Due Diligence

Due diligence is the buyer's opportunity to verify every claim made in the offering memorandum and uncover any issues that could affect the property's value or future performance. The process typically spans 30-60 days for stabilized properties and longer for more complex transactions. Key workstreams include financial review (verifying income and expenses against tax returns, bank statements, and lease documents), physical inspection (building condition assessment, environmental Phase I and possibly Phase II reports, property condition reports), legal review (title search, survey, zoning compliance, lease review), and market analysis (comparable rents, sales, and vacancy rates).

The due diligence period is the buyer's primary protection in a commercial real estate transaction. Most purchase agreements allow the buyer to terminate the contract and receive a refund of their earnest money deposit if they discover material issues during this period. After the due diligence period expires, the earnest money typically becomes non-refundable (going "hard"), which means the buyer loses their deposit if they fail to close for any reason other than a seller default or financing contingency.

Common issues uncovered during due diligence include deferred maintenance not disclosed by the seller, environmental contamination, title defects or encumbrances, zoning non-conformities, tenant disputes or defaults not reflected in the rent roll, and insurance or tax cost increases not accounted for in projections. Discovering these issues allows the buyer to either renegotiate the price, request seller credits, or terminate the transaction entirely. Thorough due diligence is arguably the single most important skill in commercial real estate investing.