Yesterday we canceled a purchase agreement for a four unit mixed use building we were adding to our portfolio scheduled to close on Friday. We felt we had to because of some things that came to light during due diligence that didn’t fit our plans. So I thought it was an appropriate time to talk about the subject.
As many of you know, when you buy a single family home you usually have about a week called the “inspection contingency” to get an inspection and any other testing done to make sure it is fit for you to live in. In commercial real estate, we call that period “due diligence”. It lasts a lot longer; anywhere from 30-90 days for building purchases to 120+ days for new construction projects and land deals. And it has a lot more steps to it.
Those steps vary depending on what you’re buying. Here is a list of everything that we did in order to make sure we were doing the right thing:
1) Comprehensive building inspection
2) Roof inspection with a rubber roof contractor
3) HVAC inspection with a licensed commercial HVAC contractor
4) Plumbing & Electrical inspection
5) Contractor meeting to get construction bids
6) Environmental impact studies (in our case a level 1 study, but you could do soil testing as well)
7) Appraisal by the bank to determine as-is and fully rented value
8) Review of profit & loss statements for the past 3-5 years
9) Review of utility bills for the past year to look for efficiencies
10) Obtain commercial insurance bids
11) Conversation with the city to get any necessary permits and go over any potential change in commercial uses or zoning
12) Conduct a rent study of neighboring apartments/buildings to confirm rental rates
13) Conversations with the tenants to renew/replace leases and see if they have any issues with the building
These are all important for their own reason. And had we not done them all, we wouldn’t have found out the thing that ultimately blew the deal apart.
Due diligence isn’t quick or cheap. In our case this was 30 days, with likely another 30 days to go if the deal had kept going, and close to $5,000. But, it is better to spend that money now than to wind up with a much bigger, more expensive issue.
If you’re looking to purchase commercial or multifamily property in the next year, we should talk and create a strategy to get you the right building. Working with a competent professional makes a difference!