Due Diligence: Investing in Commercial Real Estate
Performing due diligence in investing in commercial real estate is about attaining and understanding the truth about an investment. It’s more than just reviewing documents and walking through a building. Due diligence is the process of doing the research or “homework” on the piece of property that you are thinking of buying as an investment. It is the process of checking and confirming any important information that will determine wether the property is a great, average, or lousy deal.
A signed contract between the the buyer and seller usually includes a clause, knows as a due diligence clause, which allows the investor to examine the property for free for a period of time usually between 1-2 months. Often, buyers and sellers stretch the truth about the properties and how much money they bring in, past repairs, month expenses, future repairs that are needed, etc. Hence, the due diligence period allows or the much needed time to homework and get into the nitty gritty while making sure the property meets your standards. Proper due diligence takes persistence and weeks to accomplish. It is a means to protect the investor financially and legally. Due diligence periods might also be referred to as an “inspection period”. Which property items you will be able to inspect and how how many days allowed or due diligence will be stated in the contract clause as well.
During this time, you want to verify many different pieces of information, including the following:
- Rents, leases, and any other income
- Any and all expenses related to the property
- Any defects in the physical condition of the property’s interior and exterior
- Possible environmental problems on or surrounding the property
- Building code violations
- Any service and vendor contracts
- Existing warranties
- Local police reports
- Any liens placed against the property, such as loans, back taxes, or judgments or anything else that stands in the way of transferring ownership
For more information about investing in commercial real estate and loans, contact the specialists at HML Investments today.