Why? Because it’s when most of the dirty laundry comes out and property defects, title liens, easements, zoning issues and environmental problems are often uncovered. Any one of these problems could be a deal breaker, depending on the amount of money required to fix them. In some cases, the disclosure of such “flaws” might not prevent the deal from moving forward, but they could provide leverage to the prospective buyer who could use them to renegotiate the terms of the sale.
The size and scope of the deal will ultimately dictate everything included as part of the due diligence search, but most times, at minimum, a title review is conducted that examines such things as property lines, easements and boundaries. A physical inspection of the roof, plumbing and other mechanical systems should always be undertaken. It’s equally critical to verify that the property is zoned for the intended purposes.
The need to do proper homework cannot be over-emphasized. Many properties look great from a distance, but a more careful look might unveil what they’re really worth or what might be required to adequately prepare them for their newly intended purpose. The property may be located in a flood zone, for example, and the lender may require extra flood insurance, which is very expensive.
Environmental issues are often the most costly and difficult to remediate, but they aren’t necessarily deal breakers. They must be considered in the final negotiations, however, as their costs can escalate quickly.
To help ensure a successful transaction, consider these tips:
- Don’t fall in love with a specific property until the due diligence has been completed because then you may not be able to walk away even when you should.
- Hire the right deal team. This is not the time to skimp. You need people who do this for a living because, chances are, you don’t. Make sure your brokers, surveyors, environmental specialists, attorneys and accountants are well versed in commercial real estate and have the experience and resources to accurately assess whether you can afford the property and make money on it.
- Look at the whole picture. This means looking at the property from a financial and operations perspective to ensure it’s right for you.
- Develop a cost plan in advance that outlines under what circumstances and at what costs you’ll be willing to walk away from the deal.
- Build in added costs for assessments and possible remediation into your budget.
- Don’t be afraid to renegotiate the deal based on what you’ve learned during the due diligence period.
- Be realistic. Most due diligence processes uncover something, as there are few perfect properties.