Property Due Diligence Checklist

Written by andrew levinson
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Property Due Diligence Checklist
Before you buy real estate, do your homework. (house in a hand image by dinostock from Fotolia.com)

Buying real property is one of the largest financial decisions you can make. Practicing due diligence essentially refers to the care a reasonable person should take in confirming the soundness of an asset before purchase. Real property transactions take place in the context of "buyer beware," so it's up to you to make sure the property you or your business is buying is a safe investment.

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Structural

Take a good look at the property, preferably with the help of an engineer or licensed building inspector. Whether it's a home or a place of business, check that the plumbing including the water heater is in good working order, as are the heating, ventilation and air conditioning-systems. Also check the roof, windows and walls for signs of damage from water or wind. The first time you viewed the property and decided to buy it, you may have been too excited to notice the property's shortcomings. Go and take another close look to see what repairs may be necessary.

Title

If you're taking out a loan in connection with your purchase, your bank will likely make you secure a title insurance policy. Even if that's not the case, order a title report to ensure that you'll get title to the property free and clear from any defects. A qualified title examiner will review the local land records to confirm that the seller actually owns the property he plans to sell you. The title examiner will also identify any encumbrances on the land, such as outstanding mortgages, existing easements or unsatisfied liens. Once these items are identified, you can choose to move forward with the transaction, subject to these defects, or you may require that the seller cure these defects.

Zoning, Covenants, and Codes

Find out the property's zoning. If the property is zoned for residential use, you won't be allowed to build and operate a restaurant. Even if there's an existing restaurant in a residential-zoned area, your ability to grow the restaurant could be severely limited.

Check your title report to see what covenants the property might be subject to. Homeowners' associations including condominiums could impose rules on the properties under their purview. By buying a property subject to such covenants, you agree to be bound by them. These rules cover all sorts of things from holiday decorations to garbage removal procedures. Ask your seller to provide you with a copy of these covenants for your thorough review.

Confirm that the property complies with all requirements of the local building code. Failure to do so can result in considerable civil and even criminal penalties, so the costs of any necessary alterations should be borne by the seller, not by you.

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