Advanced Research for Purchase
Acquisition Due Diligence
Finding the ideal property to put an offer on is simply the first step in becoming a property owner. Before closing, a great deal occurs behind the scenes to verify that the property is a suitable addition to your portfolio. Before making an offer, you have run the figures (decided the cap rate you want to achieve, analyzed the return of an asset at several leased percentages, accounted for holding expenses, maintenance, value-add possibilities, and contingency reserves), and craft your offer. The real meat and potatoes of the acquisition process occur after a contract is signed. This does not diminish the significance of selecting the ideal property and negotiating the most excellent bargain; without these elements, there is no transaction. However, as the closing date approaches, carefully completing your due diligence checklist can instill confidence in your buying choice.
What factors may be explored during diligence? There are definitions of aspects of due diligence that every property should do, while others are more specialized to particular applications.
Our objective is to give a reference to some of the most critical due diligence topics to consider. However, this will not be a comprehensive list of all conceivable due diligence items since each property is unique and must be assessed based on its qualities. The following describes the most distinct components of due diligence, what to look for, and a suggested technique.
Common due Diligence Items
The due diligence period is the buyer’s chance to learn all they need to know about a property, giving them time to check for red flags that need to be remedied before closing, be accepted as-is, or result in the termination of the purchase agreement. As part of negotiating the purchase contract, the buyer and seller will define the duration of the due diligence period and any possible built-in extension periods. The duration is often determined by the buyer’s requirements and the seller’s tolerance for being under contract without a closing assurance.
For instance, if confirmation of land use and zoning change is needed for the purchaser’s ultimate benefit to be allowed on the site, a lengthier period of due diligence will be necessary to provide time for the jurisdictions rezoning procedure. Regardless of the duration of the due diligence period, if this time is used correctly, it is possible to get all the information necessary to proceed with the closure.
Searching For and Obtaining a Clean Title
Does the seller have the exclusive right to sell the subject property? The property’s title provides a brief history of the property. It is a record of the property’s previous owners and anybody who has ever had a claim to the land. A comprehensive title search will reveal the property’s chain of ownership, including sellers, buyers, mortgages, and any other liens that may have been charged. Clean title indicates that the seller/selling entity is the sole current owner and that all liens will be paid at closing. If there are further ownership claims, they will need to be located and fulfilled before proceeding.
Alta Survey, Legal Description, and Environmental Reports
ALTA, or the American Property Title Association, is the organization that manages and gathers the information required to link a specific parcel of land to its title history. The ALTA survey produces a visual representation of the title that depicts the physical boundaries of a property using the legal description found on the label and adds any easements and encroachments that may exist, as well as providing the Book and Page where a recorded document can be located in the county’s records office. The ALTA survey is supported by the written legal description and relevant legal papers.
Environmental data disclose the composition of the soil on the contested land. During due diligence, either request copies of the seller’s most current reports or employ a business to do a Phase I and, if necessary, a Phase II environmental assessment. The Phase I investigation examines the property’s past usage and utilizes visual indicators to determine the possibility of contamination. Phase II research goes further by collecting soil samples at different levels and throughout the property to see whether pollution is present.
Contracts, Terms, and Restrictions
Typically, properties in a more significant development or that have been subdivided from a larger parcel will have recorded covenants, conditions, and restrictions that dictate property use, architectural design, maintenance agreements with neighboring fields, and a variety of other things that the seller of the property has chosen to include. If your property is subject to CC&Rs, acquiring a copy of the CC&R declaration will define the restrictions you must adhere to. CC&Rs are vital whether the land is improved or unimproved, but they are particularly critical when purchasing unimproved property — you want to ensure that your planned use is permitted under the CC&Rs. Otherwise, you may close on a property you cannot use.
Seller’s Documentation on Current Operations
When acquiring a performing asset, such as multifamily, self-storage, office, or retail, knowing how the support is doing may assist validate the original underwriting (or revealing where the numbers need to be modified) and identifying any opportunities to raise the asset’s income. This paperwork from the seller should include current leases and revisions, a recent revenue accounting from leases and other sources, standard area maintenance charges, and any other expenses and service contracts. A current rent roll will include current rental prices, square footage for each tenant, lease start date, initial lease duration, lease end date, and security
deposit amounts.
Inspection of the Property (Improved and Unimproved) and Inspection of the Mechanical Systems
On paper, the information on a property only tells half of the tale. During due diligence, any other red flags are uncovered by inspecting the property and having a contractor or inspector assess the physical buildings and experts review the biological systems (HVAC, plumbing, electrical, etc.). However, you may be able to arrange a price decrease to assist balance any unforeseen expenditures that may have been detected.
Zoning Confirmation and/or Rezoning
Individual jurisdictions write zoning regulations used by cities and counties to ensure consistency in the usage of a particular area and to impart design principles that contribute to an aesthetically pleasing environment. Depending on the planned use, it may be required to undergo a rezoning procedure. Rezoning may take many months and requires the assistance of rezoning specialists, such as lawyers and engineers, who will work with the local government to acquire all the needed documents and serve as your champion with the council. Rezoning is feasible, although the process may be rocky at times.
Final Remarks
This is not a comprehensive list of due diligence things but a beginning point; each property is unique and must be examined. Negotiating the duration of your due diligence period based on your end-use requirements and using the time efficiently may reveal any present red flags, assisting you in deciding whether to proceed with acquiring an asset.
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