Overseas Real Estate Blog

Part 3 of Legal Due Diligence...

Top Tip No. 8: Maintenance Contract

If you are buying a property where there are common areas in the building or grounds then you will usually need to see a maintenance contract. This is an important part of the due diligence because quality maintenance enhances your resale value. Neglect can have a negative impact on rental and capital appreciation.

Check for the maintenance fee and what it includes and what it is for and when it must be paid. Specify when payment should start, for example building completion or opening of the facilities? Look out for VAT and future price rises. Are these specified? Are they index linked? Typically maintenance is expressed as an amount or as an amount per m2. Check whether a fund is being established for major repairs or if this will be extra. Check how often external woodwork will be primed/re stained.

Top Tip No. 9: Rental Guarantees

If there is a contractual guarantee you need to check these terms carefully. Check the exact amount is correct as you may have a percentage. How much own use are you allowed and which weeks are you not allowed to use. Check also when monies are actually paid and whether they are net or gross of maintenance charges.

Check who is actually giving the guarantee. Typically the developer but it could be their or another property management company. What is the risk this will be not honoured?

There are times when you are best not taking an offered rental guarantee because local rentals are very strong and you can negotiate a guarantee and/or rental management agreement with a specialist organisation. Some owners in Dubai recently have found they are betting doing this because the rental market is so strong there.

Top Tip No. 10: Listen to your lawyer (but its you who should direct)

Try to become involved in a discussion with your lawyer. Often terms need clarifying and make sure he does this. Sometimes lawyers can aggravate disagreements. Consider carefully which points are really worth arguing over and which are being highlighted for more "point scoring" purposes. Focus on the key points that can make a real difference.

BONUS TIPS: There are many more due diligence tips. If you have found these useful then please subscribe for more free advice on www.jet2letproperty.com . Please specify on registration page that wish to receive weekly overseas property buying tips. NOTE: Your details are confidential and can never be passed to third parties.

Any new property destination has its risks. These new risks are often not immediately apparent because an area or emerging country is being heavily promoted with nice glossy adverts and brochures - and often extravagant claims for rental and growth. The common mantra is to use an independent lawyer. A start but you need much more than this - I don't believe this is enough so here I set out what some agents themselves believe but often don't tell their clients because they are either ignorant, inexperienced or simply scared that the sale will be delayed through legal negotiation.

Top Tip No 1: Use a solicitor covered by the UK Law Society.

Buyers should be prepared to pay the often much higher price for a UK based firm covered by the UK Law Society. But to do your job as properly when buying overseas real estate is that you should learn how to manage your lawyer. Local lawyers have been known to engage in corrupt activities as we have seen from the Marbella/Spain stories.

Top Tip No 2: Check what your legal service includes for the money

Don't assume employing a lawyer that they will be clear on what the service includes. Lawyers normally charge out at £100 + per hour. Be mindful that if you start asking for extra services, such as signing of notary deed, meeting developer, snagging reports you may be charged more. Anything that takes extra time such as periodic liaising with the developer, periodic status reports and local Wills will cost you more. Make sure you ask for what is included and consider taking out a package price which will include more or at least what their rate is for extra work.

Top Tip No3: Manage your Lawyer

So now you may think I have got, and paid for, a top (UK/local to me) lawyer - I can sit back and relax? Well no actually. The problem is that lawyers are often trained to perform set tasks and not to consider the whole deal. Remember that despite you having an initial consultation with a senior lawyer your day to day contact could be a less experienced lawyer.

So be proactive and kick the process off by establishing the set tasks they said they would do. I like to start with the most important bit first. Confirmation of clean title needs to be thorough and you need to request to see what information they are relying on. Let me give you an example:

Recently when conducting my own due diligence for a project in Egypt, I discovered that the power of attorney document that should accompany a land sale was missing. This power of attorney is required so that all relevant permissions granted to the original land owner can be passed onto the next owner and so on. What became apparent was that this absence of documentation meant that there was a risk of a claim being made on the land by one of the previous owners. Not Good. So being sure of who owns the land and that the paperwork for previous owners is correct is the first step. Your lawyer will typically check for any mortgages, title or liens on the land (or property). So be sure to ask them that they have done this or check its in the list of activities they said they would perform for you.

Top Tip No4: Check you get in your contract what you have been promised

OK now its now time to study what is included in your property. Extras, often we have seen extras promised not appearing in the contract (like air conditioning) or kitchen. Not in the contract and you are relying on trust - don't risk it.

Make sure you get all the details you need to see in the contract. For example Net area, balcony, common parts, Gross area. Materials for doors, floors, tiles are important. Some countries have special language for these such as first grade, local grade, European standard. Ask what these mean and get these specified. Facilities in a development are often excluded from contracts, but we have seen sports centres and swimming pools not actually built as promised and guess what there was no mention in the contracts.

Remember your purchase contract (sometimes called the preliminary agreement or promissory contract) is your only way to prove what was meant to be included. If its not in there then it might not happen.


Next week I will post my next four tips when reviewing purchase contracts. But in the meantime post on this site your top tips for others to see.