the seller committing any type of fraud or breach of the contract the due diligence fee needs to be returned to the buyer by the seller.
Who does the third party due diligence?
One of the most efficient ways of carrying out a due diligence process is to appoint professionals to do the task for you. Some of these professionals include:
A legal counsel is an indispensable professional for carrying out the sales transaction and the due diligence process. A real estate lawyer plays a vital role in the verification of various documents provided by the seller. An attorney dealing with the due diligence process is expected to verify the title deed and form a title report showing the various owners of the property. He is also responsible to cross-check if the owner is competent under Section 11 of the Indian Contract Act 1872, to make the transaction. The duty to check the authority that the owner has in the property and ensuring that he has a transferable interest in the property also lies with the lawyer of the property.
The buyer’s legal attorney is also responsible to draft the sales deed for registration under Section 17 of the Indian Registration Act 1908. They also play a vital role in verifying if the construction works on the property is carried out in accordance with the law and the approved plan.
Valuation adviser or relators:
The role of a valuation adviser is generally carried out by the real estate agents. They carry out the valuation of the property after considering the various damages on the property, the facilities provided, and the locality in which the property is situated. It is important that the valuation of the property is done to ensure that you are not paying any excess amount for the property.
The real estate agents are also important in carrying out the third party due diligence process as they inspect the property for any damages and create reports showing the various expenses you may incur. They also help in checking if there are any tax bills or any dues pending on the property along with the lawyers.
In cases of financing a property through the bank, an inspection is carried out by them before giving out the loans. They require you to submit the link documents as well as the encumbrance certificate along with other documents to verify that the property has not been mortgaged with someone else. Bankers also have their own set of lawyers that verifies the documents submitted by the buyer. In some cases, the banks value the property at a very low rate, and in such circumstances, the buyer has options like self-financing, seller financing or to withdraw from the purchase agreement.
He can also negotiate to reduce the price of the property using the valuation report provided by the bank. If he is of the opinion that the appraisal is wrong, then he can challenge the appraisal or hire someone else to evaluate the property.
Who pays third party due diligence?
The cost of undergoing the third party due diligence depends on the scope, duration, and complexity of the property. The cost of conducting the third party due diligence is normally justifiable by comparing it to the benefit it provides to the buyer than the loss he may incur on the contrary. The cost of conducting the third party due diligence can be negotiated between the buyer and the seller. Normally the cost of each party’s due diligence team is borne by the respective party.
Summing up, it is to be stated that third party due diligence is a process that is recommended to be carried on since it enables a person to inspect the property that he is willing to purchase. The third party due diligence services can be provided by lawyers, accountants, financial advisors, etc. They help you discover any legal, physical, or financial defect in the property. The third party due diligence time and a fee that is negotiated and fixed.