Savvy investors know that detailed due diligence in commercial real estate transactions is not only “good to do” - it’s an “absolute must-do.” This step allows you to thoroughly examine the property, the seller, your financing situation and needs, compliance obligations, and other critical aspects of the transaction. But what does “due diligence” really mean? Let’s take a look.
The Basics of Due Diligence in Real Estate
The aim of due diligence is to minimize uncertainties that are present in any investment. The first step is understanding your objectives. For example, if you want to purchase an apartment building as an income-generator, you will need to verify the current tenant leases and the tenants’ payment history. Otherwise, you have no idea whether you can can count on a certain revenue stream.
When you are purchasing a property, you should never complete a transaction without walking through the property personally and inspecting it (a third-party inspector is also a good idea). This gives you the opportunity to examine the property through the lens of your intended use and goals.
You also want to see if a potential property adheres to federal, state, and local regulations in its current use and for future potential uses. For example, if a new environmental regulation will come into effect in five years, will the property still be compliant?
Remember, too, that lenders will likely require to you to complete an environmental suitability assessment. Get ahead of it by engaging an environmental engineering firm to assess past use and the presence of possible contaminants (e.g., mold, led, asbestos).
In addition, checking on any easements, liens, encumbrances, and other restrictions is a useful step: while sellers are required to disclose certain information, you want to cover yourself.
During your due diligence process, take a look at:
- Title searches
- Property descriptions
- Lien searches
- Zoning and property codes
- City approval processes
- Lease payment history
- ADA compliance
- Track record and reputation of current owner (this can impact future earnings)
- Seller’s tax returns, service contracts, loan documents, litigation history, etc.
- Documents relating to prior use of the property and its structural integrity
We understand the urge to “strike while the iron is hot” when it comes to commercial real estate transactions. But never - ever - overlook due diligence. It can save you from profit-sapping, portfolio-draining, headache-inducing problems down the road. The expert team at Keller Williams Commercial Real Estate is here to help you navigate the due diligence in real estate - and everything before and after!