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Real Estate Due Diligence: What It Is, How to Conduct It, and Why It Matters

Discover what real estate due diligence is : how it’s prepared, and why it’s crucial in real estate transactions and property asset management.


In the ever-fast-paced real estate sector, ‘real estate due diligence’ is the key that can unlock incredible opportunities and prevent serious mistakes. In this article, we will explore every aspect of this practice :from its definition to checklists, from its goals to its importance for various players in the real estate industry.

What is Real Estate Due Diligence?

Real estate due diligence is a highly significant process in the vast universe of real estate operations. It involves a detailed investigation into the state and conditions of a real property. So why is it so important? Imagine buying a house without fully knowing its structural conditions or without verifying if there are legal issues associated with the property. This could turn into a financial disaster. This is where real estate due diligence comes into play. It provides a comprehensive and detailed map of the property, enabling you to make informed decisions and minimize risks.

What Real Estate Due Diligence Evaluates

To fully understand real estate due diligence, it’s crucial to go beyond the simple definition and delve into its key aspects. In fact this practice not only involves visiting the property but comprises several essential pillars:

  • As-Is Condition – One of the initial stages of real estate due diligence is evaluating the as-is condition of the property. This involves a geometric and photographic survey to accurately describe the current condition of the property. In other words, we are trying to understand “where we are” before proceeding.
  • Maintenance – Maintenance is a crucial aspect. During due diligence, the efficiency of systems, functionality of roofing, fixtures, masonry, structural conditions, drainage systems, and more are examined. The goal is to identify any problems or areas requiring attention.
  • Zoning Status – Zoning regulations are another sphere of interest. Real estate due diligence checks for building permits, concessions or construction permits. It also checks for the issuance of occupancy certificates and the presence of building amnesty. Furthermore, it carefully examines possible construction irregularities and constraints.
  • Cadastral Status – Due diligence doesn’t stop here; it also includes a check of cadastral data, including owners, addresses, and floor plans. This step is crucial to ensure that all information is correct and up-to-date.
  • Legal Verification – Lastly, legal verification helps determine the actual ownership of the property and identifies the presence of mortgages or lease contracts that could affect the purchase or investment.
  • BIM Business Intelligence - due diligence immobiliare

Real Estate Due Diligence Checklist

In light of what has been said, here is a useful checklist for preparing real estate due diligence:

  1. Introduction and Purpose
    • Understand the objective of the analysis (purchase, sale, redevelopment, management).
    • Identify the parties involved in the process (buyer, seller, professionals, etc.).
  2. Preliminary Documentation
    • Obtain all legal and administrative documents related to the property (deed of ownership, floor plans, permits, etc.).
  3. As-Is Condition
    • Conduct an accurate geometric and photographic survey of the property, possibly using BIM software for detailed 3D representation.
  4. Maintenance Assessment
    • Verify the efficiency of systems (electrical, plumbing, HVAC, etc.).
    • Evaluate the condition of roofing, fixtures, masonry, and load-bearing structures.
    • Examine the drainage system.
    • Identify any structural issues or need for major maintenance.
  5. Zoning Status
    • Check for building permits and other necessary permits.
    • Confirm the issuance of occupancy certificates.
    • Investigate potential building violations or irregularities.
    • Evaluate the presence of zoning constraints.
  6. Cadastral Status
    • Verify cadastral data, including owners, addresses, and floor plans.
    • Ensure data accuracy.
  7. Legal Verification
    • Determine property ownership.
    • Discover the existence of mortgages or other encumbrances.
    • Examine existing lease contracts.

Benefits of BIM in Existing Property Analysis

Analyzing existing property, in the context of real estate due diligence, is a crucial step in thoroughly assessing property conditions. In this process, the use of BIM (Building Information Modeling) software emerges as a valuable and highly advantageous innovation.
BIM software enables an extremely detailed geometric and photographic survey of the property. Indeed this includes not only precise three-dimensional representation of the building but also the ability to capture specific information about structural elements, systems, finishes, and architectural details. This wealth of data provides a complete and reliable overview of the property.

Innovative techniques for architectural surveys

Among the most commonly used innovative techniques for architectural surveys are photogrammetry and 3D laser scanning, which allow for the implementation of Scan to BIM workflows, a process aimed at creating a BIM model of an existing building directly from the point cloud obtained through 3D digital survey, imported into specialized BIM software for digital modeling. These techniques enable the comprehensive, fast, and highly accurate documentation of the actual state of a building (to learn more, read ‘Architectural Surveys: What Are They For and How Are They Prepared‘).

If you need to analyze a property, experience the advantages of a Scan to BIM workflow with a fast and powerful Point Cloud to BIM software .It helps you transform your point cloud into the corresponding BIM model, significantly reducing modeling times.

One of the key advantages of using BIM in this phase is the ability to perform dynamic simulations to assess the energy consumption of the building. This allows for extremely precise and reliable estimates of future operating costs and energy efficiency, crucial information for property management and optimization. In this case, for evaluating the energy performance of the property, a BIM software for dynamic energy analysis and simulation of buildings can be very useful.

Moreover, the significant simplification brought by BIM to data sharing among professionals involved in due diligence, such as engineers, architects, and surveyors, should not be underestimated. This facilitated collaboration enhances process efficiency and reduces the risk of errors.

It is evident how the use of BIM software in property analysis provides a solid foundation for making informed and strategic decisions regarding property management, maintenance, and potential redevelopment. Its ability to provide accurate data, energy simulations, and facilitate collaboration among professionals makes it a key element in modern real estate due diligence.

Objectives of Due Diligence: Advantages

The objectives of real estate due diligence go well beyond a simple analysis. It aims to provide a complete understanding of the state of a property or real estate portfolio. This knowledge can translate into several advantages:

  • Optimization of management and costs: With a clear view of property conditions, you can plan maintenance accurately and improve operational efficiency, while simultaneously reducing costs.
  • Revenue Increase: Real estate due diligence can reveal opportunities to increase revenue through improvements or changes in use.
  • Increased Profitability of Real Estate Investment: An accurate assessment of a property’s condition allows for informed investment decisions, increasing the likelihood of financial success.

Real Estate Due Diligence Clients

Who are the main clients of real estate due diligence? This practice is requested by a wide range of players in the real estate industry, including:

  • Property Owners: Both companies and individuals who own real estate can benefit from real estate due diligence. This practice provides them with comprehensive technical, legal, and administrative knowledge, essential for divestitures, acquisitions, sales, or redevelopment.
  • Real Estate Companies: These companies manage real estate portfolios or individual properties and rely on due diligence to make strategic decisions.
  • Owners of Tourist Facilities: Hoteliers and owners of tourist facilities often require real estate due diligence to improve energy efficiency and reorganize their commercial offerings.

Monitoring

The due diligence activity can be integrated with a subsequent property monitoring phase. This process allows for the ongoing monitoring of property maintenance and management. Using sensors and online systems, it’s possible to detect and address any issues promptly.
For example, imagine having a hotel property: monitoring can help you maintain the facilities in optimal condition and ensure that services are always at their best, enhancing the guest experience.

Key Role in Property Valuation

Real estate due diligence plays a key role in property valuation. Before buying or selling a property, it’s essential to fully understand its condition and potential. This practice provides a solid foundation for financial decisions, ensuring there are no unwelcome surprises in the transaction process. Additionally, another often underestimated aspect of real estate due diligence is its role as a safeguard: it prevents buyers from encountering difficulties due to unknown property issues and can protect sellers from potential post-transaction disputes by demonstrating that they provided accurate property information.

Recent Developments in Real Estate Due Diligence

The real estate industry is constantly evolving, and real estate due diligence is no exception. In recent years, significant developments have occurred, such as the increasingly widespread use of digital technologies. Advanced software solutions, including property management platforms and BIM modeling systems, are revolutionizing how due diligence is conducted: don’t forget to consider facility management software like usBIM.maint as an integral part of efficient property management.

 

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