Whether it’s commercial or residential real estate, purchasing real property is a large investment-one you don’t want to take lightly. Ultimately, you hope to turn a profit from the property, but whether you will actually do so, how much it will be, and whether you might inherit legal problems with the land are matters you’ll need to take into account. Adequate research—or due diligence-is key to making a wise real estate investment.
Preliminary Due Diligence
Before you even begin discussing a purchase contract, you will be best served with some preliminary research. If you can access title and current owner information early, that will help you in the long run. Once the due diligence process actually starts-i.e. when the contract is signed-you will be pressed for time. Therefore, learning as much as you can about the nature and profitability of the property beforehand will help everything go much more smoothly.
There are various documents you will need to examine to assess the property and make sure it will serve you. These documents include:
- Current tenant and rental information
- Zoning documents
- All current uses of the property
- Insurance documents, including current title insurance
- Special taxes or assessments
- Construction warranties
- Current land and improvement surveys
- Notices of pending legal action
- Notices of pending governmental action
- Property bills
These documents will be necessary for the actual due diligence process, and any preliminary research you can do should help you determine how likely the owner is to provide you with this data. In some cases, reluctance on the seller’s part to furnish this information could be a red flag in and of itself, so it’s important to keep that in mind.
Once you have the needed documents, you’ll need to proceed with the actual meat of the due diligence process. This will include:
- Title review: The land’s title is the right to the property. Reviewing this will mean verifying that the seller actually holds the title to the land and that it doesn’t have any outstanding liens or claims on it.
- Appraisals: While the seller should provide you with an appraisal of the property, you should have one conducted yourself as well to verify the land’s actual value.
- Land surveying: Land surveys let you know exactly what is on the property, including current improvements, easements, restrictions, encroachments, and other features or issues you’ll need to be aware of.
- Property and environmental inspections: These inspections will discover any potential (or existing) concerns connected to the property, such as structural damage or threats to the environment.
- Zoning: Zoning laws may restrict what you can do with the property, so researching the current state of the land from a zoning perspective is crucial. In some cases, a piece of property may already be in violation of zoning laws, so you’ll need to look out for that as well.
- Leases: The current tenants on the property represent both its profitability and potential risks. Current lease information is key.
Throughout the process, you will want to make sure you have someone with you who understands the due diligence process. Our real estate attorneys at Hart & David have the experience and skill needed to make sure your prospective purchase is the best it can be.