Updated: Oct 16
What Is Due Diligence in Real Estate?
A commercial due diligence has three main categories. Let’s break it down. Financial Due Diligence- you want to know the investment potential. How much profit can the property feasibly earn for you. find out how much money the property is currently earning . For more accurate picture check the actual financials for the property going back at least 3 years tax returns ,current and past years’ rent rolls, a lease information for each tenant, past property taxes, utility bills, insurance policies, and risk assessment information gathered by the insurance company to get an accurate picture. Be aware ,"Pro Forma" doesn't represent actual financials.
Physical Due Diligence-a physical inspection to find out If the building has structural issues, pest infestations, or other problems to help make an informed decision about whether you want to take them on .
Legal Due Diligence-a title insurance company will help you with this and issue a title insurance policy to cover you if something is missing. There are common exclusions that title policies will not cover rights-of-way, restrictions, and covenants. You want to know what your policy does and doesn't cover and if any of the above items apply to your property. Generally, before a title can be insured, property taxes must be up to date and any liens on the property must be released. Finally, the deed must be approved, executed, delivered, and filed on record.
To sum up , to make sure the property has the realistic potential return on your investment and that you aren't going to pay a previous owner’s back taxes, or other liens always preform your due diligence.