Due Diligence: Evaluation of Outstanding Debts and Liabilities

An important part of buying real estate is checking the status of outstanding debts on properties or businesses.

Let’s start with the property.

When checking a property title, you will find certain annotations that could raise a flag when it comes to debs, specifically when the property has been used as collateral or is part of a lawsuit.

At first glance, the annotation will not say much as it will be shown as a number alone, so the legal representative in charge of performing the Due Diligence must engage on a deeper dive into the National Registry to find out what is the annotation for by buying a few certifications and sometimes, even checking a complete file.

There are plenty of examples of properties with annotations, for instance:

∙ Property being used as a token on a purchase or business deal.

∙ Property being part of a divorce process.

∙ Property being used as collateral on a loan.

∙ Property currently being auctioned.

Each of these examples can have different solutions depending on the specific scenario, the same way there could be no solution whatsoever. What is truly important is not to miss a detail with such importance before continuing with the purchase of estate.

Debts on businesses.

When reviewing the information about a corporation, you rely on information of public access online as well as the information provided by the seller. However, when it comes to buying a property held by a corporation, there could be “hidden” creditors.

Then again, Due Diligence is limited to check public information. Should a red flag rise, a deeper study will be required.

Unless determinant (let’s say you want to buy a business with a name that is a recognized brand, which has an added value), it is not recommended to buy a corporation for real estate purposes. Instead, a new corporation can be created so that you can transfer the property alone.

What happens if I buy a property/business with a debt?

A few weeks ago, a tenant called to know about his rights since the landlord sold the house he was renting. A special concern raised in terms of the security deposit he paid when he moved.

Even though the buyer knew the property was being rented, he was not aware he needed to honor the contract of the tenant, thus, he was now obligated to respond for the security deposit, something that was not contemplated in the Purchase Agreement.

Moral of the story is: the person who acquires a property, accepts it with all its conditions. This includes debts and liabilities on the same. Another important reason to perform a Due Diligence process prior investing on real estate. Do not forget to follow the Due Diligence Series, read our previous article here.