So you’ve signed the purchase contract and reviewed all of the seller-provided property information – now it’s time to dig into your own investigation of the property to make sure you are not buying a lemon…and the clock is ticking.
The following is a broad checklist of the information, reports and research you should obtain and conduct during the investigation period. It is important that you begin by determining the most efficient methods of organization and analysis of the (likely voluminous) information you receive (and pay for) to make a truly informed and timely “go/no-go” decision.
Without further adieu:
Title: As mentioned in our Due Diligence Process Article, your best resource in title inspection will be the title commitment. The focus of the title inspection is mainly on the list of exceptions. Each of the recorded documents underlying the listed exceptions should be reviewed in detail. Consideration of the type and extent of title insurance to obtain can also be an important decision: Should you get an ALTA 2006 policy or CLTA 1990 policy? Standard coverage or extended? Are any endorsements necessary? These will all depend on the type of property being purchased.
Survey: In order to adequately evaluate the potential problems identified by the exceptions, each exception should be reviewed simultaneously with a current survey of the land and improvements. The survey allows you to visually understand where any easements or licenses burdening the real estate are actually located and whether the scope of use set forth in the recorded document is acceptable based on its location. The survey will also identify encroachments or physical uses not shown by the title commitment. Consideration of the type of survey to obtain is another important decision: Should ALTA standards be followed, or are the local/regional government agencies’ standards sufficient? Is an improvement location certificate sufficient or should you get a land survey plat? These, again, will depend on the type of property and nature of the transaction.
Building Inspection: Inspection of buildings on the property is essential to ensure sufficiency of construction considering the intended uses of the occupants and the surrounding geography and climate. Seller’s provision of as-built plans and specifications should be helpful here, but will not end the investigation. A current inspection should be done by a certified third party inspector qualified in the type of property to be inspected. The focus of that inspection should be primarily on structural components such as the walls, roof, HVAC units and the fire suppression system. Certain climates/regions will require more exacting inspections, so hiring a local inspector is a good idea. The inspector should also independently look for any regulatory or statutory violations.
Zoning: The zoning, subdivision and land use matters are an often overlooked, but critical, aspect of the investigation. Zoning designation should be confirmed and uses at the property verified to conform to the allowed uses. In addition to current violations (or potential violations considering purchaser’s intended use), it is important to look at all of the current agreements affecting the property such as growth management agreements, covenants or public facilities agreements, as well as any current or proposed fees (impact fees or linkage fees), exactions or assessments. Also look for a pending zoning change.
Financing: While not always necessary, lender financing is usually required to purchase real estate. In the context of due diligence, the lender can be somewhat of an experienced ally. The lender will conduct its own title and survey examinations and will require an appraisal of the property, which provides a great deal of history, as well as a rough measure against your agreed purchase price. In the case of assumption of financing, a little more research has to be done by the purchaser to determine the potential for additional fees or term renegotiation based on the assignment.
Environmental Inspection: There is certainly not enough room in this article to fairly treat the detailed items to be considered in an environmental inspection, but luckily there are third party inspectors who you can hire to do environmental impact assessments. The depth and breadth of an environmental investigation should be relative to the past, present and potential uses of the real estate. That is, a piece of land which has been, and will continue to be, a clothing retailer, is not nearly as concerning from an environmental aspect as a gas station.
Existing Leases: Finally, if assuming existing leases, a great deal of lease-related analysis is necessary. All attendant documentation, including the leases, communications, operating budgets, property service agreements as well as the creditworthiness of each tenant, should be scrutinized. You should conduct actual interviews with each of the tenants to determine the condition of the property in the Tenant’s opinion.
As you know from the Due Diligence Process Article, the goal in any due diligence investigation is to make sure that the property you think you are getting is actually the property being conveyed. As you set out in your investigatory journey, we leave you with a couple of things to keep in mind: first, remember that, while patterns recur, each transaction has its own unique set of obstacles and considerations, and second, utilization of third parties in the process is critical to accuracy and cost efficiency. Best of luck on your next purchase!