If you’re buying property, due diligence is one of the most important parts of the purchase process. That’s true whether you’re purchasing a home or some type of commercial property, such as a unit of rental apartments or a business downtown that you plan to turn into a cozy Italian restaurant.
You need to know everything you can about the home or building you plan to purchase, because a mistake made by failing to do research has the potential to be extremely costly.
Residential real estate due diligence
After you make an offer on your dream home, due diligence (or more commonly called the “Inspection Period”) is your chance to investigate your chosen piece of real estate so that you don’t end up with a money pit or a legal nightmare. It is an important step before entering officially into a contract, and it gives you a chance to protect yourself before signing on the many, many dotted lines that go along with purchasing a home and taking out a mortgage.
Ask the following questions as part of the process:
- Is the house free from defects or safe for me to purchase, or are the necessary repairs too costly for my budget? Due diligence gives you a chance to hire a home inspector to make sure that everything from the foundation to the electrical work is sound. If roof repairs, electrical problems or other issues that prevent your house from being up to code make it more difficult to finance, then this isn’t the house for you.
- Is the title clear? Due diligence ensures that the title is free and clear, an important item you don’t want to overlook, because you could end up with some unexpected debt or other legal issues.
- How much homeowner’s insurance coverage will I need? Due diligence lets you know the hidden expenses behind your home purchase. If your home is in a flood zone, you will need a more extensive insurance package. For example, in 2019 the Great Lakes are a higher flood risk than ever before, raising the risk of purchasing a property along Lake Michigan, no matter how irresistible the view.
Commercial real estate due diligence
Due diligence is especially important with commercial real estate transactions. Buyers don’t always recognize problems because they love a property’s location and sellers sometimes try to speed a sale to prevent a buyer from discovering certain information about the property.
In doing due diligence, the buyer should ask several key questions:
- How much money will I make and spend? Due diligence essentially opens the books. If purchasing a business or investment property, the buyer should know the numbers before making the purchase, including how much income the business is currently generating. They should also determine how much income the business will generate under their own leadership. Looking at financial records and tax returns from the business will help provide more critical information. Knowing how much you will be expected to pay in property taxes and insurance is, at the bare minimum, a must.
- Is the neighborhood right for my business? Due diligence prevents you from making a business mistake. Conduct your own research by exploring the neighborhood, getting to know the residents who live there to determine whether or not they are your target audience. An older neighborhood or community, for example, may not be the best place for a hipster coffee shop with music at night. Knowing the crime rates compared to other neighborhoods will also help you make a sound decision.
- Is the building safe? An initial inspection (sometimes referred to as a “Phase I Environmental” can determine the structural soundness of the building, the environmental safety of the site, zoning requirements of the municipality – which can be found at the local zoning office – especially if you plan to make changes at the site.
Due diligence may be time-consuming, but it will save you potential headaches if you make the purchase without doing the research.
It would be smart to work with an attorney, especially if you are doing commercial real estate due diligence. The Auricchio Law Offices are committed to making real estate great again, so give us a call so we can help you make the due diligence process as painless and as informative as possible.
Auricchio Law Offices
Latest posts by Auricchio Law Offices (see all)
- Chicago’s Commercial Real Estate & An 89% Loss - April 15, 2024
