Most investors leave large amounts of money on the table when purchasing real estate. It’s a mistake to assume anything when it comes to purchasing property. Learning how to properly conduct due diligence when investigating investment properties will save you a pile of money and a lot of headaches. It will also be less stressful and make you a more proficient and confident investor.
Here are just some of the mistakes to avoid when purchasing an investment property opportunity:
- The property is valued improperly. It’s always surprising how many investors are willing to buy off on price after negotiating an offer with a seller, just because they arrived at an acceptable purchase price with them. Do your homework! That means checking for sales comps and other available properties on the market. Empower yourself by contacting the more active commercial brokers in the vicinity and inquire about property values and sale comparables (avoid relying solely on hearsay of your friends and neighbors).
- Signing a new loan that doesn’t cover financial assumptions. Your initial financial analysis may have included a loan amount that you assume will be placed on the property by a lender. Lender’s today are very conservative in their approach to placing debt on properties. They are much more cautious 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. Before you spend a lot of time, money and energy on 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.
- Not checking if property complies with all current state and municipal building codes. It’s a fairly common lament that a buyer finds out after the purchase that a property doesn’t meet the compliance of the 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 contactors 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 come inspect the property to discuss any improvements and compliance during your due diligence period. You don’t want any costly surprises after the closing
- Assuming no issues within existing tenant leases. The leasescan have many “trip wires” in them such as cancellation provisions, contraction provisions, caps on pass through expenses, fixed option rents… just to name a few. You want to be aware of these provisions because should these get exercised by the tenant, it could put you in a bind, as well as 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.
- Thinking 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 lenders approve them. This goes for 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.
- Trusting that the seller and their representatives have disclosed all issues. You have to be a detective when you’re performing your investigation/due diligence on the 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. emailing them so you can keep track and have a record of it in case you need to bring it to court one day. Always ask for back up receipts, lien releases, copies of paid invoices, etc
- Expecting closing statements to cover everything. 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 them 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 due brokers on leases recently completed that should be credited; tenant improvement allowances owed tenants; vendor billings that need to be prorated or paid in full prior to new ownership taking over, just to name a few