Some commercial purchase contracts are very lengthy because they run on for pages about all the types of due diligence the buyer can conduct and the time limits for each category. If you are the seller, and the buyer is going to be able to tie up your property for six months while he or she thinks about things, he or she should just come out and say so. You, as the seller, know the buyer has thirtytwo loopholes letting him or her cancel for any reason. Putting in a general due diligence clause with a six-month time limit makes more sense.
At an absolute minimum, you should order a title commitment early in the investigation process. A title commitment will cost you a couple hundred dollars at the most. You can obtain a firm quote in advance. It gives you an early warning of any potential title problems. Some of them may take time to cure. Waiting until the day before closing, when you obtain a copy of the final title policy, is no time to start solving those problems. Also, the title commitment will let you know if all owners have signed your real estate contract. If the seller's spouse must sign any deed, did not sign the sales contract, and has no intention of signing any deed, it is best to find that out earlier rather than later.
You should always check the zoning on property by calling your local government zoning department. Just because a particular business is in operation at a location does not mean that same business can continue after a sale. The zoning might have changed over the years, with the current owner grandfathered. Changes in ownership could take away the grandfathering.
Even residential properties might suffer a change in zoning, if the area has gone commercial. In such an area, a house might have to be converted to business use, and no longer permitted residential occupancy. In some states, sellers of residential properties are required to give you a disclosure form. Make sure you have it, read and understand it, and ask any follow-up questions. A disclosure regarding past water damage, for example, should prompt questions such as the following.
Other than those aforementioned items, due diligence will depend on the particular property and your plans. If you plan to build something, you need to make sure the local government inspections department does not have any requirements that will make your project more expensive. Things like fire walls, sprinkler systems, particular types of lighting and wiring, changes in the placement of exit doors, and the numbers and widths of corridors can dramatically increase your expenses.
Talk to other property owners, and listen to their horror stories and near-misses. Read books, or cruise the Internet. There is always more to learn, no matter how experienced you become. For example, an engineer's compaction report shows how dense the dirt is on a site, and whether it will support the weight of a structure. However, the drilling for a compaction report generally goes down only six feet. Unscrupulous property owners sometimes fill deep holes with construction debris and tree stumps. The stumps will rot, the debris will settle, and the soil will become unstable. Only the top 6 or 7 feet is good, well-compacted clay or dirt, which is all the engineer tests - you get a clean report but a bad piece of property.
Documentary due diligence consists of reading all the leases in place for a property to make sure no one has any special deals. A tenant might be able to cancel his or her lease early with no penalty on a simple 60-days notice! He or she might have an option to buy the property - your property - for a set amount. Anything could be in those leases. Most owners will not give you access to the actual tenants to obtain estoppel letters. An estoppel letter is the tenant's confirmation that his or her rent is a certain amount, his or her lease ends on a certain date, he or she has no claims or defenses against the landlord, and there are no side deals. As a result of your inability to obtain the estoppel letters, you will have to read every lease.
You will also need to see actual invoices for property bills to make sure they are as low as represented. For example, the owner of an office space might list marketing expenses of US Dollars 2,000 per year. That figure was obtained by taking the combined advertising expense for all six of his or her properties - US Dollars 12,000 per year - and dividing by six. Each property is charged its fair share of the overall expense.You may not be able to buy a phone directory or newspaper ad for only US Dollars 2,000 per year. You should know that in advance.
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1. Things to Know Before Selecting an Apartment
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