Unlike residential real estate, commercial property purchases are “as is,” with few buyer protections. That means it’s up to the buyer to verify that the deal on offer lives up to the bill of goods presented by the seller and seller’s broker.
In virtually every commercial real estate (CRE) contract, the buyer is offered a due diligence period—usually 30 to 60 days, but can be less in competitive markets—to review the property. During that time, the buyer verifies everything from rent roll and operating expenses to the title report, zoning, and physical and environmental conditions of the building itself..
In theory, due diligence is a repeatable process you apply to every new CRE transaction. In practice, each due diligence event varies by a hundred factors like property size, asset class, location, tenant mix, and even the buyer’s level of experience.
That’s why your due diligence education shouldn’t come from just one source. CRE investors and brokers of all levels should learn from a variety of experienced professionals and through various mediums, each offering unique viewpoints and methods of delivering information. For high-level overviews: CIRE Magazine, videos, and podcastsSometimes all you’re looking for is a basic overview or a refresh to confirm your current due diligence and valuation processes—and that’s what these blog posts, videos, and podcasts provide.
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Commercial Investment Real Estate Magazine is the digital publication of the CCIM Institute. CIRE’s 10-plus years’ worth of searchable archives includes dozens of due diligence articles, each giving an overview of a different aspect of the process.
This post, Due Diligence: Digging Deeper, offers general advice for conducting the financial due diligence of a CRE purchase—like looking for capital expenses that could be reclassified as operational expenses (which will help you understand the true net operating income of your investment).
Another post, Do it Right: The ABCs of Due Diligence for Distressed Properties, covers all the stages of due diligence within the framework of distressed properties, especially in retail. One red flag this post highlights is co-tenancy clauses, where a smaller tenant’s rent can change when or if an anchor tenant leaves.
Due diligence video tutorials are great for visual learners and those who want a more passive way to learn. While there are entire video courses that dive deep into due diligence, these examples are relatively brief (under 10 minutes) and stay near the surface of the topic.
New CRE investors or those needing a general due diligence primer should watch Commercial Real Estate Due Diligence.
In the video, Tyler Cauble—Founding Principal and President of The Cauble Group—breaks down his due diligence checklist into easily digestible buckets. He also interjects some interesting insights, like interviewing employees and customers of current tenants (not just business owners) to learn about hidden issues and improve tenant relations.
Matt McKeever’s YouTube channel is another good source for all sorts of CRE education. McKeever is a CPA and experienced real estate investor who talks about CRE in general, but is particularly versed in the BRRRR method [future link to brrrr post] of investing.
McKeever’s video on due diligence for multifamily properties features Kasey Wong, another investor, as he conducts an on-site review of a property he hopes to close. Wong points out potential trouble spots in the building and explains how he decides which tradespeople should complete the physical property review. For example, he hires a certified mechanical engineer to test building systems instead of relying on a general property inspector.
Like blog posts, podcast episodes that cover due diligence aren’t usually exhaustive resources on the topic. Rather, they either provide an overview from cruising altitude or zoom in to one facet of the process.
This episode of How to Invest in Commercial Real Estate quickly dives into how to build a due diligence team. From lawyers to property title companies, the hosts describe the value of several professionals that will help you verify the worthiness of your next CRE purchase. They also offer a free, downloadable due diligence checklist.
One interesting takeaway from this discussion is that a local property manager can be a valuable member of your pre-closing DD team. They know the local market—and possibly the seller—and will usually offer free advice to earn your business post-sale.
On the due-diligence-focused episode of The Private Equity Commercial Real Estate Podcast, the co-founders of First National Realty Partners share their philosophy of due diligence. While the guys do get into the day-to-day of DD a little, the best bits are how they frame due diligence as a win-win philosophy, so sellers are more likely to accept concession...and their bid.
The episode is worth the entire 28 minutes for new and experienced investors. But the story of netting $200K on a potentially messy environmental issue is worth the listen alone.
If you need to build or revamp your due diligence process from the ground up, then you’ll need a more in-depth resource. These books cover due diligence topics with more breadth and depth than a blog post can, but are still actionable enough to apply to everyday due diligence work.
Brian Hennessey’s handbook is a comprehensive resource that offers both due diligence big picture strategy and a step-by-step guide for new or experienced CRE pros.
You can think of this 130-page book as more of a field guide, with very little narrative to wade through. Instead, you’ll get actionable steps for completing each facet of CRE due diligence: financial, physical, legal, and operational.
Hennessey is an industry vet with stints as an acquisition executive at a real estate firm and 18 years as a commercial broker. He leverages his experience to expose some deep DD cuts, like showing you where to look for hidden value-creating opportunities in document details.
Written by an experienced fraud investigator with a CRE lender background, Financial Due Diligence for Commercial Real Estate looks at due diligence through the lens of protecting a CRE investment against false or misleading financial claims.
This book is perfect for experienced CRE investors and brokers who want to make their financial due diligence process rock solid. It includes red flags for fraud to look for in documents and breaks down financial models and ratios, so they become tools that surface misleading information.
There are so many nuances to each due diligence project that you’re not going to find every answer in a blog post or book. Websites like Quora, Reddit, and forums specific to real estate connect you with other CRE pros who can help you solve even the most obscure due diligence questions.
These sites are also great places to generate CRE leads [link to Quora post] and grow your network by answering other CRE pros’ questions.
Quora is a question-and-answer website. It’s a great place for crowdsourcing an answer to your most specific CRE due diligence questions.
You can easily search Quora for a topic, such as “due diligence” or “underwriting office buildings,” to see if it’s been covered before. More likely, your best bet is to post your question and see what advice you get.
In this example, a Quora user asked about the environmental due diligence involved when buying a property that used to be a gas station. The question had seven answers, including some pointers to go beyond the phase I site assessment and search local databases for information about the gas tank removal.
Reddit’s format—a series of niche message boards called subreddits—is ideal for generating discussions about the trickiest parts of CRE due diligence.
Like Quora, you can search Reddit to find a CRE-focused message board or look for a specific topic, then scroll through the results to see if there’s already a discussion you’d find helpful.
The subreddit r/commercialrealestate is a good place to start. You can also check out r/credd—a subreddit dedicated to CRE due diligence—but there’s not a lot of activity there yet.
Once you’re in a subreddit, just post a question or discussion topic like this one about the due diligence required for buying dental offices. There’s an interesting reply in the thread explaining how to reduce tax burden by separating the business from the property and equipment.
Commercial real estate forums operate like Reddit, only the entire site is dedicated to CRE, and the “niche” subgroups are all CRE topics. This structure makes it easy to find a CRE pro who can help you work through difficult due diligence questions.
Here’s a sample post from the WSO real estate forum. The question is about underwriting future expenses growth on a property. The consensus was to assume 2.5% to 3% growth.
There are other options like CREOnline and the BiggerPockets forum. Each is easily searchable, so you can look through previous discussions before starting your own.
When you purchase commercial real estate, you're not just buying a property; you’re investing in an income stream. Due diligence is how you verify that the income you realize is the same as what’s promised.
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Due diligence is too important to assume that last year’s procedure will work this year. A single shift in local laws could cost you thousands on your next deal. Make due diligence education an ongoing part of your CRE business and protect your cash flow.