Posted by genieSABRE on Mar 22, 2016
Top 10 Commercial Real Estate Due Diligence Mistakes

Top 10 Commercial Real Estate Due Diligence Mistakes

Due diligence is rarely talked

 

Source: Hannif Highclass c/o Genie Sabre Realty Inc.
Publish:MY BLOG: Toronto Real Estate:

“More investors make more mistakes during due diligence than any other part of the commercial real estate investing process.

  • Number one- topics like raising money  
  • Number two- finding a commercial real estate deals.  
  • Number three- analyzing and negotiating the real estate deal itself.  

Even if you’ve got these three items covered, there could still be some vital errors you are making that just aren’t helping your investment”

Top 10 Commercial Real Estate Due Diligence Mistakes

Check out  The Top 10 Commercial Real Estate Due Diligence Mistakes (From a 31-Year Veteran Investor!) MICHAEL BLANK, creator of the Syndicated Deal Analyzer and the eBook “The Secret to Raising Money to Buy Your First Apartment Building”.:

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.

The small, grainy, unclear, poorly lit photos of your home don’t exactly scream, “Let’s go see this home!” When was the last time you were excited to see a property where you had trouble discerning the details of what was in the photo. Photography is your online image, you first impression.

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.

Mistake #3: Not Checking if the Property Complies With All Current Municipal Building Codes

It’s a fairly common occurrence that a buyer finds out after purchasing a property that it doesn’t meet the compliance of building and/or ADA (handicap) codes. This comes up when the contractor goes to pull a permit from the city for intended improvements or when the city inspector comes out to check out the contractors work, discovering the infractions.

Be sure to keep an eye out for tenants whose space has been built out without a permit. It’s a good idea to have a contractor, architect, or space planner inspect the property to discuss any improvements and compliance during your due diligence period. You don’t want any costly surprises after the closing.

Mistake #4: Assuming There Are No issues Within Existing Tenant Leases

The leases can have many “trip wires,” such as cancellation provisions, contraction provisions, caps on pass-through expenses, and fixed option rents, just to name a few. You want to be aware of these provisions because if the tenant exercises them, it could put you in a bind and devalue the property. It’s important to have a competent real estate attorney read the leases if you are not familiar with commercial real estate leasing.

Mistake #5: Assuming Lenders Will Accept All Third Party Reports

Before hiring any third-party vendors to conduct an inspection and prepare a report, make sure that your lender approves them. This goes for the Property Condition Assessment, Environmental Reports, or any specialized reports, such as seismic or geological studies. Mistakenly having to pay two different vendors for the same report costs much more than time; it is very expensive.

Mistake #6: Trusting That the Seller and Their Representative Have Disclosed All Issues

You have to be a detective when performing your investigation/due diligence on a property you’re looking to purchase. Not all sellers are going to be forthcoming when it comes to disclosing the problems of their property.

Remember the Latin saying caveat emptor — let the buyer beware. Ask the hard questions and make sure you do that in writing, i.e. email them so you can keep track and record all correspondence in case you need to bring it to court one day. Always ask for backup receipts, lien releases, copies of paid invoices, etc. Remember, ASSUME NOTHING.

Mistake #7: Expecting the Closing Statement to Be Without Issues

Before you sign the final approval of the closing statement sent by the escrow officer, be sure you have scrutinized all the items listed, as well as those omitted. Many times a seller will load up items to be credited to themselves and “forget” items that should be credited to the buyer.

Some commonly overlooked items are letters of credit or Certificates of Deposit used as security from tenants that the landlord needs to assign to the new buyer, leasing commissions owed to brokers on leases that have recently been signed, tenant improvement allowances owed to tenants, and vendor billings that need to be prorated or paid in full prior to new ownership taking over.

Mistake #8: Not Checking Out the Competition

You need to — especially if you’re not familiar with the area. If you see rent specials or other concessions, you need to know they exist and why because they might affect your underwriting and valuation of the deal.

Mistake #9: Not Spending Time at the Property
Go there at different times of the day. You’re going to get a much better idea of what goes on there. That parking lot might be a hang-out for kids to party on the weekends. You get a chance to speak with the tenants. It might even change your mind about the property.

Mistake #10: Not Walking Each and Every Unit
Even if the seller doesn’t want to disrupt the tenants. For me, I want to see every one of them. You don’t know what they’re going to be hiding. Maybe one of the units has mold or fire issues. Insist on it.

Conclusion
Many new commercial real estate investors don’t know what they don’t know, and hopefully this list will help with that! Also make sure you follow your due diligence checklist and don’t cut corners.

So don’t underestimate the importance of due diligence. A deal you passed on is much better than a deal you did that you find out later is a big mistake.

Investment Mistakes

Related Readings you may like!

The Checklist That Can Help You Save Big During Due Diligence

5 Items Investors Overlook When Performing Due Diligence

 


 


 


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Home Owners: If, you already own a home – good for you!

May you be blessed with
warmth in your home,
love in your heart,
peace in your soul
and joy in your life.

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Real Estate Investors: Home ownership should be your 1st. priority. If you own your own home – Good for you. But now is the time to take that second step – Buying Rental Property for investment. Commercial, retail or home.
genieSABRE has extensive knowledge and experience in this field. As a developer of commercial /retail plazas (built 3 so far) and owners of residential rental homes, we can guide and advice you as to what is best for you according to your personal financial position.

Call: Hannif Highclass @ 416.444.4252

http://www.geniesabre.com

 

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