The ins and outs of real estate due diligence

When it comes to real estate due diligence, the devil is in the detail

Caveat emptor – “let the buyer beware” – reminds property investors to complete their due diligence when purchasing a property.

You only get one chance to get it right. The due diligence period is a discovery window that allows you to confirm your assumptions, spot red flags, uncover hidden opportunities and ultimately determine whether the acquisition is a ‘go’ or ‘no-go’. 

Using that time to your advantage can be the key to a successful transaction.

But due diligence is easier said than done. So, let’s start by understanding and unpacking the various types: market, financial, physical, legal.

1. Market due diligence

Identify the big picture obstacles and opportunities

This starts early in the transaction lifecycle and evaluates the quality of the market in which the asset is located. Consider this sampling of questions to guide you to your answer:

• Does the location boast high levels of employment and job creation?

• Are there any large infrastructure projects on the horizon?

• Do the supply and demand characteristics point to rising prices?

• Is the zoning and planning regime favorable to development?

2. Physical due diligence

Inspect the property from top to bottom

Thorough due diligence requires the help of experts to inspect the property from top to bottom. You’ll only scratch the surface by getting answers to these questions:

• What is the condition of the structure and fabric/cladding, including the roof and support systems?

• Are there any major maintenance or structure repairs planned for the sale period?

• Can you access warranties and operational manuals?

• What do the maintenance contracts and repair activities tell you about the condition of the building?

3. Financial due diligence

Review revenue and expenses

How will you underwrite the deal? That’s the underlying question to answer as you unpack the property’s financial fundamentals.

Developing a projection of a property’s future cash flows will help you determine its fair market value and return potential. Start with financials – including bank statements for all accounts, tenant leases and service contracts – for the last two years, including:

• Rent roll

• Leases

• Tax statements

• Property taxes

• Operating expenses

• Insurance

• Capex and Opex

4. Legal due diligence 

Tick the legal boxes

If the property is in good condition with no major issues beyond minor repairs, you will proceed to the legal due diligence. As part of the legal due diligence process, you need to check:

• Certificate of title

• Restrictions and covenants

• Other certificates, i.e. energy efficiency, etc.

There are many considerations when it comes to due diligence – far more than are outlined above. Navigating the due diligence path can be trick, where do you start? And where do you end?

Your guide to smart due diligence

In this guide we will cover:

• The four various types of due diligence (market, physical, financial and legal)

• The pertinent questions you should be asking

• Strategy: the missing step

• The best practices to navigate the due diligence process

Download your copy of the guide today

Navigating the due diligence process

“Just get the due diligence done” may be the order of the day, but it’s not something that can be crossed off with the help of a checklist. 

Unlike other investments, where it is easy to compare apples with apples, every commercial asset is unique. The varying locations, designs, uses and structures mean no two transactions are alike.

Understanding the due diligence activities to prioritize and those to park can’t be done by instinct and intuition alone. Different objectives alter the due diligence process and its depth.

Knowing where you will get the most value and then taking those paths requires skills and hard-won experience.

Interested in learning more about the secret to smart due diligence?