In the dynamic world of real estate, where fortunes can be made or lost with a single transaction, due diligence stands as the cornerstone of informed decision-making. Whether one is embarking on the journey of purchasing their dream home or strategically divesting a property asset, the importance of thorough investigation cannot be overstated.
Due diligence is crucial when purchasing or selling a property as it helps to uncover potential risks and concerns, assess the property’s market value, and make informed decisions prior to being bound by an agreement for sale. Here are a few reasons why due diligence is essential in property transactions:
- Identifying Risks
Due diligence allows purchasers to uncover any issues or risks associated with the property, such as structural defects, environmental hazards, zoning restrictions, or legal encumbrances. Identifying these risks upfront can help purchasers form reasonable expectations for proceeding with a possible transaction and to avoid costly surprises after the purchase such as the cost exposure and time delay in applying to modify restrictive covenants that have been breached.
- Exploring Investment Potential
For investors, due diligence which identifies such risks is essential when evaluating the investment potential of the property. This involves understanding the zoning laws and land use regulations which is important to determine whether the property will be suitable for their intended use (e.g. a proposed multi-family development or commercial use in a neighbourhood of single family residences) and being fully informed of the necessary permits, licenses and approvals required as well as potential hurdles that may arise when embarking on a particular venture.
- Buyer Beware
A key aspect of identifying the risks associated with a property is having an accurate land survey completed to confirm the property boundaries, whether there are any encroachments by or onto neighboring lots and whether any restrictive covenants that are breached. Due diligence in this area, especially for purchasers, is important to satisfy their responsibility of ‘caveat emptor’ which requires purchasers to be fully aware of what they are purchasing.
- Maximizing Value
Both vendors and purchasers are encouraged to conduct due diligence in relation to the value of a property. This may involve obtaining a formal valuation report of the property or assessing the property’s value based on factors such as its condition, location, market trends, and comparable sales. Vendors can use this due diligence to highlight the positive aspects of the property and address any potential concerns that may arise during the sale process. This can help maximize the property’s perceived value and attractiveness to potential purchasers, leading to a quicker and more lucrative sale.
Armed with the findings from due diligence, purchasers can negotiate more effectively with vendors to address any issues or concerns discovered during the process. This may involve requesting repairs, price adjustments, or concessions to reflect the property’s true condition and value.
By conducting due diligence, vendors can ensure they are obtaining the best value for their property while purchasers seek to solidify a fair price for the property and be in a position to negotiate effectively with vendors.
- Minimizing Delays
By completing due diligence upfront, vendors can minimize the risk of delays or those arising from avoidable complications arising during the sale process.
- Clear & Marketable Title
A main priority for vendors prior to placing a property on the market is to ensure clear and marketable title. An important first step to ensuring clear and marketable title is the verification of ownership. For example, a vendor should be aware of whether the property is held as joint tenants or tenants-in-common, be advised on those persons need to execute the sale of property, whether the death of a joint tenant needs to be noted on the title or if arising from an estate, the transmission of a personal representative for a deceased owner on the title.
Additionally, vendors should identify any encumbrances, such as mortgages or liens, to be settled and confirm the whereabouts of their original (referred to as a “duplicate”) Certificate of Title so as to avoid commencing a Lost Title Application in the middle of a sale.
- Securing Financing
Proper due diligence can also help minimize delays for purchasers securing mortgage financing. Typically, lenders require thorough due diligence before approving a mortgage loan. Purchasers can be proactive by consulting various lenders regarding their requirements to qualify for commitment letters quickly. Purchasers armed with pre-approved commitment for financing are in an advantageous position when entering negotiations with a vendor as vendors are typically looking for a purchaser ready to proceed and the best odds for ensuring completion of the sale.
Due diligence is essential for both purchasers and vendors in a property transaction. By conducting thorough due diligence, both parties can make informed decisions and reduce the likelihood of negotiations breaking down or deals falling through. It is wise to engage an attorney who can guide you through the transaction, safeguard your interests and facilitate a smooth and successful sale process.
Kandi Chin is an Associate at Myers, Fletcher & Gordon, and is a member of the firm’s Property & Estates Department. Kandi may be contacted via email@example.com or www.myersfletcher.com . This article is for general information purposes only and does not constitute legal advice.