10 Questions About Real Estate Due Diligence

5 April, 2024
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Real Estate
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Neus Vallara

!Due Diligence

Conducting a real estate due diligence is highly advisable before transferring or acquiring a property, as it allows us to assess the real estate transaction comprehensively. In this article, we answer 10 questions about this review process:

What is Real Estate Due Diligence?

It is an exhaustive analysis of the legal and fiscal situation of a property, which provides us with a legal evaluation of the property transmission operation, and from which a result report is obtained detailing contingencies and recommendations for the transmission or acquisition of a property.

What should be considered in Real Estate Due Diligence?

Firstly, it is important to know who the recipient is and their position in the transaction, in order to determine the points of interest or risks that may affect each of the parties.

Secondly, it is also crucial to understand the legal transaction that will be carried out with the property, in order to conduct the due diligence taking into account the risks inherent to each type of transmission.

When is it advisable to conduct Due Diligence?

It is considered essential before acquiring a property in order to understand its condition and legal status, as it can determine the acquisition and its conditions.

It is also recommended before transferring a property as it allows for the identification of contingencies and addressing them before putting the property on the market.

Consequently, Due Diligence may be of interest to both sellers and buyers.

What are the advantages of Due Diligence?

Due Diligence provides us with a comprehensive view of the risks, resulting in greater legal certainty in the acquisition. Additionally, it does not entail a high cost relative to the investment and facilitates the analysis of its profitability. However, the most significant aspect is that it can determine the negotiation between the parties, including the pricing, assumption of responsibilities, etc.

For which properties can Due Diligence be conducted?

Due Diligence can be conducted on all types of properties: residential buildings, commercial premises, land, industrial warehouses, hotels, shopping centers, parking spaces, storage rooms, etc.

It can also be conducted on surface rights, air rights, or even regarding administrative concessions or rights to urban development.

How is the documentation obtained to conduct Due Diligence?

It is rare that all the documentation is available at the start of Due Diligence. Therefore, during the process, additional information and documentation must be gathered from both the selling and buying parties. It is essential for the seller, who is familiar with the property under study, to cooperate. Meanwhile, the buyer should provide all documentation they have obtained before commissioning the report.

The documentation provided by the parties should be supplemented through inquiries to public administrations, such as property registries or municipalities, as well as to third parties such as Owners’ Communities or Compensation Boards.
What is the delivery time for Due Diligence?

We can state that the ideal average delivery time for conducting Due Diligence is around 3 weeks, although it all depends on the complexity, which may require a longer timeframe. On the other hand, the time frame can also be shorter if there is good cooperation from both parties.

What aspects are analyzed in Due Diligence?

These are the sections that a Due Diligence should include, although it can be adjusted to the specific requirements of the requesting party by adding or removing sections:

Situation of the parties.

Description of the properties.

Ownership title.

Urban situation.

Rights of third parties.

Lease and occupancy contracts.

Status of charges and encumbrances.

Community of owners.

Permits, authorizations, and licenses.

Environment.

Energy Efficiency Certificate (CEE), Technical Building Inspection (ITE), and insurance.

Contracts with third parties and employees.

Litigation.

Taxation (Property Tax and taxation).

What are the most relevant aspects of Due Diligence?

There are certain points that are crucial when making a decision regarding the potential acquisition or transmission of a property, so Due Diligence should conduct a thorough analysis of them. Firstly, the status of encumbrances is essential to determine the existence of current liens, outstanding mortgages, resolutive conditions, urban charges, etc.

Another crucial issue is the existing debts concerning the property, whether they result from the Community of Owners, Property Tax debts, or urban-related debts. All of them can entail direct or indirect liability for the new owner, so it is crucial to determine and analyze them thoroughly.

Furthermore, the existence of leases and the analysis of their duration, tenants’ rights to purchase options, or any litigation with them is also a crucial consideration, as it can affect the profitability of a property.

Finally, the urban situation of a plot of land should also be subject to special scrutiny.

What is the outcome of Due Diligence?

The outcome of Due Diligence is a report detailing the identified contingencies, meaning the risks to consider before making a decision regarding the acquisition. Additionally, recommendations are provided for each contingency to minimize the indicated risks.

If you have any doubts or need more information, you can contact the real estate law department of MES ABOGADOS at this link.

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