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What is “Due Diligence”?

When you buy a house or even a banana, you are supposed to do this: due diligence. How “diligent” you are will lower your risk in the purchase, and determining what is “due” forms the list of questions that need to be answered. In the case of a banana, your due diligence is simple – if fruit flies are circling, you’ll pass. For a real estate investment, conducting thorough due diligence using trusted experts is a must. Even then, there are always things that can be missed. But, the large items – the roof, HVAC systems, etc. – should be looked at carefully.

True due diligence involves more than the physical building you are buying. It involves an assessment of zoning and land usage, title issues, and financial analysis. It may also involve survey work, wetlands delineations, environmental surveys, and cooperation from the town to develop a piece of land for a particular use. 

For commercial property, some investors hire one firm to inspect the physical building. I believe it makes more sense to have local experts check each system according to their area of expertise.  This costs far less than a one-stop-shop firm, which might charge $5,000 or more. The added benefit is knowing that an independent roofing inspector, who is NOT a roofing contractor, for example, is assessing your rubber roof, because that’s all he does, and his knowledge base is much higher than an inspector who is looking at everything – a jack of all trades. I’ve been personally burned by such an inspection firm, and it still cost me dearly, even though I got my $5,000 back.

So, I highly recommend hiring a respected HVAC person inspect those systems, an electrician, a plumber, a structural engineer, a roof inspector, and a good lawyer. It will all cost a lot less and give you much greater peace of mind. It’s a “buyer beware” environment, and conducting careful due diligence can mean the difference between a good investment and a disaster.

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