Understanding Due Diligence in Real Estate Transactions

Preem & Partners | 12th February, 2025

The Nigerian real estate sector is experiencing notable growth, contributing 5.58% to the country’s GDP in Q3 of 2023 and 5.43 in Q3 of 2024. The real estate market is anticipated to achieve a value of $2.61tn by 2025, highlighting the sector’s unhidden potential.

As attention shifts from the oil and gas industry to real estate, which is currently the third largest sector in Nigeria [having displaced oil and gas by the National Bureau of Statistic’s debased GDP data], numerous investment opportunities emerge. However, with these opportunities come significant risks, including fraudulent transactions.

To safeguard investments and ensure seamless property acquisition or possession, conducting thorough due diligence is essential. This article explores the importance of due diligence and outlines key areas to focus on before acquiring property in Nigeria.

Due Diligence Explained

Due diligence refers to the comprehensive process of investigating, verifying, and analysing relevant information to assess potential risks and opportunities before making a business transaction, investment, or decision. In real estate, due diligence ensures that all legal, financial, and structural aspects of a property are thoroughly examined before acquisition.

This involves scrutinising property documents, confirming ownership legitimacy, checking for encumbrances, and assessing compliance with regulatory frameworks. Due diligence also includes evaluating the financial viability of the investment, understanding tax implications, and assessing the physical condition of the property.

A thorough due diligence process minimises the risk of legal disputes, financial losses, and unforeseen challenges, ensuring that investors make well-informed and secure decisions. It ultimately protects buyers from fraud, defective titles, and other complications that could jeopardise their investment.

Essential Due Diligence Checks for Real Estate Transactions

1. Physical Due Diligence

Physical assessment of the land is crucial to determining its viability for development. This includes:

Conducting a physical inspection to identify any potential environmental or structural issues.
Identifying potential environmental concerns such as flooding, erosion, or contamination – environmental assessment.
Evaluating soil conditions to determine its suitability for construction – geotechnical investigation.
Verifying the availability and quality of access roads, drainage, and other necessary infrastructure – infrastructure evaluation.

2. Legal Due Diligence

Before purchasing land or property, prospective buyers should conduct the following checks, advisably through a Real estate lawyer or law firm:

Confirm the legal owner and identify any potential disputes over ownership.
Assess whether the property is free from outstanding debts, mortgages, or liens.
Verify the authenticity of crucial documents such as the Certificate of Occupancy [C of O], Deed of Assignment, and Survey Plan [where any].
Ensure the land adheres to the provisions of the Land Use Act and other relevant regulations.
Investigate pending or past suits or litigation concerning the property.

3. Financial Due Diligence

A thorough financial assessment helps prevent unexpected costs and ensures the investment aligns with market standards. Financial due diligence involves:

Comparing the purchase price with market values to determine its fairness.
Assessing additional costs such as agent fees, legal fees, and registration charges.
Understanding the tax obligations related to the property acquisition to avoid future liabilities.

4. Post-Acquisition Due Diligence and Compliance

Once the property has been acquired, it is advised to complete the following steps to secure ownership and prevent future disputes:

Register the property with the relevant government agencies to obtain a new Certificate of Occupancy. If it is a property with statutory right of occupancy, such registration may registration of the transaction, payment of stamp duties, and the consent of the Governor of the state where the property situates.
Conduct a second official search to confirm that the property remains free of encumbrances post-acquisition.
Regularly assess the property to ensure it meets investment expectations or is fit for purpose and remains compliant with regulatory requirements.

Conclusion

In a dynamic and evolving real estate market like Nigeria’s, due diligence is not just a recommendation; it is a necessity. By meticulously verifying all physical, legal, and financial aspects of a property before acquisition, investors and assigned right holders can mitigate risks, prevent financial losses, and secure long-term value.

Taking proactive steps in due diligence ensures a smooth transaction process and fosters confidence in Nigeria’s growing real estate sector.

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