Whether you are buying a Company, initiating a merger, buying shares, investing in CryptoCurrency, getting involved in Business Partnership or buying a piece of Real Estate, the importance of due diligence can never be overemphasized.
A detailed and comprehensive due diligence will help you avoid mistakes, save you millions and improve your returns on investment significantly.
Moreso a well structured due diligence will give you a clear vision of what you will be facing throughout the period of investment as well as estimate your possible returns on investment with fair accuracy
This article will serve as a comprehensive guide to conducting comprehensive and detailed-due diligence in Nigeria with a focus on Real Estate as it will provide you with a checklist, to ensure you leave no stone unturned while carrying out due diligence on a property you wish to purchase.
With the checklist provided in this article, it will be almost impossible to lose your hard-earned money while investing in Real Estate
WHAT IS DUE DILIGENCE?
In simple words, Due diligence is the steps you take to fully understand the risk and reward attached to a particular business or investment opportunity, to ascertain if the business or investment is right for you.
According to oxford dictionary, due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
Most articles you might read are going to confuse you with big, big grammar without offering real solutions, but here, we are going to break the due diligence process down, providing you with actionable steps in the most simple language possible and understandable to any person irrespective of their level of education and IQ.
DUE DILIGENCE IN REAL ESTATE
In real estate, due diligence is the steps you take to confirm the authenticity of the property you wish to acquire and ensure it’s a complete fit for your purpose of purchase.
Experience might be the best teacher, but what type of lesson could you learn from the experience of losing millions in a single transaction just because you lack the basic skills necessary in conducting detailed and comprehensive due diligence?
One major characteristic of successful investors is the fact that they don’t invest in anything they don’t understand. They have basic skills in conducting detailed due diligence and also work with Real Estate Advisors, and this helps them eliminate mistakes and maximize the options available to their advantage.
Every Real Estate transaction have the potential to either screw you or make you profit. Comprehensive and detailed due diligence will arm you with the necessary information to guide your decisions on any given transaction.
A comprehensive and detailed due diligence will also reveal the true owner/owners of the property, a brief history of the property, transaction history, the real title of the property, the size of the property, the topography of the area, boundary, nature of the title to be acquired after buying the property, a market appraisal, structural integrity and a predictable income/ROI.
You will also be able to discover if there are pending litigations or disputes on the property, and also uncover if there is any form of Government interest or encumbrance on the property.
Other encumbrances might include liens, charges, mortgages, easements and other third-party rights over the property.
More so, A comprehensive and detailed due diligence will review all documents associated with the property and will highlight specific issues, such as pre-emptive rights, restrictive covenants, prohibitions against assignments and requirements for third-party consent.
Next, I am going to give you a comprehensive checklist for detailed and comprehensive due diligence.
Although some of these checklists are what you can do for yourself, while others might involve some experts such as a lawyer, an engineer, a property manager and a broker.
You don’t need to go outsourcing for all these one after the other. Once you contact the service of a reputable Real estate consulting firm, they will provide you with all the necessary tools.
How do you know if the consulting firm you hired is doing the right thing?Ans – By Auditing there progress with tihis check list
Here is a comprehensive checklist for conducting detailed and comprehensive due diligence on any property you wish to acquire. You might need to bookmark it or save the link in your toolbox as a necessary tool because, with this checklist, it will be very difficult to lose your money in any real estate transaction.
This checklist, therefore, will serve as a perfect guide to buying a safe property and ensuring the property is a perfect fit for your investment purpose before signing the check.
DUE DILIGENCE CHECKLIST
1. PHYSICAL INSPECTION
The physical inspection shall be your first and the last due diligence before committing your hard-earned money to any property (land or building). This involves visiting the property in person or having a member of your team who has a perfect understanding of your investment goals visit the property on your behalf.
The physical inspection in the case of land will reveal
– An overview of the topography
– A vivid understanding of the location
– Physical challenges and obstructions on the land
– Boundary confirmation
– Coordinates collection
– Environmental state (etc)
In the case of buying a house, the physical inspection will reveal
Everything mentioned above plus
– defects on the structure
– infrastructural decay
– environmental challenges such as state of the road network and neighbourhood drainage
– access to amenities
– environmental pollution etc
2. PICKING UP COORDINATES
Land coordinates define the position of property on the surface of the earth.
If you want to buy a property, whether, from a family, or real estate company, the first thing you should do is pick up the coordinates of this property.
One mistake most investors do is to rely on coordinates as provided by the family or real estate company and this has landed many investors in agony.
Land coordinates are useful in several areas of due diligence that will be discussed further in this article.
Therefore once you are ok with the neighbourhood, it is recommended you hire a surveyor, who will collect the coordinates of this property on your behalf.
Again, If you are working with a reputable consulting firm, you won’t need to worry about a reputable surveyor because they will provide you with one
3. CONDUCTING LAND SEARCH
With the coordinates, collected and Survey provided by your vendor, you can now proceed to the state registry for confirmation.
This will reveal if the said property is a “Government Committed property” or “free from Acquisition“
Properties under Government Committed acquisition have been mapped out for overriding public interest such as road networks, schools, hospitals, drainages, railways, military camps, police stations, Government housing projects, parks etc and buying such lands is tantamount to throwing your money into the lagoon.
Search at the state registry is a very important part of detailed due diligence and this is done using coordinates and survey.
4. SEARCH AT COOPERATE AFFAIRS COMMISSION
This is a very important due diligence exercise when buying land that has been previously sold to a cooperate body. At this point, searching at the CAC will reveal some hidden pieces of information on the property such as charges registered in CAC in respect of the corporation and other hidden reasons why this company wants to sell the property.
5. SEARCH AT PROBATE REGISTRY
This is a very important due diligence exercise when buying land that previously belongs to a deceased.
A letter of probate is a title issued to the person whom the property is willed to while a letter of administration is a title issued when the deceased never left a will. The possessor of either of the titles becomes the real owner of these properties and he/she is the only person that can legitimately transfer ownership to you.
The probate and letter of administration are issued by the probate registry of the state high court
Please note that a search at the probate registry will reveal the rightful owner of an inherited property
6. THE GRAPEVINE INVESTIGATION
This part of due diligence is very technical and important.
Grapevine simply means an informal way of getting information.
The American FBI are experts in gathering information through the grapevine to facilitate their investigations and as a real estate investor, you shouldn’t sweep this wonderful tool under the Carpet.
Your ability to mingle with the locals at the grassroots within the immediate community can facilitate some golden information that will guide the rest of your due diligence and investment decisions
Information gotten from the grapevine will reveal current disputes on the property, some of which have not gotten to Court yet, some few individuals trying to sell an entire family or Community land (for instance some group of boys sold a proposed community burial ground to a bank in Bayelsa State in 2009), A land that has been sold and resold to different individuals (e.g a piece of land was sold to 9 different people in Aba, Abia state in 2004).
You will also get valuable information on all the parties that need to be involved in the transaction to make it a success.
However, you don’t have to go through the rigorosity of this grapevine due diligence yourself. Our experts will handle it very efficiently for you with guaranteed result
7. FAMILY CONSENT
Sometimes, a few members of a family or community will gang up to sell a community or family land. They will come up with a fake community and family head as well as a fake Secretary.
The information gathered from the grapevine will provide you with the right family/community head. Make sure you get the consent of the entire family, including the useless drunkard and the guy that has been in California for 35 years, otherwise trouble might be brewing around the corner.
In this stage of due diligence, It’s important to seek the consent of all parties involved, get their signature of approval before moving ahead with the transaction and if you can’t get the approval of the whole family, it is recommended you start looking for another property immediately, otherwise, you might be on your way to paying your hard-earned money for wahala.
8. TITLE AND DOCUMENT VERIFICATION
This is a very important part of the due diligence required for every real estate investor before completing a Real Estate transaction.
Unfortunately, the majority of Real Estate investors don’t know the important titles and documents to look for when buying a property, all they know is a Certificate of Occupancy. (CofO) and as a result, I have put up this beautiful, and comprehensive article on Important Land Titles And Documents To Look for when buying property In Nigeria.
This article will show you
– the roles title and documents plays on the property you own or wish to acquire
– how to verify documents before initiating a transaction
– how to verify the status of a property before committing your hard-earned money to it
– how to avoid the mistake of buying fake titled land among several other information.
Also one of the documents that must be verified on every real estate transaction is the Survey.
Survey confirmation is a way of ensuring that the survey provided by your vendor is authentic.
A Survey Plan must contain the name of the Owner/Owners of the property, The Size of the property, description of the land, a map, showing the position of the property on the surface of the earth, and the date the survey plan was made, and if you bought land without Survey, please note that you own no land in the eyes of the law, this means that you are sitting on a very thin line between losing your hard-earned money and onwing a property, in short, you are on the losing side.
And one last thing on Survey, if the survey provided by your vendor does not have the “Free from Acquisition Stamp” then you’ve just been involved in a risky venture.
ADDITIONAL DUE DILIGENCE FOR HOME BUYERS AND SMART INVESTORS
Here is a list of additional due diligence required when buying land that already has a structure on it. This due diligence is highly recommended for home buyers and No.4 and 5 are super important;
1. AVERAGE PRICE OF HOUSE WITHIN THE NEIGHBOURHOOD
When buying a property, before you initiate the negotiation, it is always important to investigate and find out the average price of similar houses within your neighbourhood of choice.
If the price is way below the median price, it’s a red flag, and at this point, you need to open your eyes and intensify your due diligence.
If the house is overpriced, you can use the information you gathered to beat down the price or go for other options.
Whether overpriced or underpriced, make sure you complete your investigations before making payments and don’t allow anyone to constrain you with a deadline. And again, beware of cheap properties. In some cases, there are hidden dangers and in very few cases, you could be lucky.
2. DEMOGRAPHICAL SURVEY
Demography in this context refers to the population growth in relationship to age range and average income.
Understanding the average age, lifestyle, prevailing job/business pattern and salary range of a particular neighbourhood will give you a better insight into the type of property to acquire or develop for better returns on investment
For instance, the average resident in Lekki Phase one is 43 years old, have a wife and 2 kids and earn a salary between N200,000 and N1,700,000 per month
This explains the reason polished 2 bedroom flats in Lekki Phase 1 are in very high demand and rent between 2.5 million and 3.8 million. This isn’t the same for locations like Ikoyi, Victoria Island, Surulere, Festac, Ajangbadi, Ipaja, Badagry, Epe, Abijo, Yaba, Ado, Ipaja and other neighbourhoods
Every neighbourhood have a unique market defined by demographical behaviour
Understanding demography will help you supply the right demand, and supplying the right demand will have a very positive impact on your returns on investment
3. NEIGHBOURHOOD CHECK
Imagine spending your money, acquiring property within a neighbourhood and not having qualified tenants coming for them, and now you are forced to lower your price.
Somehow, your most qualified tenants can’t wait for their rents to expire, to vacate your property and now you are losing another 2 months, 5 months, 9 months before your property gets occupied by another tenant.
Most of your tenants are people who seem to have no choice. They owe you 2 years of rent already, sitting on your quit notice and having no money to pack.
This is one of the reasons neighbourhood check is very important.
You can’t afford to invest in an area with a high crime rate, and you need to make sure your property is accessible to amenities such as easy transportation, access road, schools, hospitals, restaurants among other things that make an average life easy.
Again double-check the demography to ensure you are providing the right product as you won’t expect to build a contemporary 5 bedroom duplex for rent at Ajangbadi, nor a multi-tenanted apartment like the “face me I face you” for people in Ikoyi. Either of these will affect your Net Operating Income (NOI) Adversely.
Also, understand the factors that drive the market and how long these factors have come to stay before concluding your investment decisions.
4. STRUCTURAL INTEGRITY TEST
A structural integrity test is a very important component of due diligence for investors buying ready-made houses. Unfortunately, very few home buyers carry out this level of due diligence.
Structural integrity assessment is a process by which we determine how reliable an existing structure can carry current and future loads and fulfil the task for a specific time frame.
It is a fundamental part of engineering that deals with the ability of a structure to support a designed structural load without breaking it down.
In short, structural integrity is used to determine the fitness and durability of a structure as it will reveal :
1. The Durability Of The Structure :
The average life expectancy of a concrete house is 50 years. This does not mean that the structure will collapse. It only indicates that the structure might not be safe for inhabitation on expiration.
Due to earth movement, climate change and other unforeseen circumstances, it is highly recommended that structural integrity tests be conducted on concrete houses and due maintenance observed every 10 years to ensure the safety of inhabitants and prolong the lifetime of the structure.
2. Weaknesses And Deformities in the structure:
Structural integrity test reveals areas of weaknesses in a structure, that could lead to deformities and eventual collapse of the building. Dictating this early will help avert great danger and save costs too
3. Deterioration Of Structures:
After the first 10 years, there is usually major deterioration caused by earth movement, corrosion, creep, fatigue, wear, tear, cracks etc. Houses closer to the ocean are more easily affected by corrosion due to the saltiness of the surrounding waters.
The first sign of structural deterioration begins with cracks from a region of high stress. Most people tend to just cement these cracks and forget about it, however, this is usually a signal that the structure might not be able to bear the load on it for too long and might collapse if necessary maintenance is not carried out.
This is usually the consequence of hiring cheap labour. It is a direct result of poor workmanship which include
– the use of substandard materials
– the use of defective materials
– Lack of a proper operational condition
– Lack of proper environmental consideration
– Not following manufacturing procedures etc.
Engineers combine an array of considerations into the design process, such as past structural failures, material performance, stress analysis and fracture mechanics to ascertain the integrity of a structure.
Therefore it is not just important, it is necessary that you include a structural integrity test in your checklist of comprehensive due diligence when buying a built property, and it’s super necessary when buying a structure that is over 10 years old
Understanding the integrity of a structure and taking necessary caution will help mitigate building failures and collapse
Structural integrity test might cost you an average of one hundred and thirty thousand naira (N130,000) for a fully detached duplex, although it depends on the location, and size of the house.
5. COST-MAINTENANCE ANALYSIS :
Maintenance costs are the expenses that are the result of your efforts to keep the property in optimal working condition.
It is obvious that whatever is not growing is dying and whatever is not improving, is dilapidating. Therefore every business/investment needs maintenance and will incur maintenance costs. Not acknowledging this fact will only lead to business failure or investment decay.
Therefore, it is highly recommended for a property buyer to start by knowing the age of the house, maintenance history, structural integrity, the state of the roof, plumbing, water supply systems, electrical wiring conditions etc.
If these are not properly investigated and analysed before concluding the transaction, it’s important to note that unprecedented expenses might be brewing around the corner.
A real estate transaction is more than just an exchange of money for a property, it’s an intentional decision you make to advance your future and it’s a sure ticket to financial freedom if done right.
Not every home fits every neighbourhood and not every property fits your investment portfolio. To achieve financial freedom, you need to carve an investment niche for yourself.
Real Estate and Investment GPS Ltd is designed to help you optimize your game and achieve financial freedom using Real Estate. When you work with Real Estate and Investment GPS, You win 100% of the time