The term ‘Due diligence’ implies the reasonable verifications and precautions taken to prevent or identify foreseeable risks. It is the process in which an action is arrived at prior to consummating it.
When it comes to investments, real estate is considered to be one of the most sought-after avenues in comparison to investments in the stock market and mutual funds etc. In other investments, one has to be careful regarding various parameters that can have an effect on the return and may even incur very heavy losses. Real Estate investments, on the other hand, do not tend to depreciate and the risks of investment lie mainly in legal issues. Hence, the returns are fair if due diligence towards clear titles are taken care of.
Why should the title be clear?
When an NRI is investing in a property, the first thing he or she should do is check whether the property is free of any legal hassles. One of the main things that can create a legal problem is not having a clear title of the property. In general, the title simply means the owner has the full legal right to the property. The title should be free of all kinds of liabilities so that it can be transferred without any kind of difficulties.
Why is Legal Due Diligence required?
While buying a property in India, it is advisable to conduct due diligence to verify the titles of the property and also check whether there are any encumbrances over the property. Such liabilities could either affect the ability of the owner to transfer the property ownership or could attach themselves to the property or land even after it is transferred and affect the buyer at a later stage. Hence it can be said that the main objective of due diligence is to gather complete information of the property so as to make a clear investment without the risk of legal hassles.
The type of due diligence and the extent to be undertaken by the purchaser’s attorney will depend on the following:
o What are the business objective and risk profile of the lessee/buyer?
o The type of real estate involved
o What kind of transaction is it? Whether it is a short-term investment or long-term investment, financing of real property or mortgage.
o In what duration will the transaction be complete?
o Is the buyer planning to get the per-transaction or post-transaction financed by a third party?
In conclusion, it is of most importance in property investments to do a thorough investigation of the property titles. In real estate a person can make a profitable investment only if he carefully examines the various legal issues involved in the real estate transactions and, if necessary, should take the advice of a qualified property lawyer for carrying out due diligence.