Commercial Real Estate Investing From A-Z What is Due Diligence? What are Some Items You Should Cover When Purchasing a Property?
In this episode, we will review what is due diligence, what types of questions you should be asking during the due diligence period, and what documents you should be getting from the seller. I won't go over the entire due diligence checklist because that is a very long checklist. This is just a very brief overview of some of the items that you will need as you're going through the due diligence report.
You can read this podcast here: https://montecarlorei.com/what-is-due-diligence-what-are-some-items-you-should-cover-when-purchasing-a-property/
What is Due Diligence?
It’s a term that you will learn when you are buying your first commercial property, it happens after your offer was accepted and that means that you have a specific number of days to review all the documents that the seller has on the property, schedule all types of inspections and reports, compare rental rates that are ongoing in the market, as well as sales comps to make sure that you are paying the right price for the property. If you Google what is due diligence, Google says that due diligence is the “reasonable steps taken by a person in order to satisfy a legal document, especially in buying or selling something”. It’s a comprehensive appraisal of a business undertaken by you (the prospective buyer) to make sure that the assets and the liabilities are correct, and make sure that this is an actual good deal for you to purchase or not. You typically have, depending on the market, 15 days at the very, very minimum to do all of your due diligence, all the way to 30 days, 60 days, sometimes 90 days. If the deal is really, really complex, it can take six months, nine months, or even one year. If you get in contract to purchase a property and you get 30 days to do your due diligence, and then you realize that you need more time because you were not given all of the paperwork on time, you can always ask for an extension, which is what we did on my first offer.
What are some example items that you need to cover during the due diligence process?
- Who is going to escort everyone to the property? You will have contractors coming over to do inspections and some reports, so you need to know who will be helping these people get in the property.
- The seller’s agent should provide you with a contact sheet for who is the escrow agent, who is the escrow officer, their phone numbers in case you need to get in contact with any one them.
- You are going to be asking for referrals for structural engineers, architects, roof inspectors and this could be from your own real estate agent because they are familiar with that city and they can refer you to the right people that they have used in the past.
- Sales comps for the area from your real estate agent, and this is for you to understand if you are paying a fair price for the property. How you determined that is by looking at the price per square feet. Prices can vary greatly based on location, so you need to take that into consideration as well. For instance, one of the sales comps can be three blocks away from your property.
- You'll need a copy of all of the leases that have been signed for this property. If you're buying an office building or a retail building, you really want to make sure that your read every single lease and all of the red lines. If you have two national tenants there for example, let's say you have a Starbucks and you have a Chick-Filet, they will likely require the owner of the property to use their own leases, so Chick-Filet and Starbucks will give their own lease to the owner of the property and they will negotiate from that.
- A breakdown of every single expense that the property has, and for most of these expenses you will want a two year history of all of the bills.