As a commercial real estate professional, investor, tenant, buyer or seller, you must understand the importance of due diligence. Essentially, this is the process of checking every fundamental detail of the property. For example, these details can include zone restrictions, quality of foundation, regulatory issues and other aspects of the property. Completing thorough due diligence is key in the negotiation, buying and selling processes of commercial real estate. There are several mistakes that can be made while performing this vital process. Michael Blank, a 31 year commercial real estate investor, published a blog post on BiggerPockets discussing the top ten mistakes. Read the excerpt from his article below, then click the green button to read the rest.
Due diligence is rarely talked about because it takes back seat to sexier topics like raising money and finding, analyzing and negotiating commercial real estate deals. But I have found that more investors make more mistakes during due diligence than any other part of the commercial real estate investing process.
I had the pleasure of interviewing Brian Hennessey about this subject on a recent podcast. Brian’s been in commercial real estate for 31 years and just published The Due Diligence Handbook for Commercial Real Estate Investments. He’s done over 9 million square feet of sale transactions, and in the process, he’s learned some valuable lessons — in other words, he knows a little something about doing due diligence.
I wanted to share with you his 10 most common mistakes to avoid when purchasing commercial real estate.
The Top 10 Commercial Real Estate Due Diligence Mistakes
Mistake #1: Not Valuing the Property Correctly
Make sure you’re conservative in your underwriting of a deal. Do your homework! That means checking for sales comps and other available properties on the market. Contact the more active commercial brokers in the area and inquire about local property values and sale comparables. Then continue to adjust your valuation during the due diligence based on what you find.
Mistake #2: Not Understanding Your Lender’s Underwriting Requirements
Before you spend a lot of time, money, and energy conducting your due diligence, make sure you’ve had a preliminary discussion with some lenders about the amount of the loan they would consider putting on the property.
Today’s lenders are very conservative and look at many aspects of the property, such as physical condition, sale and lease comparables, leases in place, intended use, environmental issues, credit worthiness of purchaser, etc. Check with them before you get too far down the road with your due diligence to avoid surprises later…