Real estate due diligence

Mar, 04 2020

Real estate due diligence is a procedure which provides a comprehensive property check and is carried out before it’s buying or renting. Under this procedure legal, financial, tax, construction and technical examinations can be carried out, potential risks are assessed and identified when concluding a specific transaction with a real estate object.

If a real estate due diligence is conducted successfully and qualitatively, the attractiveness of a transaction object can be increased for buyers or investors and the risks when purchasing of such real estate by buyers can be reduced.

Nature and objectives of real estate due diligence

The procedure of complex and comprehensive analysis of real estate is used by companies, private entrepreneurs and individuals with the intention of investing in a particular object. As a rule, lawyers, financial auditors, appraisers and construction experts are involved in real estate due diligence.

The objectives of real estate due diligence are the following:

  • Establishment the fact of presence or absence of an encumbrance of an object (lease, sublease, arrest, etc.);
  • Analysis of initial-permissive and technical documentation for the property (building permit, commissioning certificate of the property, etc.);
  • Checking the documentary and functional status of the engineering structures of the facility;
  • Checking of the object’s compliance with urban planning, construction and fire safety standards and rules;
  • Identification the history of real estate rights’ transfer;
  • Assessment of the object’s value and forecasting its value’s changes in future;
  • Determination of claim activity’s presence of the object’s owner.

The application of real estate due diligence is mainly used by potential developers. For example, a comprehensive land’s audit is necessary for the investor if he wants to use it for further construction and subsequent sale or sublease.

The main stages of real estate due diligence

Checking the property for possible risks, its assessment and documentation analysis or real estate due diligence usually consists of the following steps:

1) Verification of «encumbrances» of the property owners

This stage is extremely important in the process of real estate due diligence, since it allows you to establish the purity of the property and to ensure in the absence of legal restrictions related to this object.

So, it is established whether the property is not the subject of common ownership, whether it is on lease, mortgage, pledge or under arrest. When examining a land plot, its legal status is also checking, as well as intended use permit. As a rule, documents confirming ownership are studied – extracts from Unified State Register of Taxpayers and land lease agreements.

2) Analysis of technical and permissive documentation of the facility

Another stage of real estate audit is checking the availability of construction permits, commissioning certificates. This stage is especially important for due diligence of constructions in progress, as often during the construction or reconstruction process, legal entities do not comply with civil law requirements regarding permits. Such actions can lead to adverse consequences up to the demolition of such real estate. In case if all the necessary permits are available, the value of the building or structure as a potential object of the transaction increases.

In addition to these stages, specialists also carry out other actions implementing complete and thorough real estate due diligence procedure. It is a qualitatively conducted audit that will help in identifying and determining the risks while deal closing, as well as assess the feasibility of its conclusion with a particular contrator.

VALEN will help you to carry out real estate due diligence procedure quickly, identify all potential risks of a particular real estate object or ensure in its absence, help in negotiations with contractors, Rosreestr and other government agencies.

We specialize in due diligence procedures in the sphere of tax, accounting and real estate. You can contact our lawyers using any available method of communication and visit VALEN office by appointing a meeting via phone +7 (495) 7-888-096