Legal services in Portugal

What Is Due Diligence And Its Relationship With Properties?

The legal definition of due diligence is the amount of care, caution, and action an individual or company needs to gather unbiased, reliable data before a particular event or decision. When real estate brokers talk about "due diligence," they typically mean either the buyer's investigation before submitting an offer or the time of contingencies before the final closure. Due diligence in real estate includes checking papers, making financial estimates, and assessing risks. You may see it as an individual or company "doing their assignment."

Due Diligence Period

The due diligence procedure is crucial to prevent any future issues with the purchase. The legal representative will set aside a predetermined time (usually two to four weeks) to gather and review the property's pertinent legal records and other information. During this period, the promissory agreement—often abbreviated as "CPCV"—is also created and discussed by both parties, Purchaser, and Seller.

Why Is Due Diligence Important?

The buyer would use the due diligence phase to gather and examine comprehensive documentation about the item. Below is why it is important to carry out due diligence before purchasing a property:

1. Deep Investigation

Due diligence provides an in-depth investigation into issues, including licensing and building permits, demography, traffic, noise, hazardous chemicals, earthquake faults, etc.

2. Economic Factor

To purchase an income-producing property, maybe you are a real estate investor or a business person; you or your consultant will research economic aspects such as market supply and demand, comparable rentals, vacancies, running costs, real property taxes, and insurance. Doing this will give you an understanding of what you want to invest your money in and consider its risks.

3. Mode Of Transaction

You might not always have the desire to buy property in Portugal. You could desire to finance, develop, or lease real estate in certain circumstances. Real estate due diligence in Portugal varies depending on the type of transaction, so it is crucial to ascertain this. For instance, when leasing, the lease agreement must be considered, and when financing, the security for the loan that will be issued must be appropriately noted.

4. Understand The Condition Of The Property

Existing buildings or structures are common on properties. Smart buyers will frequently employ a professional to inspect and undertake due diligence on the condition of the buildings and environmental subsoil. To do this, it's common practice to engage the services of an engineer or building consultant to evaluate and assess commercial properties and produce a report on their current state.

5. Feasibility

To ensure that undeveloped lands can be developed, you will need more engineering skills throughout the due diligence process for the raw property.

6. Insurance Requirements

A property can only be denied insurance coverage if it doesn't match the insurance provider's basic requirements. Due diligence will allow you to go deep enough to determine if the property you want to acquire can satisfy the basic requirements to get insured.

7. Title And Ownership History

The property may have a lien against it that must be satisfied before it can be sold out. If the previous owner had work done on the property but did not pay the contractor the total amount owed, then the buyer might have to settle the debt before the title can be released free and clear in your name if they are unaware of this lien. Therefore, before making the final purchase of a property, it is crucial to conduct a title search to ensure you will receive the title free, especially to clear any ownership problems.

The Purchase Process

Following your agreement on a price for the purchase of your new home, the following procedures serve as a general guide:

1. This is the time to hire a lawyer if you haven't already. The typical fee for a solicitor's services is 1% of the purchase price. You can hire an attorney to finalize the sale on your behalf, especially if you don't have the time to sign in person or deal with the formalities of the process. You can hire an attorney from the notary's office.

2. The buyer's attorney will review the property's paperwork before creating a promissory contract, or "Contrato de Promessa de Compra e Venda." The promissory contract provides information about the property, the owners and potential buyers, the terms of the purchase, and the deadline for the sale to close (within six months).

3. After the attorney has created the promissory contract, the next process is to review it and approve its provisions by the seller and attorney.

4. Before a notary public, the buyer and seller or their legal representatives will sign the promissory contract. After signing, the buyer will give the seller the deposit. Typically, this is 10%.

5. The buyer and seller (or their legal representatives) reassemble for the "Escritura Pública de Compra e Venda," or the final act of sale. They can meet in front of a notary or a Casa Pronta office. After the seller receives the purchase price balance, the seller will give the buyer the keys to the property. Following this, the Land Registry records the property in the new owner's name, and the transaction will be completed. Property Purchase Tax In Portugal Upon every property purchased in Portugal, Imposto Municipal Sobre Transmissões Onerosas de Imóveis (IMT), which can be up to 8%, will be added to the property. Also, a stamp duty (Imposto de Selo) of 0.8% will be included. Imposto Municipal Sobre Imóveis (IMI) is another tax to pay. It ranges in annual amounts from 0.3% to 0.8%, depending on the kind of property, location, and age. Meanwhile, it is 10% where ownership is presumed to be based in a "tax haven" jurisdiction.

With due diligence, buyers can avoid making a poor purchase, and sellers can be held accountable.