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  • Writer's pictureLuis Alfonso Licona Ortíz | L.D

Due Diligence in real estate

Is it possible to reduce risks in the real estate sector by using a tool such as Due Diligence?

When a person or entity intends to acquire a real estate property that promises to be a gold mine, since the price agreed in the purchase/sale is a bargain, it is until the transaction is formalized when a series of irregularities occur and the buyer is disappointed because it is not the "great offer", so the loss of time, trust and risk of not getting the transaction, can be eradicated with an invaluable legal tool, such as the Real Estate Due Diligence.

A couple of weeks ago, in a chat with a group of friends who, although all of them are successful businessmen, have little or nothing to do with the world of Real Estate Law, the subject was brought up regarding the great interest that this area of Banderas Bay and Puerto Vallarta awakens in the acquisition of some real estate in the short or medium term, which makes it a clear option to satisfy the demand of potential buyers.

During the dynamics of the conversation, I could notice that most of them considered the real estate activity as something simple, without considering the difficulties that those who venture into it have to face. Therefore, and in view of my professional background, I could not pass up the opportunity to share my knowledge on the subject, until I came to the inevitable mention of "Real Estate Due Diligence" as an indispensable tool to avoid monumental real estate failures.

I must confess that as soon as I finished saying the prayer, I was asked to explain in simple terms what this meant. In an atmosphere of laughter, but without losing sight of my natural sense of professionalism, I told them:

- Well, in theory, "Due Diligence" is a process of investigation, analysis and valuation of the legal, architectural-urban and tax aspects related to a real estate asset being acquired. In other words, one could say that it is a thorough review of a property from several points of view, mainly legal, physical and financial; because the success of these sectors lies in prevention rather than reaction.

Of course, for the understanding of the subject, empirical knowledge of the profession was mentioned, for example: a certain company was given the task of buying a piece of land located in such place, but at the time of formalizing before a notary public they realized that "Chuchita was cheated", that the person who claimed to be the owner was in fact the friend, the grandson, the son, the uncle who claimed to have a right for having lived in the property for a couple of years.

Other absurd -but true- example is when a person or entity acquires a property that seems to be a gold mine, because the price per square meter turns out to be a bargain and because the land use is presumably compatible with the project, until, at the moment of truth, it occurs to them to send a topographer to make a topographic survey of the property, only to find out that hundreds of meters are missing or that it invades a neighbor's property.

Neither could be missing those stories where buyer and seller sign a preparatory contract after the negotiations, but when the date of formalization approaches, they ask for a certificate of freedom of encumbrance that shows that there is a mortgage or a reservation of title on the property.

It is no less important that in this kind of reviews, buyers identify if the object of the operation has availability of basic services such as potable water, sewage and electricity; as well as to verify that they are not part of areas considered property of the nation.

In short, this talk helped us to conclude that on many occasions reality does surpass fiction and that the result can be fatal. Fortunately, there are tools such as Real Estate Due Diligence, which provides greater legal certainty in obtaining and/or ensuring success in this kind of operation.

In Terán Rojas & Associates we have a space for you, who want to know important aspects about this and other topics, our experts are waiting for you to provide you with the best advice and solution.


Published on October 10th, 2022

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