Before you purchase large areas of land, it’s important to perform due diligence. In this blog, we look at the four essential steps that should be on your land purchase due diligence checklist.
Land purchase due diligence is the process of making sure the land you think you are buying as stated in your agreement matches the actual land that’s on the ground.
Put simply, it’s reviewing the transaction contract, existing documentation, and the physical state of the land. This process identifies any potential discrepancies between the assets so buyers and sellers can resolve them before closing. This can increase the ROI of transactions and fixes errors before they become costly.
It sounds simple, but in reality, it’s a lot of work. And the truth is many land asset managers don’t have the tools or proper capacity to conduct a thorough review of every acre in a transaction.
That’s where Geographical Information System (GIS) applications come in.
How GIS Is Used in Land Purchase Due Diligence
GIS is a tool that uses spatial data points, lines and polygons to represent information about the Earth at a specific space in time. These applications allow users to display and analyze data in an interactive and visual way. You can also track how spatial information changes over time.
In terms of due diligence, GIS technology assists land asset managers in mapping the physical boundaries of a transaction against the actual legal boundaries of the property.
But why is there a need to do this?
Most plots of land were last surveyed between 1781 and 1851 using historical surveying practices. The amount of accuracy those surveying teams were able to achieve with the limited technology they had is amazing. However, since those original surveys, landowners have split their land, sold small pieces of it off and handed the land down to the next generations. Today these properties contain a lot of inaccuracies and inconsistencies – meaning the legal and actual boundaries of an asset are not always the same.
Small discrepancies in a deed may seem inconsequential. But if you purchase land assets of any kind of scale, these differences start to add up fast.
Without proper due diligence, these discrepancies can cost you in the long run.
You could end up paying for land assets without actually acquiring them. Or you could find yourself overpaying property taxes on property you don’t own. You could also miss out on leveraging acres and parcels that you never knew you owned. All of these scenarios hurt the profitability of your investment.
Land Purchase Due Diligence Checklist: 4 Steps
A proper due diligence process should combine GIS mapping technology with a thorough legal review. This checklist provides a good overview of what the land due diligence process should look like.
Step #1: Map the Transaction Using GIS Software
Using GIS applications, land boundaries are mapped out to show the intended boundaries of the transaction. This involves adding the coordinates of the property. The result is a clear, visual representation of the land you intend to buy.
In the next step, the boundaries written in the deed are charted. This represents the legally defined boundaries of the property.
The end result of this process is a single GIS map with two representations of the property. In many instances, the two boundaries established will be different.
Step #2: Identify the Discrepancies
With the boundaries of the transaction visualized, identifying the differences between what’s in the deed and what’s on the ground becomes more clear.
The map can be sorted into categories, including:
- Land that’s in the deed but extends beyond the intended boundaries of the property
- Land being purchased that’s not in the deed
- Land that’s accounted for by both the deed and the effective boundaries of the property
This information, when reviewed and assessed by the correct resources, can provide a precise understanding of discrepancies in the transaction that need to be resolved. But doing so requires a level of expertise in the field in order to truly recognize the proper discrepancies.
Step #3: Resolve Issues in the Contract
With a clear overview of where the deed and the intended property boundaries differ, discrepancies can be resolved while contract negotiations are still open.
The goal is to address inaccuracies and any potential long-term issues. Doing so will improve the buyer’s position during the transaction and provide greater profitability throughout the life of the asset.
Step #4: Digitize the Land Records
Even after the transaction is finalized, there’s still due diligence work to do. All the information including the new deed, historical paper trails, as well as spatial data needs to be managed and stored properly. While this can be done manually, it can be time-consuming and hard to keep up with over the life of the investment. This becomes especially true as business practices evolve further into the digital space.
Land record management software automates this process by centralizing transaction information and documentation, as well as connecting it directly to the due diligence maps created in the GIS software. This makes it possible to click on the map and view the corresponding section of the deed in seconds.
Digital storage and filing of land transaction data also provide a more secure and accessible way to manage information.
These four steps involve a lot of work. Thankfully, there are software and service options out there that can make the due diligence process easier by putting all of these functions in one place.
How Land Purchase Due Diligence Software Can Help
There are a lot of moving parts to a thorough due diligence process when purchasing large parcels of land. That’s why many land asset managers turn to software solutions for assistance.
Land asset managers and investors need technology that can…
- Collect and review deeds, tax and legal documentation
- Validate legal descriptions
- Construct GIS maps of legal and actual boundaries of land assets
- Digitize documents into the cloud
- Flag discrepancies with automated, easy-to-use software
- Resolve inconsistencies before the ink dries
The right land transaction due diligence software can help you combine the GIS visualizations with the legal documentation to streamline the entire process from start to finish.
At the end of the day, following a land purchase due diligence checklist ensures that “you get what you pay for.”
Using GIS visualization and software that can manage the information and documentation can speed up that process and perform it with greater accuracy. From the buyer to the attorney and anyone else involved in the transaction, everyone will walk away knowing as much about the land asset as possible and be ensured that the investment has the best chance to produce returns.
Orbis Inc.’s land investment technical analysis service, LITAS, helps you prevent costly errors, maximize ROI and stay informed about the state of your property. Contact us to learn more about this state-of-the-art tool.