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The Importance Of Due Diligence In CRE

November 13, 2019

Doing your homework is part of the deal.

When most of us were in elementary school, little did we realize that each time a teacher or a parent lectured us on the importance of doing homework, they were actually preparing us for … commercial real estate. Due diligence — really, just an adult word for homework — is an essential part of the commercial transaction process.

And just like the educational — or tearful, weekday-afternoon — debate over homework, many people wonder how much due diligence is enough? Perhaps, the best way to respond is with another question: Can there ever be too much due diligence?

Due diligence is your time

While true due diligence happens long before a transaction is started or a property is even chosen, in the simplest and most-conventional terms, due diligence is the process that occurs during the time period between a buyer signing a contract and making the decision to move forward with the purchase. It’s during this time that the buyer has the chance to conduct a full review of all data that relates to the property. The more thorough the due diligence process, the more informed the buyer will be in deciding to complete or cancel the purchase.

The actual time period fluctuates in accordance with the complexity of the transaction, however. And it’s possible to incorporate a due diligence checklist into the sales contract with a stipulation that the process will commence once the seller produces the last of the requested documents.

The key elements of due diligence

When it comes to creating a due diligence checklist, there are five basic areas that need to be addressed. These, in turn, can be adjusted to meet the needs of the transaction, the complexity of the deal, and other reasonable items that the buyer may require to make an informed decision.

  1. Probably the most obvious of the data to gather is information on the property. This includes: legal and physical descriptions, property type, current use, zoning, parking, the most recent title policy or title commitment, blueprints, engineering plans, recent surveys, easements, etc. This information is then cross-checked with public data. Any discrepancies should be thoroughly investigated. Be wary of any information that cannot be verified independently.
  • The guts of the property are just as important, if not more so, than its outer appearance. All systems — structural, electrical, plumbing, drainage, security, fire protection, elevator, gas, and heating and cooling — need to be inspected and evaluated. This is also a good time to understand how utilities are delivered and metered, as well as service-agreement terms.
  • When it comes to inspections, it’s an excellent idea to leave no stone unturned. It may be necessary, for example, to work with pest inspectors, engineers, and environmental consultants — to name a few. Additionally, it may be necessary to review building permits, violations, certificates of occupancy, and court cases.
  • If the property has one or more tenants, it will be necessary to gather all legal contracts made between that party and the seller. In addition to lease terms, it’s essential to review security deposits, rent schedules, utility obligations, and any sweetheart clauses, such as a lease extension deal. 

  • Finally, it’s time to talk about the financial health of the property and/or the seller. Information here includes copies of the three most recent years’ tax statements, assessments, property income and expenses, insurance policies and claims, and pending litigation against the property or the seller.

Due diligence is a team effort

Embarking on the due diligence process can be a daunting and overwhelming task. Failure to gather all information by the due diligence deadline can result in the buyer losing his or her deposit if they find something that requires them to back out of the deal.

Fortunately, you there are experts that can help you with this process. In fact, many other experts recommend working with an experienced team that can compile the information, present it, and then advise on the next step. Morris Southeast Group is that team. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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