"Seeing around corners"​ – the importance of real estate Due Diligence

​Written by Sanett Uys, Serendipityremix

  • Challenging times present opportunities to re-position and re-purpose property portfolios.

  • Buyers must ensure that they verify the quality and suitability of the properties before purchasing.

  • Risk and benefit pass to the purchaser on transfer.

  • Thoroughly investigate and understand every aspect of the transaction process, including the physical and legal conditions of the property.

 

We are all aware of the devastating effect the Covid-19 pandemic is having on the South African economy. The real estate market is no exception as both landlords and tenants are under pressure and feeling the loss of income and fighting for the sustainability of their businesses. As a result, various properties will be available for purchase.

Challenging times also present opportunities to re-position and re-purpose property portfolios to ensure survival and sustainability in the "new normal" economy that awaits us. To guarantee the success of these ventures, buyers must ensure that they verify the quality and suitability of the properties before purchasing (pricing is everything); in terms of South African practise "caveat emptor", it is the responsibility of the buyer to conduct a due diligence (DD) on the subject property. Any issues that emerge after the transaction is completed will be the buyer's responsibility who may have little to no recourse against the seller - risk and benefit pass to the purchaser on transfer.

The due diligence process allows the buyer to literally 'see around corners' and to learn all aspects of the property they're looking to purchase. An effective DD eliminates future surprises as potential risks, costs and responsibilities are highlighted. The buyer can identify any irregularities or issues with the sale, giving them time to resolve these issues or to cancel the deal without legal or financial penalty. Therefore, the buyer must thoroughly investigate and understand every aspect of the transaction process, including the physical and legal conditions of the property and if the desired usage of the property is attainable and feasible. It is necessary to ascertain the best use for the property and to identify the upside of the acquisition. The reason for purchasing the property, for example, providing an income stream, investment purposes or for owner-occupation, has a direct impact on the due diligence process.

A due diligence period of at least thirty working days should be included in the sales contract. The contract should also state that the buyer can cancel the transaction during the due diligence period if they are not satisfied with any element the investigation uncovers. The process should be as comprehensive as possible. The specific issues investigated will depend on the nature of the property and what the buyer's intentions are with the property. At the very least the following matters should be included in the investigation:

  • An environmental impact inspection.

  • Physical building inspection to ensure it is in an acceptable condition and is in fact what the seller offered. Any defects or variations can be negotiated or remedied before closing the transaction. Any patent defect should be referred to a preferred structural engineer.

  • A legal analysis is critical, and a careful review of all the documents that could affect the title to the property is required. Any declarations, easements of conditions, deed restrictions, or other matters that may impact the buyer's intended use of the property must be noted.

  • Municipal authority sanction, zoning and restrictions must be verified.

  • Verification that there are no outstanding taxes owed to any government authorities.

  • Verification of all the relevant documents, including copies of the leases, utility bills, insurance policies, service contracts, licenses/permits, warranties, and other documents that are relevant to the transaction.

 

The transaction may require many more steps and reviews.

 

The sale of each property comes with certain risks and returns. The bigger the risks, the higher the return. The competency of the purchaser's due diligence team will determine the final risk profile for the property. As a business owner or an investor, you cannot afford to make any mistakes, especially in the current economic conditions.

 

For more information on the due diligence process, re-purposing and urban regeneration, please contact Serendipityremix for a consultation.

© 2018 Serendipityremix.