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The Importance of Good Due Diligence

By
Commercial Real Estate Agent with Strather Academy

Any commercial real estate (CRE) deal worth doing should be able to withstand a little due 
diligence. I want to discuss examples of due diligence you'll want to perform before
you put the final touches on that Purchase Agreement (PA) and they include:

 · Property Inspection

· Market Analysis (values, rents, etc.)

· Title Search & Inspection

· Lien Review

· Confirmation of Seller's Mortgage Balance and Payment

· Confirmation of "Currency" of Seller's Mortgage

• Mortgage Terms (e.g. fixed or adjustable, prepayment penalties, etc.)

 Let's spend some time on some of the most important due diligence items from the list, which
concern either title or financing, both of which are also critical prior to any commercial
real estate purchase.

Title Search & Inspection

The title to a property shows the chain of ownership and will show any liens that are 
attached to it. Both of these factors are important to look into, before you ever close on 
any real estate investment. Because of family or business arrangements, the chain of 
ownership is not always as clear as you'd like them to be, and your due diligence allows you 
to confirm that acquisition of the property can be a smooth transfer of ownership.

Lien Review

Another aspect of title search & inspection process is the review of any liens on the 
property. Liens can come in many shapes and sizes but some of the primary types are listed 
below:

· Property tax liens

· Income tax liens

· Mechanic's liens (unpaid work done to property)

• Judgment liens

Tax related liens are either due to local property taxes going unpaid or to state or federal 
taxes that are similarly delinquent. Tax related liens have high priority, when it comes to 
transferring ownership cleanly, and this is a potential issue you need to be clean up before
you close.

Mechanic's or judgment liens are usually easier to address during the due diligence period, 
but are also worthy of your review, as they can still affect the closing process. When these 
liens appear, it is often a matter of contacting who placed the lien to see what they will 
accept to release that lien. More than likely they will take less than what is owed, if you 
close right away. Always get the agreement in writing, so that you can show it to the closing
Agent or Title Company.

Confirmation of Mortgage Terms

A final form of due diligence you'll need to consider is a review of any financing terms that
the seller of a property has to adhere to. This review may include such items as confirmation
of payment and payoff terms, confirmation of the currency of an existing mortgage (to make 
sure the payoff is what everyone thinks it should be), and review of any relevant mortgage 
"fine print" that may affect the final closing numbers for the transaction.

Remember that due diligence is not just there as something to do, just for the sake of doing 
it. It is designed to protect you, especially given that commercial real estate represents an
often-substantial investment of resources.

Comments (4)

Dan Edward Phillips
Dan Edward Phillips - Eureka, CA
Realtor and Broker/Owner

Good Morning Herbert, excellent list, due diligence is critical.

Oct 13, 2010 02:41 AM
Herbert J. Strather
Strather Academy - Detroit, MI

Dan:

Thank you for your comment.

Herb

Oct 13, 2010 02:43 AM
Joe Sosky
KW Commercial - Vancouver, WA
Commercial Real Estate Broker - (360) 816-9652

Herbert,  nice due diligence list.  This is good information for buyers and their agents.  Thanks for sharing. 

Oct 13, 2010 02:48 AM
Ty Lacroix
Envelope Real Estate Brokerage Inc - London, ON

Herbert, due diligence should be an inherent habit with us in real estate.

Ty

Oct 18, 2010 12:55 AM