Due Diligence Review: A Critical Step When Buying Real Property

It astonishes me how many buyers will buy real property without conducting a thorough review of the property before closing. Most buyers will ensure a title search is ordered and buy title insurance. If a recent survey or phase I environmental review has been conducted, the buyer will typically ask for and receive a copy from the seller, but frequently will not order a new (or updated) survey and/or environmental review unless a mortgage lender is involved who will require it.   

 

Even taking this minimal diligence review into consideration, time needs to be negotiated into the LOI and purchase agreement to allow for more due diligence.  While not all-inclusive, and recognizing that certain types of property warrant a closer look than others (e.g., industrial property),  below a bullet point list of other items (besides title and survey) for buyers to consider in a real property review. Which items on the list warrant a higher level of attention would be dictated by each property’s unique characteristics; provided that purchase price should not be the only factor controlling that decision. A cheap piece of property can cause a very expensive headache later if adequate diligence was not conducted prior to closing on the sale.

 

• Litigation—Have the local court dockets where the property is located, plus where the seller is headquartered, to ensure no litigation is pending that could hinder seller’s ability to close or buyer’s ability to obtain clear title.
• Environmental—Besides the standard Phase I review, other items that may warrant investigation depending on what the buyer intends to do with the property after closing are conducting an asbestos review, wetlands study and flood plain review. I’ve encountered situations where minor dumping of non-regulated liquids from 50+ years ago still show up in soil samples today and delay (if not kill) the deals due to investigations and clean up required by a lender.
• MEP—Conduct, or have an expert conduct, a review of the mechanical, electrical and plumbing (sewer) of the property.
• Building Structure—Inspect the building structure. Will the roof need replacing in the near future? Does it currently leak? How about the foundation? Is the building in code compliance?
• Safety—Review for safety issues that will need to be addressed. If the property is industrial, what about OSHA compliance?
• Warranties—Depending on what equipment is included in the sale and the age of such equipment, a review of warranties may be warranted to ensure they can be transferred to the new owner.
• Liens—If title work was ordered, then any liens encumbering the property will be disclosed in the title report. Otherwise, a lien search should be conducted.
• Compliance with local building/zoning laws—If an ALTA survey was conducted, then legal requirements regarding number of stories, parking, setbacks, etc. are identified on the survey. Otherwise, a buyer needs to investigate these items. A zoning letter is often required by the lender as well.

 

The list above doesn’t cover the economic review that would be required if the acquisition involves a going concern, such as an office building or multi-family apartments. That may be the subject of another post.

 

Property buyers should take care not to be penny-wise and pound-foolish. A little more time and expense up front can often save a lot more time and larger expense later.

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