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As an appraisal or research for potential investors, the aim of due diligence is to check all material facts in regarding a sale. According to Investopedia, Offers to purchase an asset are usually dependent on the results of due diligence analysis. This comprises reviewing all financial records and anything considered or deemed to be material to the transaction. In the world today, it is rather important for sellers to carry out some due diligence on a buyer. One of the aims is to confirm the buyer’s ability to purchase, as well as other consideration that could affect property to be bought or the seller after the sale has been completed (Investopedia).
It is usually suggested that purchasers / buyers conduct a thorough research on the property before they are committed to buy. This exercise is deemed necessary in order to reduce the risk that potential buyers will be disappointed; thereby, increasing the chances the seller will get what they desire asides from a reasonable price (Investopedia).
The reality is that one would expect that an assignment of ownership of real estate from one person or entity to another should not be one worth all the investigation and protocol. A layman would compare the process as the same as working into a car show room and picking a ride of his choice, signing the necessary documents and driving it of the lot to his home much more difficult than buying golf clubs at a garage sale. This is because in a typical sales transaction, the sellers’ puts a price tag on the goods, the buyers signify or show interest to purchase goods and the parties haggle over price before they finally come to a compromise and agree on a fee or price. Transaction occurs, it’s a win win for both parties (Singer, 2013).
Unfortunately, things are not that straightforward when dealing with real estate. For example, each state has its own rules and regulations that govern real estate transactions. These procedures need to be adhered to in order to effect a legally binding sale. It is very technical since every jurisdiction has its own rules and regulations. Moreover, most transactions involving real estate involve a mortgage, meaning tons of additional back and forth paperwork in order effect sale (Schedler, 2002).
A typical example of the consequences of not conducting a proper due diligence is a situation where a person bought a vacant lot on the Internet without actually seen and confirming it. She paid for it before realizing that the property is unusable because it is on the edge of a development and on a deep slope. It was also part of an association, and the dues now have exceeded the value of the property. A due diligence exercise would have prevented the buyer from getting into this mess. Property owners are responsible for all the obligations, such as association dues and property taxes (Singer, 2013).
Singer, B. (2013). Sun Sentinel. How to get out of a land deal gone badly. Retrieved from: http://articles.sun-sentinel.com/2013-04-11/business/sfl-singer-housing-questions-link-20130412_1_general-informational-purposes-real-estate-pro-land-deal
Schedler, M. (2002). Williams Kastner. Due Diligence: what does this mean in real estate? Retrieved from: http://www.williamskastner.com/due-diligence-what-does-that-mean-in-real-estate-deals/
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