The Importance of Conducting Due Diligence Before Buying a Commercial Property
When you are looking for a commercial property to buy you need to consider the due diligence process as part of the contract.
Due diligence is the process of gathering and analysing information to make an informed decision on whether to buy or not. It is a vital component of the acquisition process since it guarantees that the seller is providing the correct information about the property. This step occurs before the contract becomes unconditional, so you must be thorough and act quickly.
Failure to conduct sufficient due diligence could cost you a significant amount of money.
Typically, you involve a team of people to perform your due diligence to evaluate the property and ensure that all the information provided is true and the property is in good condition. The team may include a real estate agent, property manager, lawyer, and building inspector. The team conducting the due diligence must be able to undertake research on the property, including background checks on the property owner and any other individuals who may have an interest in the property.
The buyer gathers information about the property to be acquired
A clear title is the first thing to check for in a building buying due diligence. A property with a clean title is easily transferrable to a new owner. You must also determine whether the property is subject to any liens or encumbrances. This will help you determine if any further fees are required.
Have a building inspection report prepared. This will help you to determine the building’s condition and structural soundness.
Questions to be answered include:
- Is the land contaminated?
- Does the council have any easement rights or encumbrances on the property or land?
- Is it within a flood zone?
- Is a council land resumption order likely to exist? (Taking the land back to create roads or railway lines)
A lawyer can conduct thorough research on properties and the land on which it sits to answer these questions. They can also recommend which searches to carry out.
The buyer gathers information about the seller
- Are they the legal owner?
- Are there any caveats on the property because of the seller?
The buyer performs a physical inspection of the property
Inspect the property yourself, or if you are unable to do so, have your builder, buyer’s agent, property manager, or someone you trust provide an honest assessment of the property. They can inspect it and supply you with a video. If you do not personally inspect it, you run the danger of something not being picked up.
Have a building and pest inspection conducted by a certified inspector. They will provide a thorough report with recommendations or concerns.
Create a summary of the state of the building. This will give you an idea of what you're getting yourself into.
Leases
If it is a rented investment property, you must review the leases. This will tell you how much rent is paid, if the tenant is accountable for outgoings, who is responsible for repairs and upkeep, as well as a myriad of other details on the usage of the property, the Tenants, and your responsibilities.
The buyer must check that the property complies with all applicable local, state, and federal laws
Ask about the building's future plans for expansion and renovation, any previous or pending building approvals, certificates of classification, compliance certificates etc
- Does it meet Fire codes, Council plumbing and drainage codes, workplace safety, etc?
- Is everything approved?
Remember that you need a team to perform due diligence. Your solicitor will be a part of this team and give you legal assistance throughout the process.
Conclusion
This article describes what due diligence is and what you may expect while conducting one on a potential commercial property you wish to purchase.
As agents who specialise in the management and leasing of commercial property, if you require assistance with your due diligence, management, or leasing, please do not hesitate to contact us.