Discovering that the property you’ve just bought is riddled with problems, or that it’s in the wrong zoning, is every real estate investor’s nightmare. That’s why due diligence is a crucial step when buying a property. What is due diligence and what are the steps involved? Follow our expert advice.

What is due diligence?

Due diligence consists of evaluating all the elements that may affect the value of a house, building or business. Of course, it must be a condition of the promise to purchase, i.e. before the property is acquired. Some buyers prefer to carry out a summary examination before the promise to purchase, and then a comprehensive examination before signing the sales contract. The purpose of a due diligence is to :

• Avoid unpleasant surprises
• Validate revenues and expenses
• Identify situations that could adversely affect the building
• Make sure you pay a fair price

Stages of due diligence

To give you the tools you need to carry out a proper due diligence, we’ve put together a list of things you shouldn’t forget.

Locations

This section covers everything to do with the building, house or business, as well as the land and the municipality.

Checklist :

• Visit all the rooms in all the apartments, as well as the common areas.

It’s important to visit more than just one dwelling for proper due diligence. You may find that some of them are in a much more advanced state of deterioration than others. And don’t neglect common areas, inside and out.

• Ask for the “Seller’s Declaration”.

This document provides a complete picture of the property, its current condition and its history. The seller is required to list all factors that may affect the property. .

• Make an inventory of your personal property and equipment.

What goods and furnishings are included in the real estate transaction? Don’t take anything for granted.

• Obtain the environmental reports and pyrite test, if applicable, as well as the previous inspection report.

If you forget this due diligence step, you could find yourself unable to realize your plans.

• Ask for invoices and warranties for work carried out on the building.

Are the contractors who carried out the work in order? Has the work been carried out properly? For how long is the work guaranteed?

• Validate the information with the municipality.

How is the property zoned? Is it a flood zone? Are there any notices of non-conformity? Is it possible to obtain subsidies for the purchase of the property or for renovations?

• Check the certificate of location.

Does it detect potential problems? Is it up to date?

Residents and neighbors

The human aspect has a big impact on the happiness and profitability that a property can bring you. Your due diligence must absolutely include this dimension.

Checklist :

• Ask the police about the building’s reputation.
• Find out whether current tenants intend to renew their leases and whether they are happy with their accommodation.
• Read the building bylaws, if applicable.
• Check whether there are any applications pending with the Régie du logement.
• Ask for proof of deposits.

Photo credit: Unsplash

Financial aspects

Before you buy a property, make sure you take into account all the associated expenses. Taxes and operating expenses can weigh heavily on the profitability of your real estate investment. Here are the financial aspects to include in your due diligence.

Checklist :

• Check property and school taxes.

And don’t forget the welcome tax, a one-off payment to be made when purchasing the property.

• Calculate income from housing, if applicable.

Rent increases must meet certain standards. Are current rents sustainable in the short, medium and long term?

• Calculate other revenues such as parking, laundry and storage space, if applicable.
• Establish a budget for operating expenses: insurance, energy, lawn care, snow removal, etc.

Be as precise as possible, and don’t overlook anything. The effectiveness of your due diligence depends on attention to detail.

Due diligence for condos

Condos are a special type of property and require even more thorough due diligence.

Checklist :

• Read the declaration of co-ownership.

The Declaration of Co-ownership is a notarized contract binding all co-owners. It includes the act constituting the co-ownership, the building by-laws and the description of the fractions.

• Check the reserve fund amount.

Is this amount sufficient for the short, medium and long term?

• Check the condominium’s financial statements.
• Read the minutes of the condominium meeting.

These documents contain the decisions taken by the meeting. You may learn of upcoming problems or expenses.

Why do business with the Jean-Guy Ayotte team for your real estate transactions?

Considering the very large sums involved, we use our expertise to help you make a profitable, safe and successful real estate investment.

Make an appointment today with our team to finally find a property that matches your expectations, in every way. Photo credit: Unsplash