Today, we’re going to continue talking about due diligence. Thanks so much for checking out the Real Estate Today podcast.
I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. And I’m Marcia Edwards, Residential Broker with Windermere Real Estate.
Marcia E.: Hey Bob, you commercial investment brokers could school us residential brokers in regards to due diligence. It is a fascinating process. We have some of the predictable low hanging opportunities of whole house inspection to understand how we purchase. Look at the preliminary tiler report but the level that I’ve learned from some classes I’ve taken in your arena. There is due diligence that’s many layered and that’s why that period is so much longer in a commercial investment property.
Bob Nelson: Right, unfortunately the sellers are not prone to giving us very much time. The most recent transactions that I’ve been involved with, the bigger ones, they’re giving me 21 days for due diligence with the exception of the financing contingency. I’ve got 21 days to figure out if this property is as was represented by the listing broker. That’s not enough time. So now I have to start dealing with brokers that I really trust because I know that they prepare a due diligence package for my review, and they will deliver it to me very quickly. Part of the due diligence deals with property conditions. Is it physically sound? Environmentally sound? The roof, the HVAC or the heating, venting and air conditioning systems, are they sound?
They all wear out and where are we in the process of the wear out period?
Marcia E.: You also probably have to go into every unit if it’s multi-family-
Bob Nelson: Every unit.
Marcia E.: Things that you haven’t seen before. So there’s the discovery moment, then there’s an understanding what you’ve discovered, and then there’s enumerating what you’ve discovered. So there’s really three tiers to anything that does come up-
Bob Nelson: Exactly.
Marcia E.: Or is reviewed.
Bob Nelson: Exactly. And once I’m past the property characteristics, I also have to evaluate the leases. Are there any hidden surprises in there? Like I discovered one on a property we were about ready to chase. It was a very, very nice nationally known entity. In other words, everybody would like to own one. Let’s put it that way and then I find out that at the end of the five years, they have a six months window where they can cancel anytime they’d like. I saw that and I thought, “This is a five year lease and we would be ending up with a high cube former drug store and how do we fill that thing?” We backed away like … I went from full ahead to full reverse. And they were just flying rubber and gravel everywhere.
Marcia E.: Yeah.
Bob Nelson: I got away from that thing quickly.
Marcia E.: And that was in due diligence? After it went pending sale-
Bob Nelson: Right.
Marcia E.: You took a closer look and discovered you prevented a boo boo there for the buyer.
Bob Nelson: Exactly. Yeah. And as we say, “We spit the hook.”
Marcia E.: I’m Marcia Edwards, Windermere Real Estate.
Bob Nelson: And I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments.
Join Bob Nelson and Marcia Edwards Eugene, Oregon, real estate experts daily at 5:30 on KPNW for the “Real Estate Today ” radio show.