DUE DILIGENCE IN REAL ESTATE

Given the quantum of money involved, it is financially suicidal to not conduct a complete due diligence before taking positions in Real Estate investments.The due diligence is important for both the sellers and buyers although more important for the buyers. It makes more sense to be thorough rather than either party taking the other on face value.

A minimum level of due diligence should be done before buying a Real Estate Asset. Although now RERA has been implemented but there still are transactions which are not covered under the ambit of RERA especially in the secondary market.

Buyer’s Due Diligence

Real Estate Consultant

  1. The first and foremost is to ensurethe property is RERA, if applicable, isregistered. This will ensure that the licenses have been completely obtained and the property is fit to be marketed.
  2. In case of the property not being covered under RERA, the buyer should ensure that the property is loanable. Hence the Agreement to Sell with the seller should mention that in the event of Banks denying loans on the property due to technical reasons/defects then the seller would be obligated to return the money with costs. A pertinent point here for the buyers is that even if one doesn’t need to, still they can avail a token loan. Then the banks will ensure that the paper trail is completed. By the same corollary, if there is an existing loan on the property, Home Loan/Land Loan/Commercial property loans etc, the property can be assumed to be comparatively safe.
  3. In case of the buyer not availing loans or the property not being under RERA, the buyer should ensure that the ownership document trail is complete and authentic. For this purpose, the buyers should employ an independent valuer/surveyor/advocate. They will be better off if they do not trust their broker and/or seller in this situation. When one does this exercise it essentially implies that the set of “Master Documents” i.e. paper trail of the last 30 years of the property, title search etc. should get completed.
  4. Speak to the seller (individual/builder) and get a copy of the Agreement to Sell, beforehand. It is very pertinent that the copy of Agreement to Sell is given a thorough read before signing the same. Hence a detailed read and vetting of the agreement to sell is advised and should be adhered to. If there are some contingent conditions then do get them included as applicable. Verbal agreements are as good as no agreements.
  5. Next checkpoint would be the development of the asset as per the license and plans. At times, a lot of developers and even individual sellers make alterations and/or additions to the buildings which are over and above the sanctioned plans. These changes if not regularized can make the conveyance of the property to the buyers defective. Hence a careful omscrutiny and assessment vis-à-vis the development plan would be very important. Deviations to the development plans should be regularized.
  6. Next is hidden encumbrances. An undisclosed loan/lien/mortgage on the property is an encumbrance against which a buyer should safeguard. The Buyer should take separate declarations/indemnities from the seller to this effect. If the buyer assesses a risk then some money from the consideration amount should be withheld for a certain period of time as indemnity cover.
  7. A lot of properties have litigation on them which are not publicly available. Hence, it is important to do a particular search of the legal jurisdiction to ascertain that the property is free from any litigation. This becomes even more pronounced in land deals and where the chain of ownership is not clearly established. At times even the sellers are not aware of such litigations on the property and hence this exercise can be done jointly by both the buyers and sellers.
  8. Some properties especially lands etc. have easement rights, right to passage etc. which are unalterable and hence impact the valuation, marketability and development plans. A very careful scrutiny of the documents and liaison with local authorities is important for completing this part of the due diligence. A lot of projects get stuck at a later stage when such deficient findings get known.
  9. If possible publish a public notice stating that the property is being purchased and any other claimant should come forward. The seller at the time of negotiations should be taken into confidence on the same and this exercise should be done jointly.
  10. As a conclusive step, a Real Asset should always be purchased with detailed physical visits and local area investigation. The buyer should make multiple visits on different days, times and meet as many people as possible in the local area to gain information about the property. This goes a very long way in the assessment of the quality of the property being purchased. No one knows a boy better than his neighbors.

Coming to due diligence by the seller. This is a topic which is not usually covered but is equally important.

Seller’s Due Diligence

The seller in a transaction is seeking “consideration amount” and hence his/her due diligence has to be centeredon that. For assessing the same the following should be considered.

Home Buying Decision

  1. The reputation of the buyer, especially if the buyer is a regular investor/trader. What is the track record of the buyer with respect to timely payments?
  2. Source of funds of the buyer. How is the buyer going to budget the purchase? Is it by its own funds? If yes, does the buyer already have the funds or is it contingent on some other sale or inheritance? If it is a loan does the buyer possesses the eligibility to raise such a loan?
  3. What is the reason for purchase? Is itself usage, is it an investment or is it for trading? The quality of intent and the propensity to pay is directly correlated to the aforesaid reasons. A buyer buying for self-usage has the minimum chances of default, a buyer for investment is a shade lower in terms of making the full payment, a trader/speculator would be most probable to default on payments? These things become more pronounced in a down market in the case of investor and/or trader/speculator.

These precautions, on the minimum side, would help the stakeholders make profitable decisions, reduce disputes and mitigate risks.Thus making the real estate transaction smoother.