Due diligence is a vital step for buyers looking to mitigate risk in the real estate market but can also provide transparency and clarity for all parties involved. By conducting a thorough check of the land and properties they’re interested in before making an offer, prospective buyers can unearth any nasty surprises lurking out of obvious sight and potentially save themselves time, money and no small amount of inconvenience.
Proper due diligence involves carrying out a complete survey of the real estate asset on sale to collate all the relevant information a buyer might need and want to know. This likely includes an analysis of its construction and current condition, of its environmental and planning status, and of its boundaries and rightful ownership. It can also reveal any owner obligations, land rights issues and other potential pitfalls or obscured costs a new owner may become liable for.
Such work can require a varied skill set, numerous professionals, and as often as not, money, time and patience to conduct surveys, review land registry records and study the necessary documentation. But the value gained from avoiding a disastrous and costly purchase makes it worth doing right.
What are the key components of real estate due diligence?
Market due diligence
Market due diligence involves analyzing the real estate market as a whole including the location and value of the property, its relative marketability and the wider market performance. We’ll explore market due diligence in greater detail below and look at how Praedia streamlines, speeds up and reduces cost for this essential part of any real estate transaction.
Cadastral due diligence
As the name suggests, cadastral due diligence uses land registry searches, cadastral plans and graphic illustrations to check the cadastral assets of a plot that show usage, extent, value and ownership. In other words, it’s a cross reference check to make sure what’s shown in building plans, land registry documents and title deeds correspond accurately with each other to give a true representation of the plot and property. This can include basic information too, like the property’s exact address.
Legal due diligence
Ensuring it meets all relevant laws and regulations, legal due diligence analyzes a property’s legal status and compliance. From general information like plot number and EGRID to its zoning, building and usage regulation status, potential planning permissions, and a review of company and land registries. This helps define if it poses a risk, is compliant or offers hidden potential.
Tax due diligence
The tax conditions and liabilities related to a property can have a significant impact on its investment potential and economic viability. And with tax conditions varying drastically not only between countries but also between regions, cantons, cities and even districts, a custom analysis is often necessary to examine both the taxable status of the buyer and the property.
Technical due diligence
Analyzing the structural integrity and facilities of a property, technical due diligence requirements vary according to the type of property and what it’s used for. As a general rule it includes a review of the property and basic documentation provided by the vendor to ensure what’s described matches what’s actually for sale. This includes at a minimum plot and gross floor area, layout, structural quality and calculations, maintenance and potential improvements needed, permissions and usage approvals in place. It can also, if applicable depending on the type of property, include everything from tenant agreements to protection status for historic buildings.
Environmental due diligence
A property’s location and surroundings can have a serious impact on its commercial viability. Environmental due diligence checks potential risks from nearby environmental issues like pollution, dangerous materials such as asbestos, risk of flooding and noise levels.
Financial due diligence
Financial due diligence gathers together all relevant financial data about a property. This includes the income it generates as well as its expenditure and costs and can also include an assessment of the property’s financial potential and risks. Investors, buyers and finance providers (such as banks) can use this information to decide if it’s a sound investment decision.
How does Praedia help with real estate market due diligence?
Market due diligence focuses on the buyer side of a property transaction. For buyers and investors, it delivers the kind of information that will help them determine whether a purchase is viable, especially from a commercial perspective (although it can be just as valuable for private buyers as well). At a minimum this should include:
In-depth property location analysis
Economic cycle analysis
Demographic, unemployment and buying trend analysis
Local and general market competition
Expected changes in local environment
Property marketability including development potential, future viability, third party usage rights, current condition, aesthetics and SWOT (strengths, weaknesses, opportunities and threats) analysis
As you might expect though, this can be an arduous process that demands a serious investment of time, resources and money to pull all that data together from many disparate sources. Praedia helps significantly reduce this burden on resources by extrapolating that data from the relevant sources and giving buyers and investors access to it in an easy to use but extremely detailed interface.
This helps to assess and understand a property’s marketability and commercial viability in terms of its location appeal, development and return on investment potential, and regulatory and legal status.
As the saying goes, a property’s quality and marketability is determined by three primary factors: location, location, location! So it’s logical that knowing as much about a property’s setting as possible is advantageous.
Praedia features data layers that provide instant access to a range of information including abstract and satellite maps for real-world orientation and cadastral and zoning layers. Points of interest show a property’s proximity to everything from parking areas and schools to shops and restaurants, while transport layers show the transit network and commute times by car. There’s even a noise layer showing sound level ratings so you know how quiet (or noisy) the neighborhood is.
Each property on Praedia features a location rating index that rates different factors on a scale of one to ten. This gives a simple snapshot not only of physical factors like public transport access, noise levels, views and orientation but also market factors like retail rental, sale and tax levels.
Using transactional data localized to a property’s neighborhood, Praedia gives buyers instant access to important commercial market data like rental and retail values. Its market intelligence feature then takes things one step further, extrapolating that data to predict a per-square-meter retail value for the property in question.
Alongside detailed spatial data for each real estate plot and any buildings on it, Praedia also shows any development potential a property may have. This includes the opportunity to develop a building by adding stories, the potential gross floor area and from that, the potential living space area.
Usage and status
Under each property’s ‘Legal' tab in Praedia you’ll find data relating to its current status in terms of what it’s used for and what regulations are in place concerning that usage – both restrictions and permissions – with links, where relevant, to supporting data and resources. This information is instantly available to download as a clearly laid out PDF ready to share with stakeholders and any relevant authorities.
A property’s value can be significantly affected by any planned developments in the neighboring area, be that real estate or infrastructure. In Praedia, the cadastral data layer overlays planned buildings onto the map so it’s clear to see what’s coming and what impact it may have on an investment.
Praedia is using Digital Twin technology to reshape how investors and buyers operate in real estate acquisition. Traditionally analog processes are at last being digitalized and thus transformed, expediting many aspects of market due diligence and making it available to more businesses by democratizing access and costs for everyone. To find out more, explore Praedia or speak to one of our team to see what we can do.