What Does Due Diligence Mean When You Buy A Property?

In real estate transactions, due diligence is a vital step in the home-buying experience. Due diligence in real estate transactions refers to reasonable measures which every individual should adapt before executing an agreement in relation to the real estate and immovable property.

By conducting due-diligence, you assess the risks associated with the property you are planning to purchase. You review the documents and ensure that there are no legal encumbrances on the property. It basically means to do your homework before actually making the purchase.

Due-diligence is performed by a property lawyer, but it is crucial for you to understand the basic terms used in the report and what do they imply in order to make a wise decision.  

The types

First and foremost you must know that they are two types of due-diligence reports.  

Full search report: When a full search due-diligence report is prepared, it is generally conducted for a title period preceding 30 years from the date on which the seller in question came into existence. This report includes a detailed search of all aspects relating to the history of a property.

Limited search report: Limited search report is prepared generally conducted for the transactions where the property is taken on a lease. It is generally restricted to 15 years.

The significance

Through due diligence, one confirms all facts relating to a property’s history, title, etc.

A title means right in the property. The word title does not always imply ownership in the property. It can also mean the right over the property as owner or possessor permanent lessee and a marketable title mean a title free from all reasonable doubts. The title documents should also have papers showing sanctioned plan layout. This plan should be certified by the officer of the land records.

Things to check in a due-diligence report

Check legal capacity of the seller: A due-diligence report should categorically state the legal capacity of the seller.

*The present owner or any other predecessor title holders should not a minor or a person of unsound mind.

*If the owner of the property is of unsound mind, only a person appointed as a guardian by a competent court under the Mental Health Act, 1987, can sell on behalf of the owner.

*If the current owner is a minor, the property can neither be purchased nor taken on the lease without the permission of the competent authorities.

*The report should also mention the nature of current owner’s right over the property.

*If the property is in joint names, an NOC should be obtained from the co-owners.

*When a property is held by a Hindu Undivided Family, check the family tree and verify facts accordingly.

*When the property belongs to a partnership firm, society or trust, check the copy of the partnership deed.

Ensure all your taxes are paid

You must also check whether all the taxes have been paid or not by the seller. Taxes such as property tax must be paid by the seller till the time he held the property.

Make sure documents are in place

Occupation and completion certificates: Occupation certificate is given to a building by the municipal authority after verification of all supporting documents. The possession of flat is valid only after it receives a completion certificate and an occupation certificate.

Sale deed: You must check the original sale deed which should be in the name of the seller and ensure that property is not mortgaged.

Power of attorney: When the seller is not physically present to sell the property, he might appoint an agent with the power to sell by giving him a power of attorney (PoA).  In case of the owner is an NRI and the PoA is executed in a foreign country, it should be notarised before the Indian Consulate for the purpose of authentication. It needs to be attested by the sub-registrar, too.

Allotment letter and possession letter: When a property is acquired from the State Industrial Area Development Board like the Delhi Development Authority, documents relating to allotment, lease-cum- sale agreement, possession certificate or builder-buyer agreement needs to be checked.

Land records and mutation entries: These are the record of rights, tenancy and cultivation, issued by the registrar of land holdings. They could be obtained from the Tehsildar’s office.

Khata extract and certificate: For any registration obtained after paying the tax, a khata certificate is issued to the owner of the property or to his family members. This certificate is required to apply for water and electricity connection.

Additionally, you should also check whether a green clerance has been given to the project.