What Due Diligence Should I Conduct Before Buying a Commercial Property?
A sound investment involves several layers and must align with your financial goals. Before deciding to invest in commercial property, conducting thorough due diligence is essential. This involves comprehensively assessing the property’s financial, legal, and physical aspects. Failure to perform a substantive due diligence process can result in negative post-transaction surprises that may risk your return on investment (ROI).
To see other common mistakes to avoid when investing in CRE, click here.
What is Due Diligence in CRE?
Conducting due diligence is a comprehensive investigative process that unveils crucial information regarding a property. This meticulous examination mitigates risks and aids in making informed investment decisions. By scrutinizing property history, zoning regulations, lease agreements, environmental concerns, and market trends, stakeholders can accurately assess the property’s value, potential challenges, and growth prospects.
The primary objectives of conducting due diligence encompass a comprehensive evaluation of the property, the seller, financing arrangements, and compliance responsibilities.
Understand the local real estate market dynamics to evaluate a property’s performance appropriately. Examine the area’s vacancy rates, rental rates, and recent sales. The success of a property often hinges on its capacity to allure and maintain tenants, underscoring the vital importance of robust market demand.
Top 3 Areas to Analyze During Due Diligence
1. Physical
Assessing the physical condition of the property is vital. This includes inspecting the building’s structure, plumbing, electrical systems, and any necessary repairs or upgrades. Engaging a qualified building inspector can provide a detailed report on the property’s condition. Physical due diligence will assist you in determining whether or not the business property you intend to purchase has been properly maintained. If not, you can use this information to negotiate the sale price or even walk away from the deal.
2. Financial
Financial due diligence entails studying a property’s cash flow by examining the income and costs to see if they match what the seller has presented and determining if the rent roll is sustainable. It is crucial to evaluate the property’s current and potential value, as well as any possible tax implications. Do not immediately believe the seller’s books and records. It is your job to check and double-check the property’s financial statements by validating every dollar reported going in and spending on the property.
3. Legal
The legal aspect involves scrutinizing the title deeds, permits, licenses, environmental, and any existing legal disputes or restrictions. Engaging a professional attorney to review these documents can help identify any red flags that could affect the property’s purchase or operation. Several issues can emerge when purchasing a commercial property without sufficient legal due diligence. With this in mind, hiring a licensed CRE agent with experience in your property type is advised. This will help you identify and reduce risks before you finalize the agreement.
Takeaways
By conducting thorough due diligence, potential buyers can mitigate risks and make informed decisions when purchasing a commercial property. Due diligence can not be overlooked when buying a commercial property. If you need help, please get in touch with a Matthews™ specialized agent to assist you in your investment goals.
