Due Diligence

Due diligence is a term common to many lines of business and industry. It simply means to do your research before making a purchase. According to the Investopedia site it became a common practice and common term with the Securities Act 0f 1933. The law was meant to ensure that investors had access to truthful and relevant financial information and disclosures when considering the purchase of publicly traded stocks and other financial instruments.

In real estate due diligence is a similar concept but can be a very lengthy and complex process, with lots of room for interpretation and errors. You’re looking for a piece of land to develop. You think you have a good idea for how to use the land that will be in demand. You’ve got some money committed for purchase and improvements based on your plan generating a return. Now the fun starts.

photo credit to http://www.kyforward.com

The nice thing about buying land is that you can see it, feel it, walk on it, observe the activity that happens on and around it. But in 21st Century America it can often be what you cannot see that matters. There is no land that someone doesn’t own. And there are a lot of individuals and groups that have rights to land they don’t own.

In Nevada the federal government owns approximately 85% of all land. Even when land is not publicly owned it usually has some designated use in the municipality in which it exists.

The first step in your due diligence will be to figure out what you’re allowed to do with the land. Can you build residential units? Homes or apartments? Can you build commercial? Can you farm it? Does a certain percentage have to remain undisturbed? How tall can you build? Etc.

You’ll find most of the critical information about the property in a title report. The title report will list all the ownership claims to the land. It will list all the easements. The easements determine who is allowed access to the land for various uses. Is there a major utility that runs underneath your property that can’t be disturbed and occasionally needs maintenance? Does someone have the right to drive cattle across your property every spring and fall ? (I’ve seen it). Does a mining company have rights to access some valuable mineral found deep underneath your foundation? Better know now.

When you enter into contract on land the contract will usually define a due diligence period which allows some time for you to perform this research before closing on the property. The contract will usually allow for refund of the deposit if you find anything that’s detrimental to the value of the property. The seller will usually provide any relevant information they have about the land that will help facilitate a sale, but not always. It can be a nice head start but you’ll want to rely on your own team of experts. Lawyers, land planners, engineers, architects, hydrologists, geologists, biologists, and lobbyists may all be critical in determining the allowed use.

There’s plenty more to consider when purchasing land and I’ll revisit this topic in the future. Just remember to leave no stone unturned. It’s often what you don’t know that can be dangerous.

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Thanks for reading.

Author: edmorgan1

I am an accounting and finance professional focused in the real estate development sector in the North Lake Tahoe and Reno area. I have managed the accounting and financing of large master-planned communities in high end resort areas with complex arrangements for large public companies and for private asset managers. I am experienced in GAAP financial reporting, business plans, cash forecasting, variance reporting, audits, treasury management and tax. I have helped companies grow and downsize during the real estate cycle and have a proven ability to manage diverse teams through real estate matters. In my current role I am managing a 900 unit master planned community through a change in ownership and am seeking new residential development opportunities in Northern Nevada.

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