Real estate due diligence: know every risk before signing

Real estate due diligence: the most worthwhile investment before buying

In a real estate transaction of any scale, the cost of rigorous due diligence is always lower than the cost of discovering after closing a risk that could have been identified and managed beforehand. Contingencies identified in due diligence enable the negotiation of the price, the demand for seller guarantees, or the structuring of the transaction to mitigate the risk. Contingencies discovered after closing only give rise to a right to recover losses — when the seller can pay them.

At BMC we carry out real estate due diligences for domestic and international investors, real estate investment funds, family offices, and corporate buyers. Our report is executive, decision-oriented, with a clear classification of risks by materiality and with specific mitigation proposals for each contingency identified.

What we review in a real estate due diligence

The Land Registry review is the starting point: ownership, transfer history, mortgage encumbrances, attachments, easements, planning charges, and preventive annotations. But the due diligence goes well beyond the Registry.

The contracts affecting the asset are equally important: a lease with a purchase option exercisable by the tenant, a maintenance contract with an early termination penalty, or a use concession with restrictions on the permitted activity can fundamentally change the valuation of the asset or the optimal structure of the transaction.

The planning status of the asset — land classification, use zoning, subsisting licences, pending enforcement proceedings — may reveal that the current use is not covered by the subsisting licence, or that there is an enforcement proceeding requiring the demolition or modification of part of the property.

Property portfolios: due diligence at scale

For the acquisition of portfolios with multiple assets, we design a phased due diligence process: a rapid review of all assets to identify those with material contingencies, followed by an in-depth review of the latter. This approach allows the time and cost of the due diligence to be managed efficiently when the number of assets is high.

From due diligence to contract

The findings of the due diligence translate directly into the sale and purchase agreement. At BMC we do not merely deliver the report: we coordinate with the M&A team to reflect the identified contingencies in the seller’s representations and warranties, in the conditions precedent to closing, and in the price adjustment or retention mechanisms.

Tax due diligence in real estate transactions: protecting the buyer from inherited liability

The tax dimension of real estate due diligence is frequently underestimated. Spanish tax law creates specific mechanisms by which a property buyer can inherit the tax liabilities of the seller — awareness of these mechanisms is the first line of protection.

Joint and several liability for corporate tax debts. Under Article 42.1.c LGT, a purchaser who acquires assets from a company can be made jointly and severally liable for the seller’s outstanding Corporate Income Tax obligations, if the AEAT demonstrates that the transfer was made with knowledge of the debt or that the assets transferred could have been seized in enforcement. Requesting a Tax Debt Certificate (certificado de situación tributaria) from the seller before signing is a basic protective measure — but the certificate only covers AEAT obligations and does not capture open tax periods where the liability has not yet crystallised.

Plusvalía municipal liability. The plusvalía (IIVTNU — Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana) is a tax on the increase in cadastral land value since the last transfer, levied on the seller at the time of sale. Where the seller is insolvent or unable to pay, the local authority (Ayuntamiento) may seek to recover the plusvalía from the new owner in certain circumstances. BMC verifies the plusvalía exposure and confirms its settlement as part of the completion process.

IBI arrears. Outstanding IBI debts attach to the property, not the owner — meaning a buyer who does not verify IBI compliance before completion may inherit arrears from the previous owner. BMC obtains an IBI compliance certificate from the relevant Ayuntamiento as a standard element of every due diligence.

Planning and urban law due diligence: the most common source of hidden risk

Spanish urban planning law creates multiple layers of risk for real estate investors unfamiliar with the system. The key elements of planning due diligence are:

Land classification. The urban planning document (PGOU — Plan General de Ordenación Urbanística) classifies land as urban (urbanizable), developable, or protected. A building on protected land, or a use that does not comply with the current PGOU classification, has a permanent compliance risk regardless of how long the situation has subsisted.

Licence of First Occupation (LFO). The LFO (licencia de primera ocupación or cédula de habitabilidad) certifies that a building was constructed in accordance with its building licence and is suitable for its intended use. Properties without an LFO cannot be legally inhabited, cannot obtain a tourist rental registration, and typically cannot be mortgaged. In some Costa del Sol municipalities, a significant proportion of older villas lack current LFOs. BMC verifies LFO status at the relevant Ayuntamiento.

Urban discipline proceedings. The urban discipline (disciplina urbanística) process is initiated by the Ayuntamiento when a construction, extension, or use change is identified as non-compliant with planning permissions. A pending disciplina proceeding can require the demolition or modification of the non-compliant element. BMC checks the urban discipline register at each relevant municipal authority.

Due diligence for real estate investment funds and family offices

Portfolio acquisitions — multiple assets, significant aggregate value — require a systematic approach to due diligence that manages the trade-off between completeness and efficiency. BMC’s approach for portfolio transactions uses a tiered methodology:

Tier 1 — Full due diligence. Applied to all assets above a materiality threshold or with identified complexity flags (planning issues, unusual encumbrances, occupied by tenants with long-term leases or purchase options). Typically 20-30% of assets by number but 60-70% by value.

Tier 2 — Abbreviated due diligence. Applied to standard assets below the materiality threshold with no complexity flags. Covers the essential risk areas (Land Registry, LFO, IBI, main lease terms, planning classification) without the full depth of a Tier 1 review.

Red flag summary. Every portfolio due diligence concludes with a prioritised red flag summary — a management-level tool identifying the assets with material contingencies, their nature, estimated impact, and recommended mitigation approach. This is the input into the SPA negotiation on reps and warranties, escrow, and price adjustment.

BMC has experience with real estate portfolio due diligences for institutional buyers including REITs, opportunity funds, and family offices, and delivers standard templates that accelerate the process without reducing coverage quality.

The role of technical due diligence alongside legal due diligence

Legal due diligence on a real estate asset cannot fully substitute for technical (structural, building services, environmental) due diligence — the two disciplines are complementary. Legal due diligence identifies the regulatory and contractual risks; technical due diligence identifies the physical risks (structural condition, building services integrity, environmental contamination) that the legal framework may not capture.

BMC coordinates legal and technical due diligence on behalf of clients, ensuring that the two streams of work are aligned and that their findings are integrated into a single risk assessment rather than delivered as two disconnected reports. Where technical due diligence identifies a contamination risk, for example, BMC assesses the legal framework for remediation liability, the seller’s representations and warranties requirements, and the potential insurance solutions — combining both streams into a coherent risk management recommendation.