What value does a real estate Due Diligence bring to the investor?
Due diligence is a verification process of possible contingencies and risks of a certain asset or company in operation. Is an essential precaution to avoid the frustration of the investor’s acquisition profitability expectations. In addition, as we know from self-experience at Devesa & Calvo Abogados, sometimes it is the seller himself who previously commissions professionals a due diligence report in order to give investors greater guarantees of what is intended to be conveyed, that the asset in question is “clean”.
The scope of a due diligence report can be as broad and intense as required and will depend on the type of asset/s to be acquired. Thereby, it can cover legal, labour, administrative-contentious, fiscal and/or financial perspectives. At this point, what is verified in real estate due diligence?
– Concordance between the property’s description in the Land Registry and the physical reality.
– Cadastral ownership.
– State of the property charges in the Land Registry (mortgages, usufructs, easements, seizure annotations, etc.).
– If the property is free of tenants or occupants.
– Operation’s tax cost, taking the real value of the real estate for transfer purposes as a reference.
– Agreements of the Community of Owners or restrictions in its Statutes that may affect the value of the property.
– The non-existence of town planning infringements or sanctioning procedures that could have an impact on the asset valuation.
– Possible contingencies in matters of special administrative rights (possible affections of Coasts, Public Hydraulic Domain, Roads, etc.).
Therefore, the preparation advantages of the elaboration of a real estate Due Diligence report by expert lawyers, provides the investor with the following advantages:
– Legal security in the transaction, ensuring that there are no contingencies or risks that considerably reduce the property’s value that is being bought or that will be able to be assigned to the property (e.g. a plot of land) for the purpose for which it was intended within the business plan.
– Significant savings from possible future administrative penalties or lawsuits to enforce every owned right to the purchased property against third parties.
– Deposits’ losses or down payments paid in advance as a result of not having foreseen certain conditions before handing them over (e.g. the granting of a certain permit or licence, necessary for the activity to be carried out). Therefore, it is always advisable that the due diligence takes place before the signing of the earnest money contract (where generally a a 10% of the property’s value is already advanced).
– Avoid surcharges and penalties in case of possible tax reviews, with the corresponding taxes, if the taxation applied to the property’s acquisition has not been the one which corresponds.
– Contingencies detection that affect the property to be acquired, and which, although they are already discounted from the purchase price because they have been revealed, the proposed rectification once the property has been acquired can substantially increase its value (e.g. an urban planning infringement that can be legalised before the corresponding Administration).
Finally, it is important to emphasise that in addition to having a good real estate Due Diligence report carried out by professionals with proven experience in this type of process, it is essential to configure the established guarantees when the purchase is signed (liability and guarantee clauses, guarantees, deferred prices, deposits of part of the price that are released as time goes by without any contingencies becoming apparent, deferred prices and other types of legal guarantees that are common in commercial practice).
Founding partner – CEO of Devesa & Calvo Abogados