Due diligence often gets short shrift because it’s the hard work, boring side of commercial real estate investing, but this research is often what separates the successful investors from the failures. Here are the first five common mistakes that proper due diligence can help you avoid:

  1. Calculating incorrect property values. It’s always safer to be conservative in your valuations of a commercial property. Accurate evaluation of a property requires homework: pull up sales comps, check out other similar properties on the market, and talk to local commercial brokers about local property values.
  2. Misunderstanding underwriting guidelines. Before you spend too much time conducting due diligence on any one particular property, it’s a good idea to run it by the lender you plan to request your loan from to find out how much they would consider lending you for it. Federal restrictions have forced bank lenders to be much more conservative in their commercial real estate lending since 2008, so if the property won’t fit into these guidelines, you’ll want to determine whether it would be a good candidate for a hard money loan.
  3. Not checking whether the property is up to code. It’s a good idea to have a professional, such as a contractor, inspect the property, looking out for spaces that may have been built out without a permit, to make sure it complies with municipal building codes as well as ADA codes to help you avoid costly surprising after closing.
  4. Overlooking nonstandard provisions in existing tenant leases. If you’re purchasing a rental property (retail or multifamily), it’s important to read over the leases for cancellation provisions, contraction provisions, fixed rents, and caps on expenses that can be passed on as all of these can affect the value and income-producing potential of your property.
  5. Assuming your lender will accept your third-party reports. Before arranging for any third-party reports (e.g., environmental reports, condition assessments or appraisal reports), ask your lender if they have a preferred appraiser, engineer or inspector that they can recommend so that you don’t have to pay for additional reports later on. Additionally, private lenders will often conduct their own appraisals as part of their underwriting process.

 

Check out Part 2  of this blog for the other five common due diligence mistakes. If you have more questions about conducting due diligence for commercial real estate purchases or our private capital loan programs, contact Montegra at 303-377-4181 or by email.