In the worst-case scenario, the buyer finds out about a huge issue only after the ink on the closing documents is dry.
Competitive pressures also can affect the availability of resources for the process: When acquisitions teams are busy hunting for and bidding on multiple targets, they have less time to pore over the stacks of paperwork associated with each property.
The process should involve more than “checking the box” on whether documents are in place; rather, due diligence should have an investigative quality, with experts asking hard questions about the property’s financials, vendor contracts, co-tenancy clauses, Common Area Maintenance (CAM) reconciliations and more.
Last year, the seller of a struggling multifamily property provided a prospective buyer with documentation of accounts receivable dating back 12 months.
Along the same lines, the seller in another multifamily deal presented a profit-and-loss statement and general ledger that, in a shallow due diligence process, might have been accepted by a time-pressed buyer.
In presenting this transferable contract to the buyer, the seller fails to explain that the contract has gone unpaid for six months.
Due diligence is perhaps most critical when investors are least able to give it their full attention — i.e., when the market is hopping.
The challenge here is that due diligence is not a core competency for acquisitions teams.
One way to give due diligence its due?
Hire experts to sift through the paperwork, bring risks to the surface and uncover hidden value.