The Due Diligence Process

A Comprehensive Understanding of Potential Risks

Prior to finalizing any new purchase, assignment or lending contract, it is important to do a thorough due diligence to ensure that the investment aligns with your strategy, plays to your strengths and is clear of any red flags or potential high risk scenarios. This process is your final buffer between the underwriting process and execution of the contract, and is critical to mitigate any losses - often referred to as the Due Diligence Process. It is important to note, that this process may cost you money, in fact it likely will, however, if issues are found, the small, upfront costs of this due diligence process can save you from making a financially destructive decision. 

What is the due diligence process?

The Due Diligence process is a comprehensive investigation and analysis conducted by the investor to assess the viability and risks associated with a property or real estate transaction. It involves a thorough examination of various aspects of the investment, including legal, financial, physical, and market-related factors.

The purpose of due diligence is to gather all relevant information and data about the property, identify any potential issues or risks, and make informed decisions based on the findings. It helps investors verify the accuracy of the information provided by the seller or listing agent and assess whether the investment aligns with their investment strategy and goals.

What happens during the due diligences process?

During the due diligence process, investors typically review documents such as title deeds, current lease agreements, financial statements, tax records, building permits, environmental reports, and property surveys. They may also conduct property inspections, evaluate market conditions (macro and micro), analyze comparable sales, capitalization rates and future rental rates, as well as assess the property's physical condition and potential for renovations, improvements or ongoing maintenance.

By conducting due diligence, investors can uncover any potential red flags or hidden problems that could impact the property's value or profitability. It allows them to mitigate risks and make well-informed investment decisions.

How can a comprehensive due diligence process save you money?

By now it should be clear that a comprehensive due diligence process can save you from making a bad financial decision, one that does not fit your strategy or investment criteria. But you can also use the due diligence process as a point of leverage to improve the investment’s potential.

Oftentimes a seller will not disclose every issue a property has. Maybe a tenant hasn’t paid their rent for months, maybe there is damage in an area of restricted access, maybe some equipment used to operate the building is faulty, on and on. As the buyer, it is your responsibility to uncover any potential risks associated with the property in order to mitigate these risks.

The due diligence process is most effectively done before a final agreement to buy the property has been signed. During this process the purchase agreement is still up for negotiation. Armed with the knowledge uncovered in the due diligence process, you can approach the seller to negotiate a reduction of the purchase price or alternatively request the issues raised to be rectified before you take ownership of the property. By identifying and negotiating these costs upfront, you can avoid unexpected financial burdens and secure a better overall deal. The leverage you gain from a thorough due diligence process mitigates your risk, can help you secure better terms and ultimately can save you money in the long run. And as the old adage goes, “a penny saved is a penny earned”. 

The Due Diligence Process

The due diligence process is your last line of defense against purchasing a bad deal. It is important to handle it carefully, be thorough and always use it as an opportunity to improve your position.

Joseph Costanza

Costanza Capital Investments

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