When it comes to conducting due diligence well there are certain things that might go wrong because sometimes the process of due diligence takes a back seat to seemingly more important factors such as raising money and negotiating the deal. Because the investors happen to focus on other things and other aspects of the deal, there are times when they happen to overlook essential research and thus end up making expensive mistakes. It is important to avoid making mistakes so that you do not end up wasting your money on something that is not going to pay you back. Let us have a look at the errors that you might commit while conducting your investigation.
The first and foremost error is the improper value of the property. To avoid this error, you need to make sure that you do proper research and investigation on the property. This includes things like checking the sales comps and other available properties in the market. You can seek help from professional investors or people who are into investing more often than you. You can request an assessment of the local property values and sold and listed comparables. Based on this information, you can adjust the valuation in order to get an accurate assessment of the property.
Not understanding the lender’s underwriting requirements Before you spend your time doing the investigation and research and invest your energy in due diligence, make sure that you have had a preliminary discussion with some lenders about the amount of loan that they would consider putting on the property. You need to keep in mind that the lenders these days are quite conservative and they look at several aspects of the property such as the physical condition of the property, sales, and the lease comparables, leases in place, intended use, environmental issues, the creditworthiness of the buyers and so on.
Another error that you might commit is not checking if the property complies with all current municipal building codes It is a common occurrence if the buyer finds out after buying or making the final deal of the property that it does not meet the compliance of the building or ADA codes. This happens when a city inspector or a contractor goes to pull a permit from the city for intended improvements and thus discovering the infractions. Thus make sure to check and keep an eye on the tenants whose space has been built out without a permit. It is suggested a good idea to have a contractor or a space planner in order to inspect the property and to discuss any improvements and compliance during the period of your due diligence. You sure do not want any costly surprises after the closing of the deal.
One of the common mistakes that you might commit is assuming that there is no mistake with the existing tenant leases The leases can have things like cancellation provisions, contraction provisions, caps on pass-through expenses, and fixed opinion rents, these are just a few if you talk about naming a few. You sure want to be aware of such provisions because if the tenant happens to exercise them it could eventually put you in a bind and thus devalue the property. It is very important for you to have a competent real estate attorney to help you and read the leases if you are not familiar with real estate leasing.
Another error is assuming that the lenders will accept all third party reports Even before you decide to hire a third-party vendor to conduct an inspection and prepare a report for you, make sure that your lender will approve the same. This goes for property condition assessment, environmental reports, or any other kind of specialized reports such as geological studies or seismic studies. By paying two vendors mistakenly the same reports can cost you much and can be expensive and thus you can avoid all of this.
Believing in the idea that the seller and their representative have revealed all the issues You need to understand that you have to act like a detective agent while doing the research, investigation, or due diligence on the real estate property that you are planning to invest in. Not each and every seller is going to be forthcoming when it comes to disclosing the problems of their properties. You should always remember the phrase, “let the buyer beware”. So, make sure that you ask the hard questions and make sure that you do all of it by writing i.e. prefer writing an email to them. By this, you will be able to keep a copy and a written account of the correspondence in case you need to bring them to court one day. You should always ask for backup receipts, lien releases, copies of paid invoices, and so on.
Another mistake is expecting that the closing statement will be without issues Before you sign the final approval of the closing statement sent by the escrow officer you have to make sure that you have scrutinized all the items mentioned or given in the list. Several times the seller will load items to be credited to themselves and happens to forget the items that should be credited to the buyer. Well, some commonly overlooked items are letters of credit or certificates of deposits used as security from tenants that the landlord needs to assign to the new buyer.
Not having a look at the competition If you are new and especially if you are not familiar with the area then you need to see and check the rent specials or other concessions. You need to know why they exist because that might affect your underwriting and the valuation of the deal.
Another mistake that you might commit is not spending enough time at the property Make sure that you visit the site and the property at different times of the day. By doing the same you will get a better idea of what goes on there. The parking lot might be acting like the playground for the kids. Also, you might get a chance to speak with the tenants which might change your opinion about the property.
These are the common errors that an investor happens to commit while conducting the due diligence on the property. Well, you can have a look at the list and avoid making such errors while you happen to look for the property you are willing to invest in. On the other hand, if you need any help or assistance with the due diligence then you can consider seeking professional help and for the same, you can rely on Better Capital and get the best assistance and guidance. For more information, you can visit our website at about and clear all your doubts and queries.
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