6 Mistakes To Avoid During Due Diligence
Once you find an ideal investment property and your offer is accepted, the initial excitement is over and it’s time for the due diligence period. This multi-step process is often lumped together in conversation, making it appear as a smooth and straightforward step in acquiring your new property – this is far from the truth. The due diligence process is a blanket term for the numerous steps you and your real estate team will take to avoid costly mistakes and ensure every aspect of your new investment is sound.
The process can take anywhere from a couple of weeks to more than a month if discretionary items come up but taking the time to for a thorough assessment of the property will pay off in the long run. It can be daunting, especially if you haven’t purchased commercial property before, but your agent can guide you through the process and stay on top of inspections and documents, making sure you close on schedule. Being as prepared as possible for what to come and having a great team in place will help you feel calm and in control.
Here is a list of the most common (and costly) mistakes we often see during this phase of the transaction:
- Mistake #1 – Incorrect Property Valuation. Take the time to accurately assess the value of the property you’re purchasing. In addition to checking recent comps and comparing with similar properties on the market, you or your agent should be talking to other local brokers to ensure you have the most accurate information available.
- Mistake #2 – Not Fully Understanding Your Lender’s Underwriting Requirements. Before you enter the due diligence phase, it’s a good idea to talk with your lender to get an idea of the loan amount they would consider for the property you want to buy. They will take many things into consideration including the physical condition of the property, your credit and business history, and the projected income of the property. Be conservative in your underwriting for the best chance of a smooth approval.
- Mistake #3 Trusting the Sellers. The harsh reality is that not all sellers are willing to divulge every issue with the property. Be skeptical and ruthless as you work to inspect every aspect of the property. This includes the property and land itself but also the tenants, current leases, and anything else that will remain in place once you assume ownership.
- Mistake #4: Not Doing Enough Tenant Research. If you will be assuming any current tenants in the building you’re purchasing, it’s important to thoroughly review each detail of every existing lease. It’s best to work with an experienced real estate attorney who understands the commercial real estate leasing process and can identify any loopholes or provisions that could impact your business in the future.
- Mistake #5: Assuming Lenders Will Accept All Third-Party Reports. Before you schedule costly inspections and surveys, check in with your lender to see if they have specific companies, they accept. They may even be able to send you a list of approved partners to save you time and money.
- Mistake #6: Assuming the Property Complies with All Current Codes. Have a local contractor and/or architect inspect the property to make sure it meets current building codes. You don’t want to end up having to make costly improvements right after your purchase goes through. If things do come up, you can evaluate the best way to remedy ahead of the purchase or at the very least, you can plan for any unavoidable expenses.
These are just some of the most common mistakes we see made during due diligence periods. There is a lot of steps to navigate through from the time your offer is accepted until you take over ownership of your new investment property and a local commercial agent is your best resource for making the process as smooth as possible. If you’re interested in exploring investment opportunities in the Lowcountry, please reach out to us for an introductory conversation.