Do Your Homework with Commercial Real Estate- Part One

Any real estate investment deal worth doing should be able to withstand a little due diligence, and commercial properties are an excellent example of this. Examples of due diligence you’ll want to perform for your pending deals include:

·Property Inspection
·Market Analysis (values, rents, etc.)
·Title Inspection
·Lien Review
·Confirmation of Seller’s Mortgage Balance and Payment
·Confirmation of “Currency” of Seller’s Mortgage
·Mortgage Terms (e.g. fixed or adjustable, prepayment penalties, etc.)

Subsequent articles will review these types of due diligence and review how you need to carry them out for your commercial properties. Remember that due diligence is not just there as something to do, just for the sake of doing it. It is designed to protect you, especially given that commercial real estate represents an often substantial investment of resources. It is also important to remember that due diligence on your part now only strengthens the relationship you will carry forward with both your sellers and any financial contributors like private lenders.

Poor due diligence, even if you have escape clauses in your commercial real estate agreements to protect you, may make any other parties in the deal (e.g. private lenders) vulnerable to sudden and unexpected changes. Even if flaws in the deal are not of your doing (and they rarely are), you are the expert. Challenges that put a deal in jeopardy (and that could have been avoided with proper due diligence) are invariably going to make you look like the bad guy.

Think about from the standpoint of a private lender, for whom you may have invested considerable effort, in order to secure a commitment for funding. Are you going to put your relationship with a solid funding source at risk, simply because you don’t take the time to do your homework on your properties? I didn’t think so. It’s just too important to ignore.

On the flip side, good due diligence is transparent, meaning issues will likely never come up, unless before a deal ever closes, in which case the diligence “pays off”. This makes for a much smoother process and will greatly enhance the success of your commercial real estate deals. Due diligence does not have to be a difficult process; in fact, it is usually only a problem when it is not carried out properly to begin with. The bottom line is that you need to protect yourself. It’s just good business.