Commercial Real Estate

The Top 10 Commercial Real Estate Due Diligence Mistakes (From a 31-Year Veteran Investor!)

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
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Due diligence is rarely talked about because it takes back seat to sexier topics like raising money and finding, analyzing and negotiating commercial real estate deals. But I have found that more investors make more mistakes during due diligence than any other part of the commercial real estate investing process.

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I had the pleasure of interviewing Brian Hennessey about this subject on a recent podcast. Brian’s been in commercial real estate for 31 years and just published The Due Diligence Handbook for Commercial Real Estate Investments. He’s done over 9 million square feet of sale transactions, and in the process, he’s learned some valuable lessons — in other words, he knows a little something about doing due diligence.

I wanted to share with you his 10 most common mistakes to avoid when purchasing commercial real estate.

The Top 10 Commercial Real Estate Due Diligence Mistakes

Mistake #1: Not Valuing the Property Correctly

Make sure you’re conservative in your underwriting of a deal. Do your homework!  That means checking for sales comps and other available properties on the market. Contact the more active commercial brokers in the area and inquire about local property values and sale comparables. Then continue to adjust your valuation during the due diligence based on what you find.


Mistake #2: Not Understanding Your Lender’s Underwriting Requirements

Before you spend a lot of time, money, and energy conducting your due diligence, make sure you've had a preliminary discussion with some lenders about the amount of the loan they would consider putting on the property.

Today's lenders are very conservative and look at many aspects of the property, such as physical condition, sale and lease comparables, leases in place, intended use, environmental issues, credit worthiness of purchaser, etc. Check with them before you get too far down the road with your due diligence to avoid surprises later.

Mistake #3: Not Checking if the Property Complies With All Current Municipal Building Codes

It's a fairly common occurrence that a buyer finds out after purchasing a property that it doesn't meet the compliance of building and/or ADA (handicap) codes. This comes up when the contractor goes to pull a permit from the city for intended improvements or when the city inspector comes out to check out the contractors work, discovering the infractions.

Related: The Checklist That Can Help You Save Big During Due Diligence

Be sure to keep an eye out for tenants whose space has been built out without a permit. It’s a good idea to have a contractor, architect, or space planner inspect the property to discuss any improvements and compliance during your due diligence period. You don’t want any costly surprises after the closing.

Mistake #4: Assuming There Are No issues Within Existing Tenant Leases

The leases can have many “trip wires,” such as cancellation provisions, contraction provisions, caps on pass-through expenses, and fixed option rents, just to name a few. You want to be aware of these provisions because if the tenant exercises them, it could put you in a bind and devalue the property. It’s important to have a competent real estate attorney read the leases if you are not familiar with commercial real estate leasing.

Mistake #5: Assuming Lenders Will Accept All Third Party Reports

Before hiring any third-party vendors to conduct an inspection and prepare a report, make sure that your lender approves them. This goes for the Property Condition Assessment, Environmental Reports, or any specialized reports, such as seismic or geological studies. Mistakenly having to pay two different vendors for the same report costs much more than time; it is very expensive.


Mistake #6: Trusting That the Seller and Their Representative Have Disclosed All Issues

You have to be a detective when performing your investigation/due diligence on a property you’re looking to purchase. Not all sellers are going to be forthcoming when it comes to disclosing the problems of their property.

Remember the Latin saying caveat emptor — let the buyer beware. Ask the hard questions and make sure you do that in writing, i.e. email them so you can keep track and record all correspondence in case you need to bring it to court one day. Always ask for backup receipts, lien releases, copies of paid invoices, etc. Remember, ASSUME NOTHING.

Mistake #7: Expecting the Closing Statement to Be Without Issues

Before you sign the final approval of the closing statement sent by the escrow officer, be sure you have scrutinized all the items listed, as well as those omitted. Many times a seller will load up items to be credited to themselves and “forget” items that should be credited to the buyer.

Some commonly overlooked items are letters of credit or Certificates of Deposit used as security from tenants that the landlord needs to assign to the new buyer, leasing commissions owed to brokers on leases that have recently been signed, tenant improvement allowances owed to tenants, and vendor billings that need to be prorated or paid in full prior to new ownership taking over.

Related: 5 Items Investors Overlook When Performing Due Diligence

Mistake #8: Not Checking Out the Competition

You need to — especially if you’re not familiar with the area. If you see rent specials or other concessions, you need to know they exist and why because they might affect your underwriting and valuation of the deal.

Mistake #9: Not Spending Time at the Property

Go there at different times of the day. You’re going to get a much better idea of what goes on there. That parking lot might be a hang-out for kids to party on the weekends. You get a chance to speak with the tenants. It might even change your mind about the property.

Mistake #10: Not Walking Each and Every Unit

Even if the seller doesn’t want to disrupt the tenants. For me, I want to see every one of them. You don’t know what they’re going to be hiding. Maybe one of the units has mold or fire issues. Insist on it.


Many new commercial real estate investors don’t know what they don’t know, and hopefully this list will help with that! Also make sure you follow your due diligence checklist and don’t cut corners.

So don’t underestimate the importance of due diligence. A deal you passed on is much better than a deal you did that you find out later is a big mistake.

Investors: What mistakes would you add to this list?

Let me know with a comment!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 4 years ago
    Great list, especially number 10. I’ve seen that bite some people (including us) before.
    Timothy Friars
    Replied about 4 years ago
    Oh man, I can only imagine! People do weird and damaging stuff to their places…no reason not to check every inch possible.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 4 years ago
    Great list, especially number 10. I’ve seen that bite some people (including us) before.
    Replied over 4 years ago
    Not having cash ready to put into the project. Before you apply for a commercial real estate loan, you need to make sure you have some available cash on hand. Commercial lenders want to see that you are investing your own money to cover a percentage of the project. 🙂
    Replied over 4 years ago
    Not having cash ready to put into the project. Before you apply for a commercial real estate loan, you need to make sure you have some available cash on hand. Commercial lenders want to see that you are investing your own money to cover a percentage of the project. 🙂
    Jeff Deleon
    Replied over 4 years ago
    Very insightful article. Thanks or all of the useful information!
    Jeff Deleon
    Replied over 4 years ago
    Very insightful article. Thanks or all of the useful information!
    Replied over 4 years ago
    Good article Michael, I always enjoy your posts, podcasts, and you tube videos. I am a fan. Unfortunately the Due Diligence book you reference will not live up to most peoples expectations. Your list above covers most of the book and the amount of depth covered within. I ordered the book from Amazon recently, and it is the only book I have EVER returned to Amazon feeling like I got taken. Ever. It was a total ripoff. I am not a complainer or basher, but this book will not provide you with the tools you need to really do due diligence. It is heavy on filler and blank pages, testimonials, etc …. I think it’s about page 23 (OUT OF 70 TOTAL PAGES) before Chapter 1 begins. The first 23 pages include the table of contents, copyright page, blank filler pages, etc. And keep in mind there are a few “checklists” at the end so there is about 40 pages of content. For $18 on Amazon, no. It is a $2.99 eBook. The info above covers pretty much what you will get out of the book. One would expect that a chapter would be dedicated to the important issues like Michael’s lists, but some things that are very important or covered in half a page, and all of the Chapters are about 3-5 pages. Sorry to sound harsh but I don’t want unsuspecting others to think they are getting a book that really covers the subject of due diligence. I am not a competing author or anything like, just an investor as most here.
    Neema Fotoohi from New York City, New York
    Replied over 4 years ago
    #3 is a big one, especially if you aren’t from the area and have special restrictions for the type of commercial building you’re buying. I know in NYC there’s a levy called a “Business Improvement District” where it’s a tax placed on the business to help improve the area and this is usually passed on the tenant (depending on how the lease is negotiated).
    Giovanni Soto Wholesaler from Elmont, New York
    Replied over 4 years ago
    Hi, great great article and comments Thank you. I’m presenting a LOI on my first commercial piece hopefully by tom’w. The property has a owner occupied unit. I’m having trouble with wording on the LOI to give me time to find a tenant for his unit before closing. IS THIS COMMON to request? i don’t want to kill the deal because it is a good deal but i need that rental income. Thanks all. i will look for the proper forum to post this on as well. THANK ALL
    Sam Y. Investor from Union City, California
    Replied over 4 years ago
    Great checklist, thanks Michael! I’m also fan of your video on YouTube.
    T. John Chase Real Estate Professional from Willoughby, Ohio
    Replied over 4 years ago
    Nice Job Michael! These are clearly items that can come out during the due diligence phase if you know to address them. I might also suggest the disclosing of any environmental phase concerns known prior to having to order and pay for the reports. As you know, it takes time and money invested at this point. Lastly, thoughts on property management concerns during this phase as well? Thanks for the time and consideration to pu this put there.
    Peter Mckernan Residential Real Estate Agent from Newport Beach, California
    Replied about 4 years ago
    Hey Michael, Great article! I would say the biggest takeaway from this article is #8 and how the concessions could cause the valuation of the property to change. That was unknown to me including other items on the list, but this one was an eye opener!
    Bryce robbins
    Replied almost 4 years ago
    Wow really good tips, thanks for sharing such post…looking forward for next post