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The Top Commercial Real Estate Due Diligence Mistakes

November 9, 2016

Avoid these due diligence don’ts while navigating commercial real estate investment

When it comes to securing a commercial real estate deal, the due diligence process sometimes takes a backseat to seemingly more important factors, such as raising money and negotiating the deal. Because of the focus on the other aspects of the deal, investors can overlook essential research and end up making expensive mistakes. Here are some of the common issues to watch out for when conducting due diligence on a commercial property.

Mistake #1: Improperly valuing the property

You need to do your research and be conservative when you’re underwriting a deal. This includes checking for sales comps and other available properties on the market. Contact active commercial brokers in the area and request an assessment of local property values and sold and listed comparables. Based on that information, adjust your valuation to get an accurate assessment of the property.

Mistake #2: Trusting sellers to disclose any problems

In a perfect world, sellers would willingly disclose any problems with the property to prospective buyers upfront. Unfortunately, they are not typically eager to reveal these issues, which is why it is so important for you to conduct a thorough inspection yourself.

Even if the seller has inspections and reports on-hand, it is always better to have a third-party inspector review the property on your account so you can ask any specific questions and get professional answers. And if problems are discovered before closing, you will likely be able to negotiate a reduced price.

Mistake #3: Misunderstanding a lender’s underwriting requirements

Before the due diligence process even begins, you should make sure you have a discussion with your lenders about the loan amount they will put up on your property. Lenders have been very conservative in recent years and consider several different variables you might not factor in, including intended use and environmental issues. Before moving forward with your investment, you should be sure you understand exactly what your lender is willing to provide and why.

Mistake #4: Assuming the property is code compliant

In addition to having someone inspect your property for unknown problems and damage, you should also have a contractor inspect the facility to ensure it meets all ADA and building codes. The last situation you want to end up in is finding out the property is not code compliant when a city inspector comes to review your newly-renovated or purchased space.

Mistake #5: Assuming your lender will accept any third-party reports

Before you hire a third-party vendor to conduct an inspection for damages or code compliance, make sure your lender approves of them. This includes the Property Condition Assessment, Environmental Report, or any other specialized report you might have done. As a rule of thumb, if you’re not sure if your lender needs to approve of someone, ask anyway.

Although it’s sometimes overlooked, thorough due diligence is one of the most important tenets of a successful commercial real estate deal. In order to ensure you’ve covered all your bases, it’s important to work with a team of experienced commercial real estate professionals who can help you navigate the process and avoid these common mistakes.

Need help with your next commercial real estate investment? Morris Southeast Group is here to help. With over 25 years of experience in South Florida, we are proud to represent everyone from property owners to investors to ensure their commercial real estate needs are met effectively and efficiently. Contact our team today at 954.474.1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com for a free consultation.

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