Once a contract is signed, the due diligence clock starts and an investor usually has a specified period of time before the down payment goes hard (non-refundable). An investor needs to work quickly to perform his due diligence to decide whether or not to proceed with the investment. The typical time frame for physical due diligence of commercial property is thirty days, and an additional thirty days for financing. We try to secure extensions for financing in case we run into delays. For purposes of this post, I would like to focus on the physical side of due diligence.
An investor should schedule an inspection once contracts are signed, but hold off on the inspection until the financial due diligence is complete and the numbers “work out” on the deal. Try to get the inspector on the calendar as quickly as possible because inspectors tend to be busy, and you don’t want to waste any precious time.
We usually contact our inspector at least two weeks prior to our expected contract being signed to let him know that we have an inspection coming up for him. You do not want to waste money on an inspection if the numbers don’t work.
There are a couple of ways to locate a competent inspector. The first step would be to hire an inspector who inspects properties in your niche. Don’t hire an inspector who only inspects single-family homes to inspect your apartment complex. Visit Home Inspector! or Home Advisor to locate an inspector in your market. You can also try to receive referrals from your real estate broker, attorney, accountant or property manager.
I am always wary about receiving a recommendation from a real estate broker. There may be a potential conflict of interest because the broker’s concern is to sell the property and the inspector may feel pressure not to deliver a potentially negative inspection.
To avoid this conflict, try to recruit an inspector before you have signed a contract. I wish we had done that on our first deal. We were scrambling for an inspector, and were fortunate to find one as we finished the financial portion of due diligence.
Not all inspectors are created equal, and not all inspections contain the same level of detail. Wally Conway is a Certified Master Inspector who was a guest on our podcast. He described in detail the benefits of an inspection, the different types of inspection and the value that an inspector brings to your team. You can get more information on due diligence here: Due Diligence: Guide For Analyzing & Purchasing Real Estate Correctly