Thursday, February 28, 2008

Buying Property - Part III: Property Due Diligence

Here’s the third in the series on Buying Property. In the first one, I talked about the key players in the property buying process, and in the second, I started talking about key steps in the property buying process. In this post, let’s talk about property due diligence, which is the next step in the process.

This is an extremely important step – one in which I would not recommend any short cuts. Your due diligence should focus on the following things:

Ascertaining the identity of the seller: This step is done to ensure that you are paying the person who actually owns the house. To do this, make sure you call the seller to the meeting when you are finalizing the deal. Even if this is not possible (for instance, if the owner is out of town), at least ensure that the seller is present at the time of transfer of property with an identity proof for extra measure. Some other ‘informal’ measures you could take are:
- During your discussions, strike up a conversation to know where he/she works, where he lives, find out any common interests which might lead to acquaintances and friends in that area. Try to verify whatever you learn from the seller from your network of friends.
- Google the seller or anything that he / she has mentioned so that you know that the seller is not fake.
One word of advice though – you should try to establish the identity of the seller through informal means preferably before you have closed the deal. You wouldn’t want to do a deal with someone who probably has a criminal background.

Ensuring that the property documents are in order: This process step is to ensure that the seller has the title to the property and has the rights to sell it. In the scenario that we had taken to describe the house buying process, the following are the documents you need:
- Allotment letter from the builder
- Flat buyer agreement
- Payment receipts for all payments made during the construction of the property
You need to see these property documents in original during the time that you are finalizing the deal and get a photocopy of each of them. You need to get these documents checked from the following people:
Builder: You need to go the builder’s office and verify these documents. The builder will have a copy of all these documents and receipts. The builder maintains a file for each apartment house which has a track of all the transactions that have happened for the house e.g. if the house has been sold multiple times before you are finally buying it then, the builder will have a record of all the buyers and sellers and all the payments that have been made. Ask the builder for a look at this file. This record will also tell you whether there is any legal tussle / action happening regarding this house. At this time, you can also ask for the account statement which will tell you the amount that has been paid to the builder and any outstanding amount.
Lawyer: You should consult a lawyer to vet the flat buyer agreement. The lawyer should give a go-ahead on the document only when he/she is fully satisfied that the buyer has full right to sell the house. In case the lawyer wants to carry out further checks, please act on his advice.
Many times, the seller will have a bank loan. In this case, the property documents will be with the seller’s bank. You should ask your broker to talk to the bank and fix up an appointment, so that you and your lawyer can go and physically verify these documents. The reason you should ask your broker to talk to the bank is that this is his role and that’s what you are paying him for.

This due diligence step can be made significantly easy for you if you take a bank loan. The bank does all the due diligence before lending and if it approves of a property, you can rest assured that there are no issues with the property per se. My recommendation would therefore be take a bank loan, even if it is for a very small amount.

The next post in the series is on the Agreement to Sale, which is again a pretty critical step in the process.

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