Real Estate Due Diligence: What it is and What it Reviews
A real estate due diligence allows for the review of the legal, registry, town planning, and community status of a property before purchasing it. We explain what it includes and what risks it can detect.
What is a real estate due diligence and why do it before buying
Buying a home is not just about checking its price, visiting the property, and getting a mortgage.
Before signing a reservation or an earnest money contract (contrato de arras), it is advisable to know who the owner is, what encumbrances exist, if the physical reality matches the Property Registry and the Catastro (Land Registry), if there are unpermitted works, and if the community has pending derramas (special assessments) or significant repairs.
A real estate due diligence gathers and analyzes all that information so the buyer can make a decision with greater security. Its purpose is not simply to collect documents, but to interpret the information, relate potential problems, and determine how they should be resolved or reflected in the contract.
What is a real estate due diligence?
A real estate due diligence is a prior investigation into the legal and documentary situation of a property. It is carried out before buying to check a home before buying and detect if it can be acquired under the advertised conditions, as well as any circumstance that may affect:
- Ownership.
- The use of the property.
- Its value and financing.
- Future expenses for the buyer.
- The subsequent entry in the registry.
- A future sale.
The term “due diligence” does not identify a single legally regulated document; its scope must be adapted to each property. The Housing Agency of Catalonia provides specific information regarding the documentation the seller must deliver, demonstrating the importance of this prior review.
Is real estate due diligence mandatory?
No, there is no general obligation. However, the buyer assumes significant obligations from the moment a reservation or earnest money contract is signed. The General Council of Notaries recommends getting informed before signing or handing over money.
Due diligence allows for this review to be carried out while it is still possible to negotiate the price, include conditions in the contract, request guarantees, or decide not to proceed with the purchase.
When should it be performed?
Ideally, due diligence should start after identifying a property and before signing the reservation or the earnest money contract (arras). If a reservation is required to take the property off the market, the document should condition the operation on the result of the review.
It is not recommended to leave all the analysis for the day of the deed. Although the notary performs essential checks, their intervention usually happens at the end, when the buyer might have already signed an arras and handed over a significant amount.
What does a real estate due diligence review?
The content will depend on each operation, but a complete review usually includes the following aspects.
1. Ownership and capacity to sell
The first check is to determine who the owner is and if they can sell. The nota simple (land registry excerpt), the title deed, and other documentation before signing arras are reviewed to verify the identity of the owners, the existence of usufructs, the sufficiency of powers of attorney, or the adjudication of an inheritance. The College of Registrars offers access to this key information.
2. Liens and registry limitations
The review of registry charges is fundamental. The existence of mortgages, foreclosures, usufructs, easements, or tax liabilities is analyzed. A due diligence explains what each charge means, how it can be canceled, and what should be regulated in the contract.
3. Correspondence between Registry, Catastro, and physical reality
The property visited must match its registry and cadastral description. Surface area, use, distribution, and elements such as terraces or storage rooms are reviewed. The Catastro Electronic Site allows for the consultation of this information. A discrepancy may reveal unregularized works and affect the appraisal or financing.
4. Town planning status
The Registry does not always reveal the entire town planning situation. It is necessary to check the authorized use, building permits, changes of use, urban discipline files, or possible zoning constraints. This review is crucial for penthouses, ground floors with patios, houses, and premises converted into housing.
5. Certificate of occupancy and technical documentation
In regions like Catalonia, the cédula de habitabilidad (certificate of occupancy) is essential. It is checked whether it exists, is valid, and corresponds to the property. The energy efficiency certificate is also reviewed and, in new builds, building permits and final work certificates.
6. ITE and building status
When buying a flat, one acquires a part of the common elements. It is vital to analyze the ITE (Building Technical Inspection) of the building, the certificate of aptitude, and pending repairs. A building that has passed the ITE may still have significant works to be executed.
7. Community of owners and special assessments
Beyond the debt certificate, the latest minutes, budgets, bylaws, and possible conflicts must be reviewed. Minutes may reveal problems that have not yet become a derrama (special assessment), such as the study of a costly repair.
8. Occupancy and leases
It must be checked who occupies the home: the seller, a tenant, a relative... If there is a rental contract, it must be analyzed. If it must be delivered vacant, the earnest money contract must clearly reflect this.
9. Reservation and earnest money contract
A due diligence must translate its findings into the contract. When reviewing a reservation or an earnest money contract, clauses should be included establishing what the seller must correct, within what timeframe, and what happens if it is not fulfilled.
10. Financing and total cost
If the purchase depends on a mortgage, the contract must be compatible with bank deadlines. The financing condition precedent, deadlines, and consequences of a low appraisal are analyzed, and the total cost of the operation is calculated, including taxes and foreseeable expenses.
What problems can it detect?
A real estate due diligence can reveal, among other problems:
- That the seller is not the sole owner.
- The existence of a lien on the property.
- That an enclosure or extension was carried out without a permit.
- That the building's ITE detected serious deficiencies pending rectification.
- A significant special assessment approved or under discussion.
- That the property is rented without having been reported.
- That the earnest money contract does not protect the buyer if they do not obtain financing.
Some of these problems can be solved; others may justify a price renegotiation or suggest not proceeding with the purchase.
What does a legal due diligence not replace?
A legal review does not replace a technical inspection by an architect if there are doubts about the physical state of the property (cracks, dampness, structure).
Nor should it be confused with an appraisal (tasación), which determines the value of the property but does not analyze charges, community minutes, or contract clauses in depth.
In which operations is it especially recommended?
Due diligence is key when buying old properties, renovated homes, penthouses, ground floors, houses, properties from inheritances, if the seller acts with a power of attorney, if it is rented, or if the documentation is incomplete. The more peculiarities, the greater the need to analyze a property before buying.
What should a good due diligence report look like?
A useful report should identify the documentation reviewed and what is missing, any incidents detected, the risk level, the necessary actions, and, above all, the conditions that should be included in the contract to protect the buyer. It must end with a clear conclusion on the feasibility and risks of the operation.
Frequently Asked Questions
Is a due diligence the same as requesting a nota simple?
No. The nota simple is one of the documents reviewed, but due diligence analyzes a much broader set: Catastro, town planning, community of owners, ITE, contracts, and occupancy.
Does the real estate agency perform the due diligence?
The agency collects documentation as an intermediary, but its work is not equivalent to an independent and exhaustive legal review carried out exclusively in the buyer's interest.
When should it be commissioned?
Preferably before signing a reservation or an earnest money contract. If they have already been signed, it should be done as soon as possible to take action before the signing of the deed.
Does it guarantee that a problem will never appear?
It significantly reduces risks based on the available documentation. It cannot guarantee the absolute absence of hidden defects or facts not communicated by the seller, but it is the best tool to minimize them.
Is it also useful for new build properties?
Yes, although the focus is different. In new builds, building permits, the registration of the development, legal guarantees, the quality specifications, and especially the clauses of the purchase-sale contract are reviewed.
Conclusion
A real estate due diligence allows for in-depth knowledge of the legal, town planning, and community status of a home before assuming financial commitments or signing a contract.
Its value lies not only in discovering encumbrances, but in detecting all types of risks: unpermitted works, problems in the building, future special assessments, or unfavorable clauses. Ultimately, it is about making an informed decision and buying with security.
At INMODOCS we are experts in the legal review of housing. We analyze all the documentation, identify the risks, and advise you so that the contract protects your interests. Before taking such an important step, know exactly what you are buying.