Understanding due diligence in real estate

For the uninitiated in the real estate game, it is important to remember the phrase caveat emptor, which in Latin means "Let the buyer beware." As real estate blogger Ahmed Nashaat notes, a major risk when you enter a real estate transaction -- whether you are buying or renting -- is that you will also acquire the seller's problem. For this reason, due diligence is necessary for any potential real estate dealings.

Simply put, due diligence in real estate is investigating the facts and figures surrounding a property proper to completing a transaction with the other party. Think of it as doing your homework to learn the property's overall condition.

The process works differently depending on whether you are buying, leasing, or renting a real estate asset, says Ahmed Nashaat. It involves some general steps, such as the following.

Physical Due Diligence

Before putting a bid or laying down earnest money to the seller, it is essential to check the physical conditions of the property's interior and exterior. Some of the most important tasks to perform are area and neighborhood analysis, checking of integrity of the structure, electrical, heating, and plumbing systems in the property, and determining the possible repairs that may be needed. If possible, also arrange for a formal property appraisal to compare other prospective properties within the area.

Financial Due Diligence

The last thing you would want to happen when buying or renting a property is to incur financial losses, and an effective way of avoiding it is to practice financial due diligence. Prepare for and conduct an in-depth cash-flow analysis, which involves asking for all pertinent financial statements and verifying financial disclosures from the seller. According to Ahmed Nashaat, financial due diligence also includes reviewing the possible financing options when acquiring a property.

Legal Due Diligence

It is best to practice legal due diligence to minimize possible legal complications. Make sure to review all documents relevant to purchasing the property and examine zoning issues code compliance.