How to Prepare for Due Diligence in Real Estate Law

I’m often asked to perform a due diligence audit on a real estate or business transaction. A due diligence audit is an investigation into important or material items that can affect a transaction outcome. And it refers to the care that a reasonable person would give or should take before they enter any type of an agreement.

So my job as a real estate attorney is when we’re dealing with property or a loan or other type of financial transaction, it’s not going to be a general investigation. It allows me to look into specific elements that can vary based on the circumstances or the nature of the transaction or the property. But my job is really to look deeper into a transaction. And the job is to protect both parties, but primarily in my business, it’s usually going to be either the seller or the purchaser.

Perhaps you’ve heard that adage: there’s three sides to every story. And in my business, there’s the buyers, the sellers, and then there’s the real estate attorney’s opinion. So in real estate, my job is to uncover all those potential liabilities and risks that are associated with the property and make sure that nothing is hidden.

One of the first things that I do when I’m doing a due diligence audit is I start by reviewing the contract. What I am looking for is what financial obligations and disclosures does the seller have to provide, or what does the buyer have to provide in the transaction. Also, I’m looking at warranties and guarantees that are being made by the seller and what type of representations that the seller makes, what representations are going to survive that purchase agreement or that sales contract.

So how is the investigation of the property and the financials going to be performed? What is the timeline for the inspection or the permitting and when are we going to get approvals? The answers to these questions can give me a better sense and a really good indication as to a party’s credibility. I find that if things are on a short leash and a seller is trying to push a buyer into closing rather quickly, they may be trying to hide something. Not always, but it does happen.

Other than the contract in a property sale, I’m also looking at quite a few items. I look at an appraisal of the property. I do look at the marketability of the title. We see that through title work. Invariably, I’m asking for a location survey on the property, which can show us encroachments on a piece of property. Again, I’m looking at the contract and I’m also looking at the home inspection. If it’s residential or commercial, it would be just a regular contractor’s inspection. I’m looking at city ordinances. I’m looking at the laws that govern this property, and regulations, such as a homeowners association. So I’m looking at those things that we can do, you know, what prevents or restricts a seller or buyer from selling or buying a home or operating a property. I’m looking at operating agreements. I’m also looking at other financials.

Performing your due diligence is not that easy. I had a client very recently who was buying a multi-million dollar apartment complex and the seller provided very limited documentation yet wanted a very high listing price. The sales price was actually the listing price. The contract was very involved and there were several areas of contention, but what killed the deal was the fact that the seller was not going to provide my client with leases or a verified rent roll. His operating agreement was also very poorly maintained and he did not have an accountant, which was crazy, especially for the property that we were looking at.

So it’s very important to have an attorney review the documentation and also investigate red flags that go up from that documentation. An attorney who’s auditing the file should be able to tell you that there’s a problem.

I’m David Soble. If you have a question or comment, I encourage you to leave them below. If you have a suggestion or wish to explore a legal topic, leave your comments and we will respond. Make sure you also go to www.ProvenResource.com for more articles, videos, slide presentations and also to register for the advance copy of my newest book, Shady, a book about protecting oneself in legal and business relationships among friends or relatives.

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