Due diligence is a process through which commercial real estate investors can protect themselves from buying properties that might turn out to be bad investments. In a bid to know how much time they have to do this, many investors ask, how long is due diligence period in commercial real estate?
How Long Is the Due Diligence Period in Commercial Real Estate?
Usually, the due diligence period for commercial properties lasts for a period of 30 and 60 days. The due diligence period, also known as the investigative period, should be long enough for a buyer to conduct the necessary investigation and inspections to ascertain whether or not a property is a good choice.
The length of the due diligence period is subject to change, depending on the specific needs of the buyer. This is because, during this period, the buyer has to determine whether the property suits the particular requirements for the business it is intended for. The time needed for this varies from business to business.
When Does the Due Diligence Period Begin?
Since due diligence is used to determine whether or not a property is a good deal, it is best carried out as early as possible. Due diligence could be carried out either before or after the signing of the purchase and sale contract.
If carried out after signing, then the buyer has the right to terminate the contract while the due diligence period is still ongoing, on the grounds that the property does not suit his exact needs. If carried out before the signing of this contract, however, the seller might require some form of agreement signed to protect his interest.
Factors That Affect the Length of Due Diligence Period
As mentioned earlier, the length of a due diligence period for commercial real estate is subject to change, because the specific requirements that need to be satisfied vary based on the intended use. Here are a few factors that could either make the due diligence period shorter -less than 30 days- or longer -more than 60 days-:
Many states have specific laws guiding the process of acquiring a real estate property within their jurisdiction. These laws affect real estate transactions within the state, and by extension, could affect the length of time it takes to carry out due diligence.
How Can State Laws Make For a Longer Due Diligence Period?
Using Kentucky as an example, where the state laws require that a municipal lien search has to be conducted before the closing of all real estate transactions carried out within the state. This implies that people looking to purchase commercial real estate in Kentucky in a bid to meet this requirement, might need a longer due diligence period.
How Can State Laws Make For a Super Fast Due Diligence Period?
State laws could also help in promoting a quick diligence period. In states where the laws are more lax, and for example, do not require real estate investors to carry out a municipal lien search or some other formality, due diligence could take a shorter time, possibly only about 30 days to complete.
While purchasing a commercial property, zoning rules have to be put into consideration to ensure that the intended use of the property falls in line with the land use classifications.
How Can Zoning Regulations Make Due Diligence Period Longer?
During due diligence, it could be discovered that a property cannot be used as a result of zoning regulations. When this happens, the buyer could either choose to make changes to the property or to its intended use, hence requiring extra time to apply for the necessary permits and licenses, which would consequently drag out the due diligence period.
How Can Zoning Regulations Make Due Diligence Period Super Fast?
If the intended use of a commercial property fits into the zoning regulations, the buyer is free to go ahead with purchase without any restrictions as regards land use. This saves the time that the buyer would have otherwise spent trying to alter the property to suit the rules, hence making the due diligence shorter than usual.
During your due diligence period, it is advisable to contract the services of a professional broker, such as Si Vales Valeo Real Estate, to assist you in these investigation processes and negotiate deals with the professionals you need to ensure the due diligence is carried out correctly.
This section provides answers to questions that you might have as regards due diligence.
Can I Back Out of a Sales Deal After Due Diligence Period?
Yes, you can decide that you no longer want to purchase a commercial real estate property, even after the agreed-upon due diligence period is over. However, you would be doing this at the risk of losing your earnest money, except if you have proof that the seller hid important property problems, such as a property title issue.
What Is a Due Diligence Fee?
Due diligence fee is an amount of money a buyer might be asked to pay to a seller for the due diligence period. This fee is to serve as compensation to the seller for taking his property off the market for the buyer to conduct inspections and is usually refunded to the buyer at closing.
All real estate transactions differ based on type, location, market trends, pricing, and many more, and should therefore have their distinctive due diligence. The length of time this period takes should be largely dependent on the buyer’s unique requirements and should not be tailored to fit any other standards.