For real estate developers, performing due diligence is an enormously important task that involves multiple stakeholders, inspectors and environmental groups, architects, state and local government agencies, and contractors… just to start. It’s very easy to forget something vital to the success of your project.
Without effective protocols in place, a developer may overlook red flags in the title, easements, or even on the property itself that could turn into millions in lost revenue (not to mention a number of lawsuits).
To help out, we assembled this basic due diligence checklist for real estate development that will guide you through the process:
Developers can choose to purchase greenfield or buy a property with existing structures. The pre-acquisition considerations for each will differ slightly, but the fundamentals are the same:
Title and zoning due diligence
Buyers are responsible for undertaking all aspects of title and zoning due diligence. This process involves several key verification steps, not to mention collaboration with several local agencies and private organizations.
The buyer is responsible for confirming that property conditions match the descriptions on the title and survey before the sale. They will also need to confirm that the owner of the property is the sole property owner (and not a part owner looking to sell the property out from under other stakeholders).
In addition, buyers must perform due diligence on land use and zoning to ensure that the intended structure is compliant with local guidelines, environmental protections, and regulations. Failing to do proper checks on zoning guidelines could result in costly plan revisions, perhaps even a long and drawn out petitioning process that could slow your development by months or years.
Traditional surveying fulfills most basic legal needs, but more and more developers are adding a bird’s eye view to protect themselves from potential liabilities.
Outdated topographical maps often don’t reflect current conditions on the ground, which can impact everything from building design to water runoff planning and more. Thankfully, advanced UAV surveying technology offers a fast and affordable alternative to traditional mapmaking to fill the gap.
Financial due diligence
Before purchasing a property, you need to ensure the title on the land is clear. Financial due diligence ensures that the sale won’t be held up by tax liens or judgments against the property.
In addition to searching for liens, your title company should provide documentation of recent tax payment amounts.
Utilities, access, and environmental use due diligence
Land access is a big surprise for a lot of first-time land buyers. Not all land is accessible to power companies and utilities, even in some urban and suburban areas. Properties that have existing access roads may not be accessible to public water and sewer without significant infrastructural work.
The difference between available on-site utilities and “nearby” utilities can cost a developer hundreds of thousands of dollars in work and delays, even when the connecting distance is only a few dozen meters.
The land buyer will also need to check easements, covenants, and conditions on the property to ensure they are up to date. Existing right to access agreements on a property can present snags that create big problems down the line.
Existing property due diligence
Replacing an existing structure comes with its own set of considerations. While you may not need to confirm utilities or survey raw land, existing structures usually have commercial or residential tenants that require their own layers of due diligence.
In addition to documenting existing agreements, leases and deposits, and other accounting, developers will want to document conditions in the existing building and surrounding areas.
A lot of developers now use drones to survey nearby properties prior to construction to have a record in the event of unexpected damage. For demolition projects in high-density urban areas, this documentation is especially valuable.
DURING CONSTRUCTION CHECKLIST
Of course, due diligence doesn’t stop when a property is purchased. To ensure the best ROI, complete and thorough documentation should continue throughout the project lifecycle to prevent the kind of mistakes that could cost developers money.
Start by documenting pre-construction conditions on the job site. This should include the condition of existing nearby structures, as well as natural features such as protected waterways. Detailed photo documentation of your underground utilities, slab, and other vital infrastructure ensures that you will be able to visualize and measure all of the in-ground and in-slab systems even after they have been covered.
Many developers will opt for progress photography throughout the construction process to protect against future claims, confirm subcontractor work, or simply check on-site progress without traveling to the job site.
Once you receive the certificate of occupancy, due diligence during the handoff process can prevent the miscommunication down the road. Proper documentation of as-built conditions throughout the property is a valuable resource for facilities managers. For example, having access to detailed 3D-measurable images of in-wall or in-slab utilities can minimize the amount of demo or destructive verification needed to access them, expediting repairs and streamlining the whole process.
Virtual walkthroughs are a valuable resource for sales and marketing teams looking to sell properties as well.