Performing the appropriate commercial real estate due diligence before purchasing is an essential part of successful real estate investment. Due diligence can help you avoid any potential costly and unpleasant surprises when you take ownership of your new property. In this series of blogs, we will look at the key items in a buyer’s due diligence checklist: title insurance and surveys; building and environmental inspections; zoning and existing leases; and financing.

Title Insurance Policy

One of the first steps to take when conducting due diligence on a property that you’re considering purchasing is to obtain a title insurance policy commitment from a title company. Before issuing this commitment, the title company will conduct research into the history of the property’s title. They identify recorded documents in the public record which affect title: easements, liens, restrictive covenants, and other documents of record.

The commitment binds the title company to providing a title insurance policy on the property once certain requirements are met. These requirements generally consist of the following: payoff of the seller’s current mortgage; proof of buyer’s new mortgage; payment of any outstanding taxes, assessments, or liens against the property; a property deed showing transfer of ownership; and a new survey. It also stipulates any exceptions which will not be covered, such as any existing claims, easements, liens, covenants, or other restrictions which did not appear in the public records when the title search was conducted.

For more on title insurance and the importance of obtaining it, see our previous blog “Title Insurance: What Is It? Why Do You Need It?”

Property Surveys

Once you have the title insurance commitment in hand, it’s time to bring in a professional land surveyor. He or she will survey the property and prepare a survey map of it. This map is a graphical depiction of boundaries (and any problems with them) and buildings, improvements, and fences as well as information about potential issues such as locations of flood plains. The survey will include items shown in real estate records in addition to the surveyor’s own field observations. The surveyor will also typically incorporate information from the title insurance commitment in order to show you how easements and other recorded documents will affect your use of the property.

What are the benefits of having property surveys made? It gives the buyer useful information which can help with the decision of whether to purchase the property and to determine the accuracy of the property’s legal description. Surveys will graphically display how any easements mentioned in the public record will affect a property’s use. The surveyor may also observe easements that do not appear in public record or that easements listed in the record don’t actually affect the property.

What types of surveys can you request? There are myriad types of surveys for a variety of uses. Four types of surveys are most common when dealing with commercial real estate properties in Colorado.

• Land survey plat. A scaled drawing of the property, which shows its boundaries and all recorded and apparent easements. It also includes a written property description. This type of survey does not show any improvements which have been made to the property.
• Improvement survey plat. Similar to the land survey, this plat is a scaled drawing of the property with boundaries and easements. However, unlike the land survey, this one shows the location of structures, visible utilities, and fences or other walls on the property and within five feet outside of the property’s main boundary. It will also show any visible encroachments and other boundary conflicts or problems.
• ALTA/ACSM land title survey. This survey is typically requested for commercial property transactions and is based on nationally standardized requirements established by the American Land Title Association (ALTA) and the American Congress on Surveying and Mapping (ACSM). These standards allow this type of survey to satisfy any survey-related exceptions in the title insurance commitment so that they can be removed by the title company. These surveys show surveyed land and water boundaries, monuments, easements (both recorded and apparent), buildings, and improvements (including those within five feet outside the property’s boundaries). You can also request that the surveyor include additional items such as topographic contours, parking, zoning designations, or flood plains.
• Improvement location certificate (ILC). This not on the same level as the first two survey plats (land and improvement). It shows improvements, easements, and any encroachments from neighboring properties, but does not have utilities or in-depth details that are included in the other three types of surveys. The advantage of an ILC is that it provides you with a basic overview of a property at a lower cost than the other options.

Title insurance commitments and surveys are just the first part of the due diligence that buyers should conduct before purchasing commercial real estate. They can reveal potential problems while the buyer still has an opportunity to address them and decide whether they wish to proceed with the purchase.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.