Due diligence is twofold, on one hand it is a defensive strategy to avoid making serious mistakes. A Real Estate Agents dream is to have a motivated and naive buyer that asks minimal questions and is willing to put forward an unconditional offer straight away.
The due diligence process levels the playing field and swings the balance of power onto the buyer’s side with 14-28 days of the exclusive right to assess the properties true situation. The primary reasons agents will avoid providing a due diligence period where possible is because:
It can cool the interest in the property if it’s a new listing.
If the property doesn’t sell at the end of the due diligence period they have a frustrated owner on their hands.
Prospective buyers may now be wary of the property as it has failed someone else’s due diligence tests.
Nonetheless, as a buyer this is an important step to implement. The keys to due diligence from a defensive perspective on your end are to:
Ascertain the true net rent.
Confirm the current tenant’s willingness to continue with their lease and ensure their business is genuinely profitable.
If the property is vacant determine the current market rent and projected vacancy period.
Determine if the property is at, below or above market rent.
Understand how long it would take to replace the tenant if it did become vacant.
Review your personal financial position to confirm if this property matches your risk tolerance.
Assess the supply demand setup in the area for that property type.
From an advantageous perspective, due diligence periods are there to confirm if there are opportunities to:
Increase the net rent due to the property being under market rent.
Lease currently unutilized lettable area.
Reposition the asset from an industrial tenancy to an office tenancy for example.
Find new revenue opportunities such as billboard leases, solar panel leases or dividing the property into smaller tenancies to increase the square meter rate of the property.
Assess the ability, costs and potential rent and equity generated from building on a vacant area of land or adding to the existing structure.
During the due diligence period it will be essential to speak with your necessary team members or tradespeople to confirm if your vision for the property is genuinely viable and what the costs to complete such actions will be. This will help to confirm the potential costs, likelihood of a profitable outcome as well as the total potential profit from such an action.
Once this is known you can purchase a property in which you have minimised the risks with strong safety nets for the property and ideally being able to improve the property to further increase its income and equity either in the short, medium or long term.
