I’ve heard there are more millionaires made selling cardboard than Cadillacs. Writing about due diligence made me think of that because it’s pretty boring, but it’s where all of the profits are. Done well, due diligence will make a good deal, great. On the other hand, if done poorly, it’ll cost you a fortune and put you out of the commercial real estate investment business for good.
So, What is Buyer’s Due diligence?
Well, when you put a commercial property under contract, you usually have a period where you can back out of the deal with minimal penalties. That is your due diligence period. This is when you ask the seller everything about the property, but more importantly, you get them to verify the claims they are making. Due diligence is simply making sure you get what you pay for.
When you do it right, you have a checklist. A big checklist, with lots of sub checklists, on every aspect of the purchase. You’re verifying things like leases, rent history, bank statements, utility bills, permit drawings, warranties, certificates of occupancy, tax appeals, operating expenses, and hundreds of other details about the property.
Never Assume Anything
You can’t assume anything you’re being told is true. Your seller is always going to paint a rosy picture, leaving out the ugly details. Your job is to uncover those details because every one of them will eat into your deal, making the property more expensive than you actually think it is. Whatever you catch in the due diligence process, you can try to get a discount on your contracted price. But if you don’t catch it, well, then it becomes your problem after closing. Caveat emptor or buyer beware.
Sure, it’s time-consuming. Sometimes a seller doesn’t want to provide the necessary documentation. Sometimes, after all of your hard work, you come to realize you should walk away. But seriously, wouldn’t you rather know that before the close, and not after?
Commercial real estate is an expensive investment. You need to make sure the buyer’s due diligence is complete to prevent a good deal from turning into a disaster. Unfortunately, very few brokers or buyers do it well, if at all.
Get What You Pay For
To make sure our clients are getting what they pay for, we have an extensive checklist that we run our buyer clients through. If you want to learn more, check out our reviews, then ask us to help you today.