What is “ Due Diligence “ and why is it important ?
The process of investigation, performed by buyers, investors, investment houses, realtors, real estate companies, real estate lawyers and practitioners into the details of a potential investment, such as examination of operations and management and the verification of material facts.
Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
From a layman’s point of view, Due Diligence comes in the following manner :
1) Checking pertinent documents of property being bought.
HOUSE AND LOT or RESIDENTIAL LOT :
a) Transfer Certificate of Title ( Certified True Copy )
b) Tax Declaration ( Certified True Copy ) – updated within the last three years
c) Real Estate Tax Receipts / Tax Clearance
d) Lot Plan
e) Vicinity Map
a) Condominium Certificate of Title ( Certified True Copy )
b) Tax Declaration ( Certified True Copy )
c) Real Estate Tax Receipts / Tax Clearance
d) Association Dues
e) Utility Bills ( Telephone, Electricity, etc )
f) Certification from Administration ( Tenancy or Non-Tenancy )
a) Articles of Incorporation
b) SEC Paper ( Certified True Copy )
c) General Information Sheet
d) Financial Statements
For everyone’s information, on a sale of a property, the standard procedure on paying taxes is that the Seller pays for Capital Gains Tax / Creditable Withholding Tax / VAT ( if applicable ) and Broker’s Professional Fees. The Buyer normally takes care of Documentary stamps tax, transfer tax, registration fees and other transfer related fees.
At the time of full payment and signing of the Deed of Absolute Sale, it has been a standard procedure to deduct the amount of Capital Gains Tax (CGT )/ Creditable Withholding Tax (CWT) from the full amount due Seller in order to expedite payments ( CGT / CWT – Seller’s Account and Documentary Stamps Tax – Buyer’s Account ) and to assure the Buyer that the Seller’s obligation are fulfilled in procuring the Certificate Authorizing Registration ( CAR ) from the Bureau of Internal Revenue. The thing is, there are times when an unexpected expense arises and it’s difficult to charge the party that’s really liable. It’s unfortunate that our government departments ( Bureau of Internal Revenue, City Treasurer’s Office, Register of Deeds, Assessor’s Office ) makes it the property owner or the buyer’s responsibility to look out for expenses that may arise. This is when additional “Due Diligence” is required.
I had an associate who recently encountered a problem with the City Treasurer’s Office when “Business Tax” was being charged on the sale of the property. Unfortunately, the Seller has been paid the full amount for the property so when the charge for this “Business Tax” came, they initially refused to pay until the City Ordinance was showed to them. Mind you, if the Business Tax wasn’t paid, the documentation for the transfer of title would have reached a stalemate to the disadvantage of the Buyer. That’s why all computation of expenses should be checked and verified prior to the final payment of a property so any payments due the Seller MUST be deducted to avoid such a situation.
Another instance is when the technical description of a Transfer of Certificate of Title is erroneously typed by the Clerk of Register of Deeds. There was a case where the Seller was in a rush to sell his property and the Buyer took out a bank loan. Since the bank needed to do “Due Diligence”, they had to verify all documents ( Transfer Certificate of Title, Tax Declaration, Tax Clearance, Lot Plan, etc ). Upon plotting the technical description on the Title the points of the property wouldn’t close so the bank couldn’t approve the bank loan. The Seller now has to get an approved lot plan from Land Registration Authority in Quezon City as that is the original survey done and is the most accurate plan. Unfortunately, it couldn’t be found so the next option was to see if the Land Management Bureau at Manila had a copy. Again, it wasn’t there. So now, a Geodetic Engineer had to be hired in order to resurvey the property and have the plan approved. The Geodetic Engineer now has to start by doing a “TRACEBACK” ( going back to the original title issued and plot the technical descriptions to find out where the error was made ). So is the property being sold by the Seller legit ? Is the property on the title same as the one being sold ? Did the Seller do enough “Due Diligence when he bought the property 15 years ago ?
Other instances where I’ve seen the need for Due Diligence is on buying income properties such as hotels, buildings, and dormitories to name a few. It also applies when an existing business is being sold from an internet shop, salon, laundry shops, restaurant and bar, gasoline station, apartelles and condotel. Buying a property through sale of corporate shares has always been popular due to the tax advantage it offers but requires a tedious process of Due Diligence.
I’d also like to advise you ahead that ZONAL VALUES are going up in all areas if they haven’t yet and BUSINESS TAX will be implemented to other cities as well. Please take the time to do your ‘DUE DILIGENCE” in order to have a smooth, safe, orderly transaction.
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Robert G. Sarmiento Properties
Professional Affiliation :
Philippine Association of Real Estate Boards
Member, City of Taguig Real Estate Board 2016, 2017
Real Estate Broker’s Association of the Philippines
President, Greenhills Chapter 2008, 2009
Philippine Association of Real Estate Brokers 2000-2015
San Juan Mandaluyong Chapter 1998, 1999
PRC # 6569
AIPO # 000897
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