‎Real Estate Due Diligence in Brazil

How to do a Real Estate Due Diligence

Anyone in the real estate sector will have heard a horror story about projects that are delayed, become more expensive, or even canceled due to situations inherent to the land.

Some hypothetical cases:

The construction permit takes more than two years to come out, because the measures of the deed do not coincide with those that the Municipality has in its file, and a prior rectification has to be made.

The excavations for the basement begin, only to find that the terrain is much rougher than they had considered. Now it turns out that you cannot make two basement levels but only one.

The utility of the project was perfectly calculated at the time of acquiring the land, but the additional cost of bringing the gas infrastructure had not been considered, since the closest intake is 5 km away.

The bad news, for these hypothetical cases, is that with the project being so advanced it can be very difficult to recover from these major unforeseen events.

The good news for us is that all these eventualities can be predicted, and even prevented, by doing a real estate Due Diligence: the process of reviewing the background of a property, to identify possible situations that could put the viability of the project and the business at risk.

how to do a real estate due diligence

The main objective of Due Diligence is to confirm the viability of the real estate business before making a major investment.

It is an iterative process, during which various factors that affect each other must be analyzed:

Market

Technical

Legal

Financial

Due Diligence will require an investment greater than that which had been made up to now in the process of selecting and acquiring a property. For this reason, my recommendation is that before starting a purchase promise or contribution with suspensive conditions is signed.

In other words, that the acquisition of the land is conditioned to the positive result of all the aspects that will be evaluated during the Due Diligence.

In this way, you as an investor will be protected in the event that an unfavorable situation arises for the business.

market viability

During this validation stage is where it is most recommended to carry out a real estate market study, to confirm the assumptions that were had up to now in relation to the product and the market:

Perception of value of the area: both for the location and for the services available around it (schools, parks, shopping centers, etc.)

Total demand: the total amount of spaces that are required in the area to satisfy the needs of the population

Current supply: the number of spaces that are already meeting the demand in the area

Unsatisfied demand: the area of ​​opportunity for the real estate business; the necessary spaces that are not yet covered by the current offer

Product definition: the ideal mix of units to meet demand and meet business objectives

Minimum and maximum prices accepted by the market

Expected absorption: the number of units that are expected to be sold on a monthly basis

It may interest you: Our secret to achieve "impossible" real estate deals

technical viability

This includes all the physical and regulatory aspects of the property that must be confirmed before proceeding to the next stage:

Dimensions of the land: make sure that the width and length measurements allow you to develop an efficient project. For example, for a parking lot, one side is required to be at least 32 meters wide, to accommodate two rows of drawers and lanes.

Infrastructure: identify existing services and confirm if any additional investment is required, such as the growth of electrical capacity or connection to a water or gas connection that is located far from the property.

Topography: analyze the physical characteristics of the terrain; confirm, for example, that contour lines are not below the city's drainage level, or if additional excavation or fill will be required.

Impacts: check if there are rights of way of any municipal, federal or state agency, such as underground pipes, bodies of water or high voltage lines. If so, the corresponding procedures must be carried out to confirm whether it is possible to build around them.

Regulations: make sure that the project is within the guidelines of the Urban Development Plan and the local building regulations.

Soil mechanics: if necessary, carry out a study of the physical composition of the soil, which confirms the investment assumptions for concepts such as foundations, structure and construction of basements.

For some of these points you will need a conceptual architectural project. There are two paths you can follow:

Hire the architectural firm that will continue with the project later on. This projects continuity to the decisions, but requires a greater initial investment.

Hire a trusted firm or architect, solely for the conceptual project, that it reduced to investment, but corresponds to the risk of having to start from scratch in the next phase.

legal feasibility

The property's antecedents must be studied and verified:

Property history: take a trip back in time to the origins of the land; confirm if the current dimensions have been the same from then or if it has been merged or subvidid; analyze property acquisition methods over the years.

Property: confirm that you are up to date with all the required tax payments.

Freedom from liens: make sure property is not encumbered; that there are no liens, debts, credits or annotations involved.

Current owner: confirm that the person with whom you are negotiating is actually the rightful owner; asked for their identification and addresses. If there is a co-ownership, confirm that you are treating yourself as the correct representative and that you have the consent of the other owners.

Property limits: verify that the measurements and property limits of the deed coincide with those of the Municipality; make sure there are no trespassing on the property.

financial viability

Based on all the previous information, we will see a financing analysis to confirm that the business objectives of two investors are being met. For that they must be calculated:

Income: the total amount of sales, according to the information from the market study

Expenses: o total custody of the acquisition of land and construction, taking into account the additional costs of infrastructure or conditions that are identified in Due Diligence

Profit: the amount and percentage of profit obtained from the business

Financial Cost: the interest cost of the bridge loan during the life of the development

Financing structure: design of the structure and sources of capital to cover investment requirements

In case the profit and the returns to complement this analysis are lower than the expectations of those involved, then the financial viability will be negative. In this case, it is recommended that you do not go ahead with the acquisition of land, or that all factors be analyzed again until you reach a project option that meets the relative indicators.

If, on the contrary, all the elements of the Due Diligence are fulfilled, the project becomes viable and is positive, with which it is possible to proceed with the acquisition of the land.

As you can see, Due Diligence is an essential process to confirm the viability of a real estate business. There is no process for the acquisition of a land and the administration to carry out a Due Diligence by the hand of experts, contact us. We are sure that together we will be able to enhance the value of your real estate business.