Commercial real estate transactions often have long-lasting consequences including the ability to gain or lose a significant amount of money. If you are interested in purchasing commercial property, having the right information at your disposal is crucial. Luckily, there are steps you can take before buying a commercial property that will help you determine whether the purchase will make for a sound investment.
In this blog post, we will discuss the importance of due diligence in a commercial real estate transaction. Before we jump right in, let’s begin with an overview and take a look at what a commercial real estate due diligence checklist generally consists of.
Overview
Due diligence is a comprehensive, complex, and critical stage in any commercial real estate acquisition and provides for an investigation into a transaction so that the buyer can make an informed decision about how and whether to proceed with the purchase. As a buyer, think of yourself in this case as a detective. This “investigative period” can be understood in one simple word: Verify!
What Should Be on Your Commercial Real Estate Due Diligence Checklist?
Items on a due diligence checklist will generally fall into one of the following categories:
- Acquisition Actions / Documents
- Title/Survey/Zoning Matters
- Tenant/Lease Matters
- Financial Matters
- Property Operations and Management
- Service Contracts
- Litigation
- Insurance
- Physical Property Inspection and Review
- Personal Property Inventory
- Governmental Review
- Financing Matters
- Internal Procedures and Reporting
- Closing Actions
Why is Due Diligence Important?
The ultimate purpose of due diligence is to relieve the buyer of any risk involved in making a purchase without sufficient knowledge of what they’re really getting into.
While seasoned buyers and sellers of commercial real estate understand the importance of due diligence, there are instances where buyers cut corners and sellers try to rush the process. Buyers can become so emotionally invested in buying what they believe to be great property, that they do not conduct the due diligence that is needed to ensure they are getting what they paid for. If a buyer does fail to exercise due diligence on their commercial real estate transactions, any unwanted surprises that emerge after the fact may be their burden to bear with little to no recourse.
Bottom line: Do not let your emotions be the driving force behind your decision making when purchasing a commercial property. Sure, the due diligence process is a time consuming and costly undertaking for buyers; however, it is essential to uncover important facts and circumstances that may impact the value of the property being acquired. It may even lead the buyer to the conclusion that they are either getting a great deal, should renegotiate the purchase price, or back out of the deal altogether.
As a buyer, your due diligence goal is to verify, verify, verify and confirm the property you are purchasing is in fact, the property being conveyed.
In a nutshell, the due diligence process, and a buyer’s comprehensive performance of this phase can mean the difference between a successful purchase and severe buyer’s remorse. This is why due diligence is crucial in the negotiations prior to signing a contract. A thorough due diligence checklist should be prepared early in the negotiation phase of the deal.
Note: Every commercial transaction is different. Therefore, it is important to tailor your due diligence to the unique characteristics of a property.
Conclusion
If you are purchasing a commercial property, it critical to ensure that the due diligence associated with the purchase is conducted in a complete and thorough manner. In other words, you don’t want to leave any stone unturned. Be sure to review all items and documents and look for any possible red flags before a transaction is made. Remember, the devil is in the details and each property will have its own set of considerations.
