Due Diligence Investigations
When it comes to important decisions, you want all the necessary information at your fingertips.
That is where due diligence investigations come into play. These investigations protect your interests and help you make informed decisions. Whether considering a business venture, entering into a contract, or making an investment, a due diligence investigation can give you the insights and understanding you need to proceed confidently.
Due diligence investigations often occur during real estate transactions, and this process has numerous steps.
First, the buyer and seller must agree on the transaction price and the terms of the deal. After they have set the terms of the agreement and signed a contract, certain things must happen before closing the deal.
The buyer must obtain financing to purchase the property. In addition, the buyer has some protections during the transaction process that allow them to do some digging and learn more about the property.
In practically any real estate deal, whether residential or commercial, the buyer will have some form of due diligence investigation.
In a residential transaction, due diligence may involve only an inspection and title search. In a commercial real estate deal, the buyer can perform a far more in-depth due diligence investigation.
A real estate lawyer can conduct a complex due diligence investigation and deal with any issues.
These attorneys understand the law and can inform you how various legal factors may affect your decision. They can also help you assess the potential legal implications of the information uncovered during the investigation. The results may jeopardize the entire deal or lead to a renegotiation of the terms.
A real estate attorney can conduct due diligence on your behalf, and they may negotiate with the seller should the need arise.
The Purpose of Due Diligence
Either way, the buyer needs to know what they get when purchasing real estate property. They are making a significant financial commitment that they will pay for well into the future.
Further, the financial institution that lends the money also wants to know that the property is in good condition and free of any significant legal issues.
Due diligence lets prospective buyers learn what they are getting should the deal close, and many real estate transactions require it. In the due diligence process, the prospective buyer can do more than kick the tires. They can figuratively go under the hood to get a more in-depth look at the property.
Due diligence allows the buyer to make an informed decision about the property they purchase. If there are any major issues, the buyer can renegotiate the terms of the deal, or they may exit entirely, depending on the severity of the issue.
However, the due diligence process will not necessarily allow a buyer to use a minor issue as an excuse to get out of the deal when they experience buyer’s remorse.
When a Due Diligence Investigation Occurs
Once the buyer and seller agree to the deal, they will draw up a contract memorializing them. The contract will allow for a period of due diligence before completing the deal, and the money and property will change hands.
In most cases, the buyer may perform due diligence. Sometimes, the seller may want to conduct their own due diligence on the buyer.
The contract will allow a certain amount of time to complete due diligence. Presumably, if the buyer does not uncover any significant issues and can obtain financing, the deal will proceed.
What You May Learn in the Due Diligence Investigation
- Title: The most important thing to know is whether the buyer can fully own the property they purchased. They are checking whether there are any liens on the property or competing claims to ownership.
- Easements: Someone else may use the property, whether it is under an actual written agreement or implied conditions on the land. The easement will generally pass with the land, and it can lower the property value.
- Environmental compliance: The property’s existing conditions may not comply with environmental rules, requiring extra investment or even rendering it unusable in the future.
- Local regulations: Local regulations may affect how the buyer uses the land. Zoning laws and land use restrictions may hinder the buyer from developing the property as they wish.
- Potential liabilities: The new land owner may inherit the liabilities associated with its ownership. For example, the new owner may bear liability for ongoing lawsuits against the old owner. In addition, the new owner may also inherit the liability for any environmental cleanup costs.
- Property inspections: A close inspection of the property may reveal dangerous conditions or defects that reduce its value or prevent its full use.
The Due Diligence Process
When you begin a due diligence investigation, you must start with a plan. If you take a haphazard and scattered approach, you may fail to conduct a thorough investigation.
You will need to tailor your approach to due diligence based on the type of transaction.
For example, suppose you are conducting a due diligence investigation for a real estate transaction. In that case, you will need to know the relevant regulatory background ahead of time and want to learn more about the property’s history.
Determining the Purpose of Your Due Diligence Investigation
You will begin the due diligence process by setting your purpose and objectives. Due diligence aims to determine whether you want to complete the transaction. To get there, you must choose the scope of your investigation at the outset, including the documents you need to obtain and review.
At the same time, you also need to maintain a certain degree of flexibility in a due diligence investigation. In other words, even though you are setting the tone and scope of your investigation ahead of time, you also need to go in the direction that it leads you.
Allocating Personnel and Resources to a Due Diligence Investigation
Then, you will determine the personnel that will contribute to the effort. Due diligence can require time and many people.
Some companies outsource the due diligence process entirely to those with experience and who know what they are looking for in their investigation. These individuals can contribute their unique perspectives and experiences to uncover potential red flags, financial irregularities, and hidden challenges that may impact the deal’s success.
Many even hire a real estate lawyer to conduct the process because it can save time and resources and allow for a more effective investigation. They can help identify potential legal risks and liabilities, review contracts and agreements, and ensure compliance with applicable laws and regulations.
At the very minimum, a real estate attorney can guide you throughout the process, reviewing issues you have identified and helping shape your review’s scope.
Requesting Documents and Making Site Visits
Once you have determined who will be working on the due diligence review and the scope of your investigation, you will need to decide what documents to request.
Although the other party to the transaction has an obligation to turn over the document to you, make a targeted document request. You want to avoid having too many documents to review or making the process burdensome for the other party.
Due diligence in a real estate transaction will also include multiple visits to the site and perhaps even interviews with other people, including personnel from the other party.
Due Diligence Investigations Can Uncover Possible Red Flags
Once you have received the documents, you will begin your review. The diligence investigation aims to identify any red flags requiring you to renegotiate the deal or even back away from it entirely.
Sometimes, your reviewers spot potential issues that complicate the transaction. If a real estate lawyer does not conduct the due diligence investigation, you can still run any issues by them to learn what they think. You will learn more about the potential risks of the deal depending on what you have found.
After the due diligence investigation, you will prepare a report of what you have found and outline any significant problems you have discovered that can impact the transaction. Depending on your discoveries, you may need to negotiate further with the other party about the deal terms.
In some instances, it may even be necessary for one party to walk away from the deal entirely.
Buyers will have to abandon the transaction if issues prevent them from using the property as they may have envisioned. They may learn that they will assume a major obligation or liability in the future because they can run with the property. The hope is that a due diligence investigation reveals no major issues that can derail a deal.
Typically, real estate contracts allow buyers to walk away from the deal based on certain things they may learn in their due diligence investigation.
However, the seller may claim that the buyer still must go through with the transaction, and what they may have learned does not rise to the level of allowing them to abandon the deal.
Many transactions can end in litigation when a buyer tries to exit the agreement after learning something in due diligence.
How a Real Estate Attorney Can Help
Real estate lawyers can examine the documents on your behalf. They know the entire inventory of documents that you need to request and review to conduct a thorough due diligence investigation.
Moreover, attorneys have access to various databases and resources that can uncover information that may otherwise be difficult to find. They can conduct comprehensive background checks, search public records, interview relevant parties, and analyze financial statements. They have the knowledge and experience to dig deep and gather the pertinent information needed for a thorough due diligence investigation.
When you hire a real estate attorney, they can help you with all legal aspects of the transaction process.
Your real estate attorney can advise you while negotiating the deal and inform you about legal matters affecting the transaction. Then, your real estate lawyer can lead the due diligence on your behalf should you retain their services for this task.
If any disputes arise about the transaction, your real estate lawyer can try to resolve the issue. They will attempt to negotiate a solution with the other party that allows you to avoid litigation, perhaps by amending the terms of the deal. If your case goes to court, your real estate lawyer can argue your case in front of a judge or jury.
By enlisting the help of an attorney for your due diligence investigation, you are ensuring that you have a qualified professional who can provide advice and guidance. They will help you make sense of the information gathered and assist you in making well-informed decisions.
Do not leave important decisions to chance – invest in an experienced attorney to protect your interests.