Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Due Diligence

Once a purchase and sale contract is entered into, a period will be specified during which the buyer may examine all aspects of the transaction to verify that he or she wishes to move forward with the purchase on the agreed terms. This period is referred to as the due diligence period. A prudent buyer should compose a checklist of items that the seller should be asked to produce for examination. A comprehensive due diligence checklist is shown in Appendix D on the companion website.

Buying property is analogous to a chess match. Psychological strategies are key in structuring a purchase and a sale agreement and in moving from contract to closing. As a buyer, you may not want to ask up-front for all of the items listed in the checklist. Such a request would be too overwhelming for a seller. As a strategy, it is usually better to request key items like the rent roll and historical income and expense numbers and then, as the due diligence progresses, request additional appropriate material.

The seller is under a duty to disclose matters adversely affecting the property that he knows about or should have known about. However, it is often difficult to prove that the seller knew or should have known about such a matter. Therefore, when purchasing real estate, the general rule is: “buyer purchase at your own risk—buyer beware.” The burden is on the buyer to conduct, to his satisfaction, adequate tests, inspections, analysis, and research so that he is comfortable with the ...