Property Due Diligence: Why Does It Matter?

by BVR Property Team
28 December 2023

Buying property in Indonesia takes a long process and is challenging. Doing property inspection is one of the most vital processes you must do before committing the property transaction – this process is called property due diligence.


What is due diligence in property/real estate? Why does it matter? This article will explain the important aspects and what you should do when finding issues in the due diligence process. Let’s begin!


What is Property Due Diligence and Why Does It Matter?

Property due diligence is a comprehensive investigation or analysis of property financial, physical, legal, and environmental conditions in the area where the property is located. This activity is conducted by the buyer before dealing with any property transaction decisions.


If you want to do a property investment, this is a vital process because it can help you to minimize and avoid unwanted risks and conflicts regarding your property in the future.


Due diligence is an in-depth and time-consuming process, regardless of the type of property you buy – villa, house, apartment, or land.


6 Important Aspects of Property Due Diligence Inspection

Here are 6 important aspects of property due diligence inspection, as follows:


1. Legal Inspection

The first factor you need to do in property inspection is the legal one. Verifying the legal and ownership status of the property is crucial in property due diligence.


You need to encompass the examination whether the property has liens, encumbrances, and potential title defects.


Don’t forget to review permits, leases, legal documents, and contracts to make sure your dream property is clean from legal issues.


2. Physical Inspection

Besides legal inspection, physical inspection is also important for you as a buyer before making a final decision on the property transaction.


This process helps you to assess the systems, structure, and amenities provided by the property. Physical inspection can also give you an insight if there are any defects in your property or its facilities.


3. Financial Inspection

Everyone who wants to start a property investment must dream of generating income as much as possible. So, understanding cash flow assessment and the property’s income potential is vital for investors.


This is the function of financial inspection.


Conducting a financial inspection provides you valuable insights into the property’s long-term return on investment (ROI) outlook.


4. Environmental Inspection

Not only the property itself, but everything around the property is also important to be inspected. Moreover, in today’s eco-conscious world.


Conducting an environmental inspection provides you an information on contaminations or potential hazards that possibly exist around the environment of the property. This information is valuable for you to mitigate risks and compliance with environmental regulations.


The factors you can check regarding environmental inspection are:

- Soil quality

- Air quality

- Water quality


5. Land Zoning Review

If you want to invest in land, understanding land zoning regulations is vital for you to avoid legal issues.


Land zoning regulations give you an insight into determining the property’s intended use.


There are some intentions of land use – agricultural, residential, business, tourism, and more.


For instance, if you intend to acquire land (whether through Leasehold Title or HGB title) to construct a villa, ensure that the chosen land is legal for villa construction.


This review also allows buyers to evaluate the land’s potential opportunities or risks in the future.


6. Market Analysis

Recognizing market analysis is crucial for grasping the property’s value and potential in the market. Analyzing market trends, competition, and demand empowers you as a buyer to comprehend the property’s growth prospects.


Pre-offer Due Diligence

Before making any offer on the property you intend to have, you can do a pre-offer due diligence to have insights about the environmental condition around the property.


There are some factors you need to know in pre-offer property due diligence, as follows:


1. Median rents and vacancy rates.

2. Property value trends.

3. Job growth.

4. Population growth.

5. Neighborhood and school.

6. Crime rate.

7. Renter-occupied households percentage.

8. Household income levels.


Financial Due Diligence in Property

Profit is the ultimate goal of property investment. If you’re a property investor, you need to find out the projected profit you’ll generate from your property. The pro forma statement that you’ve done earlier helps you to make a final decision regarding financial due diligence.


Here are the lists you need to check when conducting financial due diligence on the property, such as:

- Real estate valuation, to know if the property you want to have is overpriced or at a good price.

- Fees and taxes when you have the property whether through HGB Title or Leasehold Title.

- Maintenance costs, including water, electricity, and internet costs.

- Decoration and repairing costs.

- Evidence of no debts on mortgage, utility bills, or taxes.

- The prices on other similar properties in the same area where the property you want to buy is situated.


Physical Due Diligence in Property

As a buyer, you must ensure that the property you want to buy is in good condition. Physical due diligence in property includes the following:

- Interior and exterior condition.

- Utilities.

- Mechanical systems.

- Structural items.

- Drains, driveways, and sidewalks.

- Finishing materials condition. Make sure they’re safe.

- Inspection of pests and insects.


Legal Due Diligence in Property

Legal is a factor that you can’t ignore at all when investing. Understanding legal factors in property due diligence helps you avoid law issues.


The lists of legal due diligence in the property include:

- Title documents for knowing who owns the property.

- Encumbrances – inheritance or mortgage.

- All needed permissions (in case the property is still under construction).

- Rules of renting out the properties: additional permissions, insurance, restrictions, and so on.

- Renovations.

- To find out if the property is under dispute or not.


Property Due Diligence Issues

After the inspection, sometimes the buyers know that the property’s condition is below expectations. This condition is possibly happening to you as well.


You have 3 ways to respond to the property condition – refuse the deal, you can fix the issues, or ask the seller to fix the issues.


If the seller fixes the issues, an amendment should be added to the contract.


However, there are some issues that sellers impossible to handle, like noisy environments, high crime rates, or severe construction conditions. If you face these situations, you have the option to either purchase the property despite its shortcomings or decline the offer and find an alternative property.


Make Your Buying Property Process Seamless

Buying property is time-consuming and challenging. To ensure the potential success of your property investment, it’s vital to assess every aspect of the property and ensure that it aligns with your expectations. One of the processes you must go through is property due diligence.


When engaging in property due diligence, it’s crucial to focus on various aspects – physical, legal, financial, and environmental aspects. Considering these aspects will contribute to securing the best property.

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