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.

Share on facebook
Share on twitter
Share on linkedin
due diligence

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.

Related Articles

istockphoto 1313421433 612x612 1

Pradhan Mantri Kisan Samman Nidhi Yojana

What is the Pradhan Mantri Kisan Samman Nidhi Yojana? The Pradhan Mantri Kisan Samman Nidhi Yojana is a plan initiated by the Indian government. It gives income help of as much as Rs. 6000/- annually to all marginal and small farmers. Families of land-owning farmers receive an Rs. 6000/-  cash advantage a year under the Pradhan Mantri Kisan Samman Nidhi Yojana plan. This amount will get paid Rs. 2000/- in 3 equal payments per 4 months. Also, read Saving Schemes in India. The Motive of the Pradhan Mantri Kisan Samman Nidhi Yojana? As we all know, agriculture is the backbone in the Indian economy. So, farmers are an important part of society. But, the economy has socioeconomic gaps between the urban areas with rural areas. So, farmers battle with long-term profitability. This problem has afflicted the majority of India’s people since its freedom. The state and federal governments have worked to solve this challenge. They have also introduced a variety…

Read more
istockphoto 951524746 612x612 1

Post Office Time Deposit

So, what is the Post Office Time Deposit Scheme? India Post provides the post office time deposit as a modest savings program for Indians. Post Office Time Deposit Scheme is a savings account investment provided by India Post. This program gets intended for depositors who desire to make a one-time deposit with an FD of 5-year which is a tax advantage. With a few exceptions, it is identical to a bank fixed deposit. People can create a post office time deposit account by approaching their closest post office or by utilizing India Post’s official app or website. India Post has been in existence since 1854. It is the most globally disseminated postal network, with over 1.55 lakh offices spread over India. Majorly known for mail delivery, India Post also offers these services: Small savings schemes. Postal Life Insurance and Rural Postal Life Insurance Instant money order E-money order. Mutual funds. Services for money transfer Also read Post Office Investments –…

Read more
istockphoto 1364622197 612x612 1

PPF Vs SSY

PPF Vs SSY: What is the difference between the two? Sukanya Samriddhi Yojana Account (SSY) and Public Provident Fund (PPF) are the safest investments. These are accessible to those desiring significant financial development with a low-risk component. So, if you wish to invest in any or both of these schemes, you would investigate and check. Financial objectives, risk tolerance, rate of interest, and versatility should all get addressed. Read SSY – Sukanya Samriddhi Yojana Benefits & Interest Rates. PPF Vs SSY PPF and SSY are solid investment options, although they differ in important ways. The Sukanya Samriddhi Yojana is a female child welfare plan. It helps to safeguard a girl child’s future. But, the PPF is a program that enables depositors to receive zero-tax interest. In India, the Public Provident Fund (PPF) plan provides a long-term investing choice. It provides high profits while also giving tax deductions to the investor. A PPF account may get created in any private or…

Read more
Small Savings Schemes

Small Savings Schemes

Small savings schemes are an excellent way to save money. They offer a good rate of interest and can be used as an alternative form of collateral for investments, bonds, and property. The following schemes are available throughout the country and are some of the most popular ones that you can consider: Post Office Time Deposit Scheme The Post Office Time Deposit Scheme (POSTD) is a small savings scheme launched by the Government of India to provide investment opportunities in the secondary market. The scheme was launched on 15th September, 2015. This scheme is popular in rural as well as remote corners of the country, where the people have limited access to other financial products or alternative investments. The Ministry of Finance sets the interest rates for this scheme based on the performance of government securities, which is generally spread across the yields of the government sector. For 2022, the rates of interest are 5.5%, 5.7%, 5.8%, and 6.7% for…

Read more
istockphoto 1033711098 612x612 1

UAN Helpdesk

What is the UAN helpdesk for PF account holders? UAN is a 12-digit Universal Account Number that is assigned to every PF account holder at the time of joining the first job. The PF number when allocated, is used for each organization through the use of UAN. The new PF identification number that the person is associated with is his UAN in each new company of which an employee is a part. UAN can be described as a code that is used to identify several PF account IDs for an individual participant. It serves as an umbrella for multiple PF IDs assigned to individuals by various organizations. Also read UAN Registration & Activation Process Online. What exactly is UAN Helpdesk? The Employee’s Provident Fund Organization, India has a separate helpdesk online for (Universal Account Number) UAN-related issues and complaints. Users can access the helpdesk online and resolve their issues on their own or contact the executive offline. Employees can also…

Read more
child saving scheme

Child Saving Schemes

A child is the most precious thing in your life, and it’s important that you take care of them. However, it can be hard to know how much money you should save for their future education, health, and insurance needs. There are many different types of child saving schemes available for parents who want to safeguard their children from financial difficulties later in life. Here are some examples: Sukanya Samriddhi Scheme The Sukanya Samriddhi Yojana is a child saving scheme specially made for girl children. It was launched by Prime Minister Narendra Modi on January 22, 2015. The objective of this scheme is to promote the financial inclusion of girls in India by incentivizing them to save money through the Sukanya Samriddhi account. The interest rate ordered by this scheme is 7.6% per annum, and the minimum and maximum investment amounts are ₹250 and ₹1.5 lakh per annum respectively. Also, the maturity period of the Sukanya Samriddhi Scheme depends on…

Read more