What is Due Diligence in real estate investment?
Due Diligence is a check that is conducted before any significant deal. It allows one to ensure the legal purity of the transaction and make an informed decision on it.
When it comes to real estate, a buyer needs to learn beforehand whether the object is suitable for investment and won’t bring problems like expensive repairs, low demand and profitability or issues with local authorities after the deal.
The check includes an evaluation of risks, calculation and investigation of the deal’s legitimacy.
Usually, the research is done before making the offer, and the primary Due Diligence is conducted after the offer and before closing the deal. The buyer usually has 1—5 weeks to make all necessary investigations, depending on their agreement with the seller.
Physical inspection of a property
A buyer wants to ensure that the property has a good physical condition and a comfortable environment.
First, the buyer pays attention to the parameters that can be evaluated when viewing the property: layout, interior and exterior decoration condition, yard and the area in which the object is located. And when the offer is made, it’s time for a deeper inspection.
Real estate physical condition check includes the following:
- A general inspection that covers interior and exterior finishing, structural items, other utilities and mechanical systems.
- Checking the outside items like sidewalks, drains, and driveways.
- Inspection on whether the housing suffers from insects, and whether the finishing materials are safe.
The inspection shows whether there are leaks, cracks, mould or other troubles. Some of them may be fixed before the deal — ask the seller if they can do it. And if there is a lot to make, get repair offers that may help you reduce the price.
Also, it’s essential to overview the nearby area:
- Check whether all necessary infrastructure objects are nearby, like shops, restaurants, schools and medical facilities.
- What about the environment? Learn whether the building may suffer from a flood or humidity and whether it is cold in winter in the chosen area. To do it, check the climate and geographical conditions in the particular area. These facts will help to decide whether additional insurance or repair may be needed.
- Look if there are land plots nearby that can be developed. If there are some, check what kinds of buildings can be constructed there and ask for a building plan from a local land department if possible.
Also, an investor can talk to neighbours to learn whether the area is safe and comfortable to live in, check the local crime rates and visit the area several times a week.
Financial Due Diligence in real estate investment
If an investor buys real estate to rent it out, they need to find out the estimated profitability. Also, additional costs like maintenance and taxes are essential when making a final decision.
The financial Due Diligence checklist includes the following:
- Real estate valuation by a certified appraiser. It shows whether the property’s price is overpriced. Also, it may be crucial if you buy a property to apply for residency or citizenship by investment. For example, in Turkey, the price in the appraisal and the contract must be the same if the purchase is an investment to apply for citizenship.
- Calculating fees and taxes when buying and owning real estate.
- Evaluation of maintenance costs, from electricity bills to payments for the internet.
- Evaluation of repairing and decoration costs.
- Asking the seller for evidence of no debts on taxes, mortgage or utility bills.
- Searching for the prices for rent of similar properties in the chosen area to calculate profitability.
This data lets buyers decide whether the cost and future income ratio suit them.
Legal Due Diligence in real estate investment
Finally, a buyer checks the legal purity of the transaction. This is important because some problems with documents can lead to fines, cancellation of the sale and purchase deal and other consequences.
What to check before signing a contract:
- Title documents. Learn who owns the property and does everyone agree with the deals.
- Encumbrances, like mortgage or inheritance.
- Renovations. If there were any changes like the demolition of walls, glazing of balconies or relocating a bathroom, they must be agreed upon with local authorities.
- All necessary permissions in case of a property under construction.
- Rules for renting out the properties: restrictions, need to get additional permission or buy insurance.
Some countries limit foreigners’ opportunities when buying or renting out real estate. It may cause additional expenses and the need to choose a property in a particular area. For example, in Malta, non-EU nationals can buy properties for rent out without restrictions only in Special Designated Areas. Outside the SDAs, a foreigner can buy a property only after getting a special AIP permit with a fee of €233, and the property can’t be rented out.
In addition, if an investor buys real estate to obtain residency or citizenship, the property must comply with the program’s rules. Otherwise, an expensive purchase won’t help an applicant to acquire the desired status.
Properties in countries with residency or citizenship by investment programs
What to do if you find issues: a property buyer’s rights
If an investor finds out facts they don’t like about the property, they have three ways of solving the problem: refuse to conclude the deal, fix the flaws themselves or ask the seller to do it.
If the seller is ready to solve the issues, an amendment with all the agreements must be added to the contract.
Some issues may be impossible for the seller to solve, like severe construction defects or having a noisy bar nearby. In such cases, a buyer decides whether to purchase the property regarding those flaws or find another object to buy.
Reasons to turn to an agent to buy a property abroad
Citizenship and residency by investment programs usually allow purchasing real estate for participation. Some of them require the obligatory assistance of an agent, and some don’t, but it may be hard to buy real estate abroad without professional support.
Here is why turning to an experienced agent when purchasing real estate may be a good idea.
All-in service. If an investor buys real estate abroad by themselves, they need to spend time and money on the following:
- searching for a fit-and-proper object;
- contacting local realtors, advocates and notaries;
- conducting Due Diligence before signing a deal;
- getting a tax number;
- opening a bank account, etc.
Investors can delegate this work to get a high-quality result effortlessly if they turn to an agent. Real estate professionals and lawyers conduct their Due Diligence, prepare documents for the deal and help the investor open a bank account and get a tax number if necessary.
Relatively fast purchasing process. Immigrant Invest real estate professionals and lawyers check properties that investors wish to buy and help conclude deals. Also, we offer our clients pre-checked real estate and help them choose objects that suit their goals and budget.
We verify the properties beforehand, so the clients don’t need to wait when Due Diligence ends. This fastens the conclusion of the deals.
Experience in foreign markets. Professional acquaintances and knowledge of a particular real estate market are crucial when it comes to purchasing properties overseas.
We have offices in six countries and years of experience in several jurisdictions. Our lawyers know the peculiarities of real estate transactions in countries where our clients get residency or citizenship, so the deals go through successfully.
Sometimes I hear that purchasing real estate in some countries is a piece of cake. But attractive offers on real estate selling websites and amiable managers don’t guarantee a safe and legal transaction.
For example, in Greece, resale properties quite often have encumbrance. Also, an object with several owners is a common situation. I’ve heard about a case: when it came to the deal, it turned out that an apartment had about 30 owners, and half of them were against the transaction, so it was over — the buyer just spent time and money preparing for the deal.
Real Estate Chief Operations Officer, RICS certified professional
Compliance with the conditions for obtaining citizenship or residency. Investors who purchase real estate to participate in citizenship or residency by investment programs need to ensure that the properties are suitable.
In some countries, like Antigua and Barbuda, Dominica, Grenada, St Lucia and St Kitts and Nevis, applicants choose objects to invest in from the ones pre-approved by the government. And licensed agent’s assistance is obligatory: the law requires investors to turn to agents to apply for citizenship.
In other countries, like Portugal or Turkey, the governments don’t limit the investors’ choice by providing applicants with lists of approved properties. They don’t oblige investors to turn to licensed agents. But there are some rules: for example, in Portugal, investors can’t buy residential properties in Lisbon, Porto and most mainland coastal regions to apply for a Golden Visa. And in every country, a buyer should regard the market’s peculiarities.
In Turkey, only the evaluated cost of a property counts when an investor applies for citizenship. And this value may be lower than the one in the sale and purchase contract.
The citizenship-by-investment program requires a real estate investment of at least $400,000. Sometimes investors buy villas or apartments for this or a higher price, but their applications are denied because of insufficient investment. To apply again, they buy other properties to comply with the rules.
Real Estate Chief Operations Officer, RICS certified professional
If an investor turns to Immigrant Invest to get second citizenship or a residence permit, we offer them objects that suit all the programs’ requirements.
Detailed data analysis. Immigrant Invest provides investors with detailed descriptions of the properties, starting from locations and nearby infrastructure and ending with estimated profitability.
We analyse the data from the leading real estate brokerage companies to find out whether purchasing a property in certain areas is a good investment and what is the profitability of certain types of real estate. Our clients get reliable and up-to-date information to make informed decisions.
Real estate Due Diligence: a checklist
- Due Diligence in real estate investment is a check conducted before the deal. It’s like a buyer’s “homework” before deciding on the purchase.
- A thorough inspection allows the buyer to ensure that the property is in good condition and that the transaction is legal. Also, revealed flaws may help an investor negotiate a lower price.
- An investor needs to check whether the property is in good physical condition: it has no severe construction flaws, dangerous materials in finishing or insects. Also, it’s essential to overview the nearby area.
- Financial Due Diligence of real estate includes property appraisal, calculating the additional costs like taxes, fees and maintenance, and evaluating the estimated profitability. Also, one needs to ensure that the previous owner has no debts on taxes, mortgage or utility bills.
- Legal Due Diligence includes checking title documents, encumbrances, renovations, permissions and local legislation on purchasing and renting out properties.
- A buyer can ask a seller to fix some flaws. If they agree, they add an amendment to the sale and purchase contract.
- If you purchase a property abroad, it may be more convenient and safe to turn to an experienced agent familiar with the local real estate market. And assistance is even more helpful in the case of getting citizenship or residency by investment: a mistake can cost an investor a status.
Frequently asked questions
It is a check conducted before concluding a deal. A buyer checks whether the object is suitable for investment and regards the legal purity of the transaction.
Making a safe and profitable investment is the purpose of real estate Due Diligence. And in the case of purchasing real estate under citizenship or residency by investment programs, it’s also necessary to check if the property complies with the requirements.
The check allows the buyer to learn if the property is suitable for investment and won’t bring additional costs or issues like low demand, profitability or fines from local authorities after the deal.
During the real estate Due Diligence, the physical condition of the property and financial and legal issues are reviewed.
An investor needs to order a general inspection to check the property’s physical condition. Also, it may be useful to talk to neighbours and explore the area to check whether it is safe and comfortable to live in.
Another step is financial Due Diligence. A buyer requests a professional appraisal, calculates all additional costs like taxes, fees, repairing and utilities, and evaluates the property’s profitability.
Also, it’s essential to ensure that the transaction is legal. Check title documents, encumbrances, renovations, all necessary permissions and local legislation on purchasing and renting out real estate.
Turning to an experienced agent may be a good idea if you wish to delegate these tasks.
Ensure that the property complies with the rules of the investment migration program.
The requirements depend on the country. For example, residential real estate in most mainland coastal areas is unsuitable for obtaining a Golden Visa in Portugal. And in Turkey, the price in the contract must match the one in the appraisal so that an investor can apply for citizenship.
