February 11, 2015
By: Arnon Wiener,
Esq.- CEO, Real
Diligence and LeaseProbe, divisions of Madison Commercial Real Estate
Services
The revival of the real estate
market is presenting new opportunities for commercial real estate owners and
investors across the U.S. Improved lending conditions and the increase of
capital availability are driving market growth on its forward momentum. After
hunkering down to wait out the storm of the recession, the commercial real
estate market is resurging with an influx of deals.
This is good news for real
estate owners and investors. However there is a consequence to the increasing
demand for properties: fierce competition. While competition is beneficial to
the marketplace, investors should be aware of a secondary effect which may have
a negative repercussion on the decision making process; namely the shrinking
due diligence window.
Due diligence is the research
conducted ahead of purchasing a property. In real estate, the due diligence
process should include a thorough review of the financial history and cash flow
projection for the property. The buyer should analyze all the financial
information which is pertinent to the property, including historical financial
statements, projected budget income, reimbursable income and methodology,
operating expenses, taxes, insurance and more.
Conducting a comprehensive due
diligence review takes time. The prospective buyer needs to carry out a
thorough and accurate assessment in order to determine the financial and
physical state of the property.
The due diligence period usually
begins when the prospective purchaser has made an offer that the seller has
accepted. The buyer then places a down payment in an escrow account to be
applied towards the purchase. Once the due diligence deadline has passed, the
deal goes hard.
Both parties in the transaction
want it to move along at a reasonable pace. It used to be that typical due
diligence periods ranged from 40 to 45 to 60 days. This was considered a
practical amount of time to make an informed decision.
However, because of the
increasing competition, due diligence time periods are shrinking significantly.
Buyers are now being offered a due diligence window as small as 28 or even 21
days. Tighter due diligence windows of three or four weeks can pose a risk to
investors.
With the pressure of a tight
deadline, investors may be tempted to rush through the due diligence process in
order to snap up a property. There is no denying the importance of speedy and
assertive decision making when purchasing real estate. At the same time, it is
as essential to have the knowledge to make a decision that is not just quick-
but correct as well.
Buyers are now positioned
between a rock and hard place, in which they are pressured to meet the impeding
due diligence deadline, while still conducting thorough research of the
potential property. The increased strain on the buyer may put him or her at
risk to make hasty decisions, and then repent later.
Despite the shrinking window of
stipulated due diligence periods, real estate owners and investors should still
remain conscious of the need to make informed and measured decisions.
---------------------------------------------------------------------------------------------------------------------
Madison Commercial Real Estate ServicesSM is a
group of independent but related companies that offer specialty services for
the commercial real estate market. Each company excels in a specific, highly
specialized area of expertise. Their collective mission is to anticipate and
fill the needs of the commercial real estate market with a comprehensive
network of services delivered by exceptionally knowledgeable, skilled, and
experienced professionals.
Among the many services offered by Madison
Commercial Real Estate Services and its affiliates are: Title Insurance and
Closing Services (via Madison Title Agency, a full-service title agency); 1031
exchanges (via Madison Exchange, LLC, one of the industry's premier §1031
specialists and Qualified Intermediaries); cost segregation studies and
analysis (via Madison SPECS); Lease abstracting and administration (via
LEASEPROBE Abstracting Services); and comprehensive, accurate and timely financial
due diligence for commercial real estate acquisitions (via REAL DILIGENCE
Financial Valuation and Analysis).
For more information, contact:
No comments :
Post a Comment