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Secrets To Real Estate Due Diligence
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Secrets To Real Estate Due Diligence

Due diligence is the most important action that can be taken when assessing a property for potential acquisition. Due diligence is the investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. Never purchase a property without conducting a thorough examination of the following:

Legal Due Diligence:

Legal due diligence is conducted to ensure that the property has a clear title. Clear title means that there are not any encumbrances on the real property's title that will adversely affect the ownership or tenancy of said property. For the new owner to have satisfactory occupancy a more in-depth investigation should be conducted on all licenses, leases and sub-leases. This kind of due diligence is very important for commercial real estate and multi-family properties. A licensed and insured title company or a board certified attorney should be used for this type of verification.

Financial Due Diligence:

The financial due dilligence includes the value of the of the property as an investment by considering the supply and demand factors in vicinity of the property. Commercial properties are valued differently than smaller residential properties. With commercial investments repairs, maintenance, renewal of leases, income, and other capital and revenue expenditures are necessary for a accurate property valuation.

Physical Due Diligence:

The physical due dilligence involves an investigation into the physical structure of the property. The functionality, structural integrity, the foundation, roof, plumbing, electrical, emergency and heating systems are analyzed for condition and proper operation. This kind of due dilligence should be contracted out to a licensed general contractor or commercial/home inspector.

Environmental Due Diligence:

Environmental due dilligence is equally important. Electrical and plumbing systems have to meet certain environmental requirements. Lead based paint, asbestos, and radon gas are serious contaminants that cause major health issues. The property should be investigated to ensure that it adheres to current enviornmental laws. These and other contaminants need to be analyzed and identified because they can cause risk of health to the people occupying the property. There was an extremely urgent issue in 2009 involving drywall that was made in China. A federal lawsuit was filed claiming that the dry wall emitted a "rotten egg" smell, causing respiratory problems and was corroding electrical equipment.

The presence of radioactive components, the eruption of sinus and respiratory problems, the undue damage to air conditioning coils, copper wiring, etc; can all amount to huge financial losses as well as other complications to the owner. These kinds of issues can create problematic legal battles that can financially ruin lives.

A complete and thorough investigation will help alleviate many of the above stated concerns. A satisfactory due dilligence report can be the green light needed to take your deal to the closing table.


Street Talk

Hi Kenneth, Thank you very much for a very informative article. This issue can save one from a lot of chaos later.

Reply
  about 7 years ago
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