Investigate Both Physical and Intangible Qualities

In every conveyance of real estate, whether it be an apartment lease, a residential home purchase, a commercial business lease, the purchase of a strip mall or the purchase of a Manhattan skyscraper, the prospective purchaser or renter must conduct some level of due diligence toward investigating the quality, both physical and intangible, of the real estate they are being conveyed.

The foregoing list represents a progressive continuum dictating the depth to which that investigation should be conducted. An apartment renter, for instance, “kicks the tires” by walking into the apartment (usually with the salesperson in tow), looking in all of the rooms, turning some lights on and off and maybe checking the garbage disposal; the purchaser of the Manhattan skyscraper has a little more to do, not only because of the substantially larger investment he is making, but because of the permanence of the tenancy and substantial increase in potential liability to third parties using the property.

It is important, however, to remember that the foundational logic for conducting the property investigation at both ends of the continuum remains the same: you need to know the characteristics of the real estate being conveyed, so that you can adequately balance the risks and confirm that the superficial level of value represented by the purchase price or rental rate matches the reality of the condition of that real estate. The importance of keeping this in mind, especially in the larger transactions, is that every transaction is different and so must be viewed, not entirely through the lens of a Due Diligence Checklist, but as its own transaction, with its own unique potential pitfalls.

Review of Seller Documents

Once the real estate sales contract is signed, the race begins to garner the maximum amount of information, keeping cost efficiency in mind, but focusing on maximizing efficiency of time, as the investigatory period is invariably shorter than the purchaser would prefer. Assuming adequate document retention by the seller, a thorough review of their documents can save a great deal of time, effort and money that would otherwise be spent by purchaser procuring the same information.

Be sure to ask the seller for all documents and things the seller received (or should have asked for) during his due diligence process when he purchased the property (especially if acquired relatively recently). Such a list might include:

• Current tenant information
• All present uses of the real estate
• Any third party reports or inspections initiated by seller
• Any surveys of the land and improvements in seller’s possession
• Seller’s current policy of title insurance
• Any applicable condominium documents
• Notices of any pending or threatened litigation or governmental action relating to the real estate or seller
• Notices of any environmental conditions
• Notices of any new or special assessments or taxes
• Copies of all current bills for the property
• Service contracts
• Evidence of current zoning
• As-built plans and specifications
• All construction related documents including warranties
• Evidence of insurance.

You (or an agent on your behalf) should review each of these documents or items independently to identify the potential problem areas which require deeper investigation.