Due Diligence
By Bradley Luster
If you have been in any Real Estate transaction or plan to be, as a Buyer you are afforded a Due Diligence period. But what exactly is a Due Diligence period?
“Due” according to Webster’s dictionary means “Meeting special requirements”; and “Diligence” again according to Webster’s means “Marked by painstaking effort”.
A Due Diligence Period is a defined period in time for which the Buyer shall perform studies into the physical and material aspects of the Real Estate being sold and/or bought to determine if the Buyer wants to proceed with the purchase. Most Due Diligence periods commence upon the opening date of escrow and conclude on an agreed upon time sometime thereafter.
In many of my transactions, I am representing the Seller and it is then that I try to put a different spin on the words of Due Diligence. I ask my Seller’s to perform specific studies that by my experience determine what a Buyer may want. For example, I usually suggest that owners perform a Phase I environmental study for their property. It can cost from $1,500-$3,000 or more pending the property, size, etc…
Many Sellers’ in the beginning of this conversation usually balk at the idea of spending money prior to finding a Buyer. But I usually turn them around by explaining the reason to perform the study. Most contracts, standard forms for industrial property require the Buyer to perform the study. So what is wrong with me? I hope I’m o.k. It is my job to represent the Seller, it is also important to find out what might be a problem in escrow that might kill a deal. What would be worse than entering into escrow on a sale and the buyer performs a Phase I environmental study and it comes back that you have an issue that needs more investigation. Maybe it says that in the past there was a use on the property that might have used an underground fuel tank?
Who was hired to do this study? The Buyer is an adversary in a transaction and it has been known to use a less than truthful contractors to renegotiate deals. So why not spend a few dollars and know what you are selling first. If there is an issue, you can take care of it if you chose or disclose it to a Buyer. This strategy has helped my clients close more deals and the main reason is that we avoid the waste of time. We know the issues and deal with them. You cannot bury your head in the sand and hope that no one will find out the problems at a property. Also, who wants to get into a legal battle with anyone? That is a losing proposition always.
There are many different things that a Buyer investigates while in the Due Diligence Period. Here is a list:
Title Conditions
Zoning
Square Footage
Land Size
Mechanical Functions of the building
Electric
Neighborhood
Roof condition
Government restrictions
Grading for flooding potential
Leases
Loan
Contingency
These are the basics of what a Buyer will investigate. I try to arrange information in advance of going onto the market for as much as possible to reduce the Due Diligence time needed by a Buyer as the work has been done. My best story is the one where I sold a property in downtown Los Angeles for $4 million more than the Seller anticipated. I listed the property but did not put a price on it. I prepared a marketing package with all the Due Diligence materials named about and more. I sent out marketing materials about the opportunity to known prospective Buyers who might want to buy the site for future development. The Seller got $15 Million, and the Buyer went hard with $1Million non-refundable in 10 days and closed 30 days thereafter. The Buyer’s put a $100Million development on that site.
If you are a Buyer it is important that you receive full disclosure about a property and then still investigate the sources and information for accuracy. These types of transactions are for big money and require expert representation and guidance weather you are the Buyer or Seller.
A seasoned real estate professional, Bradley A. Luster has been a consistent Top Producer for Major Properties for 24 years. In 1992, he and his brother Jeff became owners of the firm started by their father, Arnold Luster, in 1964. Mr. Luster is the President of the firm and has literally sold millions of square feet in the Downtown Los Angeles real estate market. Major Properties has brokered over $3.0 billion in transactions and has served thousands of commercial and industrial property sellers, buyers, lessors and lessees. Check them out at www.majorproperties.com. Mr. Luster may be contacted at (213) 747-4151, by fax at (213) 749-7972 or by email at brad@majorproperties.com.
