Due diligence is an essential component to any real estate purchase, but Alec Pacella says you might be surprised at how little some people know about a building before they sign the papers to buy it.
“I’ve sold plenty of property where the owner never looked at it,” says Pacella, managing partner and senior vice president at NAI Daus. “To me, that’s unfathomable that somebody could buy a property without seeing it.”
Experts such as structural engineers, land surveyors and environmental assessment professionals are typically brought in to evaluate a facility. But they are looking at the space with a very specific purpose in mind.
“You’re the owner and these people aren’t looking at your building with the same eyes that you are,” Pacella says. “If I’m buying a building, I’ll have the experts make their assessment, but I want to see it with my own eyes. That’s No. 1.”
Smart Business spoke with Pacella about ways that due diligence can reduce your risk when purchasing real estate.
What are some common mistakes that business owners make when purchasing real estate?
There are two parts to your due diligence efforts. One is what you pay for and the other is what you do yourself. The part you pay for is an area that people often overlook. You’re a business owner and you’ve already agreed to pay $500,000 for a building.
Now you’re expected to dole out more cash for a building inspector, a Phase 1 environmental study, a survey of the property.
If you’re in a hurry to complete the deal and get moved in, you might make the assumption that everything is OK and that any problems would have already been brought to light. This can be a dangerous and costly assumption made in a misguided effort to control costs. The effort you make to identify problems with the heating and cooling system or the structural integrity of the building before you buy it can ultimately save you money.
As for what you can do yourself, do a complete visual inspection that includes every aspect of the space. Inspect storage areas, the basement, the roof and the stairwells. Take note of anything that doesn’t seem right.
You should also visit the property at different times. Most property visits in business take place in the middle of the day. Make time to stop by early in the morning or in the evening or even on the weekend. The complexion of the property could be very different. If it’s your building, you want to know what’s happening on or around your property, whether you’re working or not.
How costly is it to not be thorough in your due diligence?
It can be crippling. If there is an easement across your property that you didn’t know about, you might be surprised to look out at your parking lot one day and find several trucks that have arrived to service an area that is only accessible through that easement.
Perhaps your building is located next to a site that was once a gas station and there are monitoring wells that require periodic inspection. Issues such as these can have a long-term impact on your business. In some cases, you can work around the issue. But it’s a lot easier to manage a potential disruption when you can plan for it.
Another useful step that doesn’t cost you anything is to check in with officials of the city where you’re looking to buy a building. Talk to building or zoning inspectors or the local planning commission. Often, they’ll know about the history of your property and anything that might impact it. This could be something from the past or a future project.
If there are plans to put in new sidewalks or a new sewer system, or to rezone a parcel adjacent to your property, that would be useful information to know. In some cases, it might cost you a little more to discover important information. But if it helps you avoid a more expensive headache down the road, it’s money well spent.
Insights Real Estate is brought to you by NAI Daus
