Hack: Exposing the games CRE buyers play

chess-boardLet’s assume you or the listing broker representing you has properly qualified the purchaser who has your commercial real estate under contract.

Let’s also assume you provided that purchaser a very comfortable six week conditional period to complete their due diligence and arrange financing so they don’t have to come back to you with a request for an extension.

I just experienced this exact situation as a listing broker working with a buyer’s agent from another brokerage.

I checked in with the buyer’s agent a couple of times during the due diligence period and as was informed everything was “on track.” The day that the conditional period expired the buyer requested a two week extension.

As a result of some further investigation I discovered that the buyer had not engaged the necessary professionals to complete an appraisal, environmental assessment or a real property report until the final days of the conditional period.

The process for these professionals can typically take more than four weeks after engagement to complete. This is not an isolated incident.

What are the buyers up to?

The estimated costs to obtain the above mentioned reports could range $8,000 to $10,000. That doesn’t include the cost of building condition inspections.

In this case the buyer took his time to try and ensure that he had financing in place subject to appraisal, environmental and survey before he committed to spending that money.

This was in spite of the fact that we had been told he had already spoken with his financial institution before submitting the offer and was confident in his ability to obtain a mortgage.

What obligations do we have as broker to a transaction?

When I am representing a buyer I believe it is my duty to stay actively involved in the entire due diligence process.

That may mean assisting to obtain quotes from appraisers, engineers and surveyors. It requires that I attend to the subject property with these professionals when the tours are done.

If we know a specific report is required and arrangements have not been made to tour the property a red flag is raised; it then becomes my duty to question the buyer early in the due diligence process.

What are the implications for the vendor?

In this case there is a personal financial benefit for the vendor to complete this sale prior to yearend. When we came to terms on this offer there was another very qualified party competing for the deal.

Should we have done the other deal…time will tell!  There are other implications that come with the passage of time.

There is a saying in our industry, “Time kills deals.” We can sometimes experience a slower market over the holiday season and the dead of winter.

I’ve seen examples in the multi-family market and hospitality sector where the value of a property can change significantly over a relatively short period of time due to a shift in occupancy.

The moral of the story here for listing brokers is more direct, probing questions are necessary to ensure the buyer is doing everything reasonably possible to complete his due diligence within the agreed time.

Posted by Barry Stuart

 

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One Comment

  1. Great article Barry!

    As a professional commonly involved in the due diligence process, I applaud the proactive approach you are recommending. Undoubtedly, this type of approach makes the process much more enjoyable for all parties involved on both sides of the transaction.

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