Buyer’s due diligence is the process of inspecting all aspects of a property to determine whether or not buyer wants to purchase it. This could start before a purchase agreement is signed, but usually occurs during the period of time provided in the purchase agreement. The seller may have the buyer enter into a due diligence access agreement before allowing the access of the property. This due diligence period usually lasts between 30 to 45 days or more depending on the purchase and sale agreement.
Step 1- Gather documents with the Seller
First step is to get documents organized. It is best to arrange a way to receive all documents and information relating to the property. This can include title reports, deeds, easements, rental leases, and restrictions on the property. Getting documents before a purchase agreement is signed can help the buyer determine how long the due diligence should be, budgeting for each party, and the necessary physical inspections needed to complete the deal.
It is also important to note the type of entity that will take title to the property. For example a limited liability company (LLC) limited partnership (LP), corporation, or possibly a joint tenancy between multiple parties. There are different benefits and limitations with each form depending on the buyers intent, use, and future use of the property, as well as tax considerations. Although these are not documents obtained from the seller, buyer should not wait too long to make these decisions or it could delay the closing.
Step 2- Research the property
Get the inspections rolling. Start scheduling the necessary property inspections as soon as possible because organizing an inspector could be delayed depending on the inspector’s schedule.
Research all recorded and unrecorded documentation that would limit the use or provide information about the land. This includes: documents in the chain of title, current land survey, reciprocal easement agreements, and covenants, conditions, restrictions on use and operation of the property, permits, licenses, subdivisions, zoning reports, and liens. It is very important to ensure that the buyer will not be restricted from using the property the way they intend to use it. Research and inspect the environmental status of the land to ensure there are no pending fines or issues that have not been addressed. This could be a very costly expense if not properly researched.
Research third party property agreements. For example property management, brokerage, leasing , development, and asset management agreements, as these items will need to be reviewed to ensure these documents could be assigned or transferred if the buyer wants these agreements to remain in place, or cancelled if buyer does not want them.
Check the title insurance policy to know what is covered and check if there are any exceptions that are of concern.
Step 3- Finances
Get copies of the financial records including rent roll, appraisals, financial statements, budgets, property tax bills, tax returns, and assessment notes.
After researching the property the buyer will have a better idea of the potential investment including any necessary remediation, deferred maintenance, etc. Further, understanding the taxes and financial statements from the property gives the buyer a clear picture of the cost and benefits of the property.
After buyer completes due diligence and understands the limitations, costs, and benefits about the property, buyer can decide whether or not to proceed with the purchase agreement. The provisions of the purchase and sale agreement are critical to make sure buyer can get out of the agreement at little or no cost if due diligence turns up some unpleasant surprise.
**This information is limited in scope to a fictitious scenario, and a buyer interested in a property should seek adequate and competent representation to ensure the buyer understands and completes proper due diligence.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be address directly to Strategy Law, LLP.