A thorough due diligence report removes uncertainty from key decisions that must be made when analyzing the cost/benefit of any real estate transaction. A comprehensive inquiry should be designed to provide a buyer with clear pictures of where their strategies and decisions are taking them, or to put it simply – what it is they are buying.
There are a multitude of details which must be considered when dealing with purchasing a parcel of real estate. Many of these details are easily overlooked i.e. property and ownership documents. The function of due diligence is to independently verify all representations made by a prospective seller as well as to uncover pertinent facts which have not been disclosed but which are important to the buyer.
A multi-tenant property, either residential, office/retail or mixed use is the most complex for evaluation purposes.
After identifying a target property, due diligence starts during the contract negotiation stage. Unless the seller understands at the beginning of the process what document production and other information, will be required before the deal is closed, there is going to be automatic trouble in getting to the closing table. When a seller is presented with a thorough list of required due diligence items by a prospective purchaser, the seller can be overwhelmed.
A list of required due diligence items is essential in the purchase agreement and it is expected that there will be some negotiation as to what will and will not make it to the final contract.
At least 30 days after the delivery of all documents should be provided to complete due diligence.
Contracts should state that the purchaser must give written notice that all due diligence is complete and satisfactory, or that there would be no further obligation to proceed with the transaction. Generally, due diligence should not be undertaken until after the contract is executed by all parties. Any time triggers should be tied to the delivery date of the last document supplied by the seller, with provisions for the extension of time based on the appearance of any non-disclosed material documentation. By requiring written acceptance of the due diligence items, control of the deal can be maintained.
Beyond the physical condition of the property, there are a multitude of tangibles and intangibles that have to be taken into account when evaluating a site for acquisition.
There are many types of companies, jointly or separately, that provides due diligence services. Several provide their clients with a detailed market analysis of income, operating expenses, vacancy rates, rental competition, sold comparable, on-market competition, and available sources of financing. They will also gain knowledge of the property and all internal and external factors likely to affect its economic health, now and in the future. The benefit of having an independent evaluation ensures that an enlightened and clear assessment of a project’s potential and pitfalls will be exposed.
An evaluation of factors which an astute purchaser must consider are different and dependable upon the company that perform the due diligence process.
When considering the external physical conditions of a target property, an informed purchaser is well advised to secure the services of a licensed inspection service.
One result of a thorough due diligence process is that when the time comes to present a deal to either partners, investors, lenders or another buyer, one will have the level of information and knowledge surrounding the property that gives a clear picture of a property’s financial, legal and physical condition.
This information enables others to make lending and investing decisions relative to the property in an informed manner. In addition, proper due diligence also reflects favorably upon a purchaser in the eyes of lenders and cuts down on time bringing the transaction to loan closing.
The most important result, however, is that the buyer will receive the benefit of the bargain made and paid for, without receiving very unpleasant and possibly fatal news after the closing. Once the purchase price is paid, absent certain limited circumstances, the property with all of its faults belongs to the buyer, and if it isn’t worth what was paid, the buyer will have to live with the consequences.
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