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This episode is all about doing due diligence on commercial real estate.

Due Diligence is rarely talked about because it takes back seat to sexier topics like raising money and finding, analyzing and negotiating deals.

But I have found that more investors make mistakes during the due diligence than any other part of the process.

To help us with due diligence I have on the show today Brian Hennessey.

Brian has been in the commercial real estate industry for 31 years as: a commercial broker for 22 years; a Senior Vice President of Acquisitions and Dispositions for 6 years for a major investor, and ran his own real estate syndication/asset management company for 3 years. He has represented a number of Fortune 500 Tenants including Bank of America, The Walt Disney Company and Baxter Healthcare.

With over 9 million square feet of sale transactions, many painful, but valuable lessons were learned and a wealth of experience was accumulated. 

He is the author of the book “The Due Diligence Handbook for Commercial Real Estate Investments”, a top selling
book on commercial real estate available on Amazon, Audible.com and on his website www.impactcoachingsystems.com.

He’s going to share with us the Top 10 Mistakes people make when doing due diligence on commercial real estate.

So it’s important to pay attention to what Brian has to say.

Purchase the Book!The Due Diligence Handbook For Commercial Real Estate by Brian Hennessey

Once you’re done listening to the episode, make sure you purchase Brian’s new book “The Due Diligence Handbook For Commercial Real Estate”. You can get a 20% discount if you use the promo code “BLANK” at checkout.

Purchase the Book Now (20% Discount)

Connect with Brian

The best way to connect with Brian is via his web site www.impactcoachingsystems.com.

Transcript

Why do you believe most investors and commercial real estate professionals aren’t familiar with or don’t pay enough attention to doing due diligence?

They don’t know what they don’t know. Once I became the buyer I realized there’s a lot more to it than I thought. I found there aren’t a lot of resources out there to help you with due diligence. My book really started out as a reference manual for myself.

Why do you feel that it’s important to learn how to properly conduct due diligence?

Most investors leave large amounts of money on the table when purchasing real estate without even realizing their oversight. It’s a mistake to assume anything when it comes to purchasing property. Learning how to properly conduct due diligence when investigating investment properties will save you a pile of money and a lot of headaches.   Avoiding these common mistakes will empower you to be confident in your proficiency as an educated investor.

What are some of the most common mistakes you see investors make when doing due diligence on investment properties?

Here are the 10 most common mistakes to avoid when purchasing an investment property opportunity:

Mistake # 1: Not Valuing the Property Correctly

It’s always surprising how many investors are willing to buy off on price after negotiating with a seller, just because they arrived at an acceptable purchase price. Do your homework!  That means checking for sales comps and other available properties on the market. Empower yourself by contacting the more active commercial brokers in the vicinity and inquire about local property values and sale comparables. You’re constantly adjusting your valuation during the due diligence based on what you find.

Mistake # 2: Not Understanding your Lender’s Underwriting Requirements

Before you spend a lot of time, money and energy conducting your due diligence, make sure you’ve had a preliminary discussion with some lenders about the amount of the loan they would consider putting on the property.  Today’s Lenders are very conservative and look at many aspects of the property such as: physical condition; sale and lease comparables; leases in place; intended use; environmental issues; credit worthiness of purchaser; etc.  Check with them before you get too far down the road with your due diligence to avoid surprises later.

Mistake # 3: Not Checking If The Property Complies With All Current Municipal Building Codes

It’s a fairly common occurrence that a buyer finds out after purchasing a property that it doesn’t meet the compliance of building and/or ADA (handicap) codes.  This comes up when the contractor goes to pull a permit from the city for intended improvements or when the city inspector comes out to check out the contractors work, discovering the infractions.  Be sure to keep an eye out for tenants whose space has been built-out without a permit. It’s a good idea to have a contractor, architect or space planner inspect the property to discuss any improvements and compliance during your due diligence period.  You don’t want any costly surprises after the closing.

Mistake # 4: Assuming There Are No issues Within Existing Tenant Leases

The leases can have many “trip wires” such as cancellation provisions, contraction provisions, caps on pass-through expenses, fixed option rents… just to name a few.  You want to be aware of these provisions because if the tenant exercises them, it could put you in a bind and devalue the property.  It’s important to have a competent real estate attorney read the leases if you are not familiar with commercial real estate leasing.

Mistake # 5: Assuming Lenders Will Accept All Third Party Reports

Before hiring any third-party vendors to conduct an inspection and prepare a report, make sure that your lender approves them.  This goes for the Property Condition Assessment, Environmental Reports, or any specialized reports such as seismic or geological studies. Mistakenly having to pay two different vendors for the same report costs much more than time, it is very expensive.

Mistake # 6: Trusting that the Seller and Their Representative Have Disclosed All Issues

You have to be a detective when performing your investigation/due diligence on a property you’re looking to purchase.  Not all sellers are going to be forthcoming when it comes to disclosing the problems of their property.  Remember the Latin saying, “caveat emptor”: let the buyer beware.  Ask the hard questions and make sure you do that in writing, i.e. emailing them so you can keep track and record all correspondence in case you need to bring it to court one day.  Always ask for back up receipts, lien releases, copies of paid invoices, etc.  Remember, ASSUME NOTHING.

Mistake # 7: Expecting The Closing Statement To Be Without Issues

Before you sign the final approval of the closing statement sent by the escrow officer, be sure you have scrutinized all the items listed… as well as those omitted.  Many times a seller will load up items to be credited to themselves and “forget” items that should be credited to the buyer.  Some commonly overlooked items are:  letters of credit or Certificates of Deposit used as security from tenants that the Landlord needs to assign to the new buyer; leasing commissions owed to brokers on leases that have recently been signed; tenant improvement allowances owed to tenants; vendor billings that need to be prorated or paid in full prior to new ownership taking over.

Mistake # 8: Not Checking Out the Competition

You need to … Especially if you’re not familiar with the area. If you see rent specials or other concessions, you need to know. 

Mistake # 9: Not Spending Time at the Property

Go there at different times of the day. The reason I say that is that you’re going to get a much better idea of what goes on there. That parking lot might be a hang-out for kids to party on the weekends. You get a chance to speak with the tenants. It might even change your mind about the property.

Mistake # 10: Not Walking Each and Every Unit

Even if the seller doesn’t want to disrupt the tenants. For me, I want to see every one of them. You don’t know what they’re going to be hiding. Maybe one of the units had mold or fire issues. Insist on it.

How do you feel about re-trading a deal?

Re-Trading means asking the seller for a LEGITIMATE discount. Make sure you document that properly. Write a letter and itemize each and every issue that you uncovered and that needs to be addressed. It’s all in the manner you present it. And if they don’t address it, make sure you have an out. 

If you were to try to boil it down for us, what would be the key take-away from doing due diligence?

If you’re going to assume anything at all, assume that there are multiple problems to discover. Learning how to properly conduct due diligence will help you uncover those problems, as well as discover hidden value enhancers to increase property value.

Purchase Brian’s Book!The Due Diligence Handbook For Commercial Real Estate by Brian Hennessey

Make sure you purchase Brian’s new book “The Due Diligence Handbook For Commercial Real Estate”. You can get a 20% discount if you use the promo code “BLANK” at checkout.

Purchase the Book Now (20% Discount)

Connect with Brian

The best way to connect with Brian is via his web site www.impactcoachingsystems.com.

 

 

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