Purchasing real estate is always related to many challenges – negotiations with the seller, discussions with the bank, calculation of the expenses for notary fees, renovation works and others. However, in the hustle of solving the most urgent and practical matters, some of us pay little attention to the most important point – comprehensive research and due diligence on the seller and the property itself.
Below we have outlined some of the most important steps, which every buyer should undertake before investing in a particular real estate.
Report from the Property register
As the first and foremost step, the potential buyer should verify the property’s status with the Bulgarian Property Register and conduct checks within the file of the property itself as well as for the name of the current owner. Encumbrances such as mortgages, reserved right to use, registered rental agreements, court disputes and others shall be reflected in the written report issued by the Property Register.
Documents evidencing the ownership of the property
The second step to be undertaken is enhanced due diligence over the history of ownership. The seller should present all documents evidencing the history of the ownership, which will prove a clear link between the initial owners of the property and the currents ones. The history of the ownership should date at least 10 years before the purchase.
Obligations of the owner
The owner of the property could have monetary obligations to public or private creditors. Under such scenario, the creditors of the owner in principle have the right to initiate a court case and request reversal of the deal if it is harmful to their interests e.g. if the price received for the property by the owner is significantly lower than its market value. In order to be aware of ongoing court cases initiated by creditors of the seller, the buyer should conduct checks in the court of permanent residence (if individual) or of the primary address and the principal place of business (headquarters) of the seller (if legal entity). In addition, the buyer should request a certificate for lack of public obligations under Art. 87 of the Tax Insurance Procedural Code.
During the period 1944 – 1959, a process called collectivization of the land took place in Bulgaria. Private land ownership was partially eliminated and the ownership was transferred to the state. Later on, in the 90s every heir was given a chance to request from the Department of Agriculture the land previously owned by his ancestors to be returned to him/her. However, many of these requests have not been reviewed yet. A potential land buyer in Bulgaria should consult the Department of Agriculture and obtain a certificate confirming the lack of restitution claims regarding the land which he/she would like to purchase. This way the potential buyer would have a guarantee that there is no risk that the land he/she purchases would be returned to a third person.
Specifics in cases when the seller is a legal entity
If the real estate belongs to a legal entity, the potential buyer should perform checks in the Bulgarian Commercial Register under the file of the legal entity. Potential encumbrances and limitations over the commercial enterprise or the shares of the company will be registered in the file and will provide the buyer with information regarding any pledges over the company, which could reflect the real estate.
Bank loan’s specifics
Every bank conducts enhanced due diligence on the candidate and the property before granting a loan. Therefore, before signing any preliminary contract or agreeing to execute the purchase, the potential buyer should coordinate the process with the bank granting the loan. In case the buyer signs a preliminary contract, provides 10% deposit to the seller and afterwards the bank does not grant the loan for the rest of the purchase price, there is a risk that the potential buyer would not be able to perform his obligation and pay the purchase price. Such scenario will result in a loss of the paid deposit.
It is important to keep in mind that the banks in Bulgaria typically grant mortgage loans to Bulgarian citizens or foreign nationals holding a permanent residence permit. If a foreign national has prolonged residency, the case should be specifically discussed.
Purchase of real estate is an important decision. This decision has to be informed and based on sufficient, structured and comprehensive information and due diligence on the property and the seller. This way the major risks will be eliminated and the potential risks will be identified and respectively mitigated with solid protection clauses.