Due Diligence In Real Estate: Know This To Avoid Scams

  • Author: Akhila Masapogu
  • 5 min read
  • October 7, 2020
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Due Diligence In Real Estate: Know This To Avoid Scams

Caveat emptor. It’s a Latin phrase that means “Let the buyer beware.” One of the risks of investing in rental property is that you are also purchasing the seller’s problem. Due diligence in real estate helps you avoid making a large financial mistake by learning as much as you can about the income property you’re buying before you buy.

Though Investing in Real Estate has become a lot easier lately, it still seems baffling to some first-time investors. Anyone for that matter can be intimidated by this process as it involves hard-earned money. Lack of awareness is a major reason that makes this process seem complicated. Investors doing their own groundwork through Due Diligence in Real Estate before investing in a property will help immensely to avoid any kind of risk or at least be prepared for it.

A good deal is only a deal that comes without any complications. Due diligence is a process of the thorough study of the property details, history, and previous transactions relating to the asset to avoid any unpleasant experiences further.

Real Estate Due Diligence helps in a complete evaluation of a property that provides the buyer with all the needed information about the asset. Due diligence also speeds up the process of buying an asset and assures the buyer about the reliability of the property. Due diligence report cross-checks the compatibility of the property with all the legal, environmental, and social laws. A thorough due diligence report from a reliable source is a basic requirement for investing in a real estate property.

And what is Commercial Real Estate Due Diligence?

Commercial real estate is a capital-rich investment opportunity in a fast-evolving industry. ‘Due diligence in real estate is the process of investigating all aspects of a CRE before the buyer signs on the dotted line.  This is an essential process to undertake to avoid any post-transaction surprises.

Commercial real estate investments are one of the biggest investments in a person’s life. The buyer needs to be sure about investing in a property that has a good background and is free of risks. A superior level of research is required to play safe and investigate potential risks. That is where ‘due diligence comes into the scene as a savior.

A little carelessness in commercial real estate investment often leads to a huge loss. So, Due diligence is cross-checking the commercial property in and out before investing. This process goes on for 2 months after submitting a token of money to the seller. The investor hires a team of experts to get everything about the property he is going to purchase. Cross-checking the commercial property through an expert’s eye ensures long-term benefits and omits any room for discrepancies.

What Exactly Is The Process Of Due Diligence In Real Estate?

If you’re planning to purchase a Real Estate property, you’ll have to examine the financial, operational, and legal histories of the property thoroughly along with an in-depth inspection of the interior and exterior of the property. And you’ll have to make sure that the property has been built following all the laws of the government and is legal, to avoid any kind of surprises that will land you at risk.

In a nutshell, due diligence entails investigating facts about the physical and financial condition of the property, as well as the area in which the property is located. Due diligence can be thought of as doing your homework both before you make an offer and after your contract is accepted.

If the property you are investing in is a rental property then all the details relating to previous tenants, lease structure, and rental transactions should be carefully evaluated. If the property is commercial then the focus is mainly on the physical and financial due diligence.

No matter what type of property you plan to invest in, don’t skip on due diligence.

  • Physical Due Diligence:

    Physical due diligence is an important step in due diligence. Especially for rental properties and commercial properties where the earnings from the property depend on its physical conditions. Physical due diligence entails inspecting the physical conditions of the property’s interior and exterior. At this stage, it is critical to examine and document environmental conditions, building integrity, and electrical, heating, and plumbing systems.

  • Financial Due-Diligence:

    A crucial due diligence step is to investigate the property’s transactional history and all the transactions that took place for the property to ensure that the property is not into any kind of litigation. Financial due diligence will prove the reliability of the property. Financial due diligence entails studying and verifying financial disclosures provided by the seller, such as taxes, income, and expenses.

  • Legal Due-Diligence:

    Legal due diligence entails investigating zoning issues, and code compliance. The property’s title report, Revenue records, and the encumbrance of the Title should be carefully examined and reported by a reliable property lawyer or any other third party. These reports will help you not pick up some random risky property that brings trouble.

  • Market Analysis:

    A market study to evaluate the future earnings from the property should be done by examining the similar properties’ location, demand, amenities, etc. Market analysis will help in evaluating the future demand of the property and thereby you can decide whether or not to invest in it.

  • Know Seller:

    Due diligence encompasses more than just the property being purchased. Before entering into a commercial real estate transaction, the seller’s standing, reputation, and track record should be thoroughly investigated and vetted. Not only may this indicate a less-than-trustworthy transacting partner, but the current owner’s (and even occupants’) reputation may also hurt future earnings. Before venturing to invest in Real estate property the track record and reputation of a seller should be investigated carefully. A seller with an excellent reputation is always more reliable and will have a positive impact on the future earnings of the property.

What is The Importance Of Due-Diligence In Real Estate?

Although the due diligence process is a little tedious and time-consuming this will affect the property for many years ahead. Due diligence will also help in speeding up the investment process and thereby save you from making costly mistakes as well. It also proves the reliability of your investment. While the process may be complicated, it will give you confidence in your investment and increase the chances of real estate investment success. For new investors who are skeptical about investing in real estate property, due diligence will help in gaining their trust.

Though Due diligence may not help in avoiding the risk involved in investing, it will at least help you avoid the risks that you cant afford.

If you discover a major flaw during due diligence, you have the option of walking away from the property if the seller is unable or unwilling to fix the problem. This is the point at which you can renegotiate the offer based on the information uncovered during due diligence. This is the benefit of doing your research and developing an excellent due diligence process: you will save time and money while feeling confident that your new asset will benefit your portfolio in the long run.

Can You Hire Real Estate Due DIlligence Experts?

These experts are commercial experts with titles such as engineers, interior designers, chartered accountants, lawyers, auditors, and investment gurus.

The investor can hire professionals through his personal network, internet, or a commercial real estate broker. A special note must be made about the knowledge, qualification, and work history of the professional. For example, a skin specialist cannot conduct heart surgery; a regular chartered accountant would not have the right skills in commercial real estate due diligence. Only a commercial, financial expert with work experience fits the role. A few pointers for finding such experts are given below:

  • Looking for A Personal Referral: The investor can use his circle of networks to find the referral of professionals who can carry out the series of investigations.

  • Surfing the Web: The investor can browse the internet to find contacts of good commercial experts. The internet stays a good place to check their profiles, previous works, ratings, and testimonials.

  • Reaching Out for a Commercial Real-Estate Broker: A commercial real estate broker can help the investor find commercial experts and recommend a contractor. A lot of time is saved on hiring a contractor since the contractor will have his own team of experts and look after the entire process.

Commercial real estate investment is an expensive affair, and due diligence saves the investor from risks, helps him establish a budget, and makes way for higher profits and value-add opportunities. Therefore, the investor cannot neglect due diligence in the investment procedure at any cost. Need help? Assetmonk is a secure platform that offers quality assets that undergo a stringent evaluation process. Only properties that undergo Due diligence can make it to our list of high-growth potential assets.

Real Estate Due Diligence FAQs:

The physical, internal, financial, legal, and transactional aspects of a property should be critically examined and investigated for the due-diligence process.

Due-diligence covers external, financial, and legal aspects relating to the property or the investment.

Due diligence checklist contains the mandatory aspects like the financial and legal, that need to be looked into for confirming the viability of the property or investment.

Due-diligence is of many types and based on the requirement and the type of property the concerned type of due diligence is done. Legal and Financial due-diligence are the two common types.

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