Ray’s list is a great approach, but he is absolutely right about the process. Diligence is a very inductive search for information–that is, you start very generally, with the financial data provided and a visual inspection of the property. If you aren’t able to get these very early in the process, I would not even pursue the deal.
Think of diligence as layers. You are starting with some fairly general information, and as you go you accumulate questions that need to be answered. Don’t nickle and dime the broker and seller to death with these questions yet, but take them in layers, and request verbal responses/documents as appropriate.
As a word of caution, I would never consider doing a commercial property acq. without a PE inspecting and helping you formulate your list of questions to resolve. Don’t focus on defects yet–get all of the information you can, then determine how important any defects are to you (financially).
Diligence is an investigation process, not a one-time event. Use your investor’s Sixth Sense to tell you where/how much to dig (you will develop this by watching non-verbals and thinking like a seller).
I have read many a post/replies on the subject of ‘Due Dilligence’. I want to be certain that I understand this process.
I see a property in an area that I’m interested in.
To perform due dilligence I would approach Representing Broker, or Owner and “just” ask for all the “Rays Check List” of information to perform due dilligence.
I guess I’m naive to think that the property owners on a office building, or multi-family would be willing to give over all of this information for me to perform a due dilligence process.
Is there any apprehension towards buyers in handing over this information?
I mean what if the numbers do not add up the way I would want them to?
Did I just waste someones time?
Is there some other information that I’m leaving out that would prompt me to move forward with the performance of ‘Due Dilligence’?
What is the proper approach to an income producing property?
Maybe there is a post already written toward this answer.
Could someone lead me to it or give me some keywords that I could search?
No, that’s not the way to do it - Posted by ray@lcorn
Posted by ray@lcorn on February 09, 2004 at 08:38:05:
David,
That checklist is not for initial contact. Few, if any, brokers or sellers will turn over that amount of information without some idea trhat you’re a serious buyer.
Most deals start with the buyer being supplied with at least a pro forma statement of income and expense. You may get actual operating numbers before going further, but it isn’t the end of the deal if you don’t. After reviewing whatever info is supplied you should be able to make a determination of whether you want to go further. If so, it is customary to issue a Letter of Intent stating the basic parameters of the deal as you want to pursue it, contingent to the verification of the seller’s representations. The LOI should specify that the parties will proceed toward a contract. You may want to include the DD list as an exhibit to the contract, but don’t be surprised if the seller comes back and says not all of the info is available. The list is an ideal, not an absolute.
I don’t think I’ve ever gotten all of the information, and many of the items, such as market research and third party inspections, are self generated by you, not the seller. The list is a guide to what you need to consider and inquire about in the context of the entire deal.