Due Diligence, What is it?

Question

Ok I already know what Due Diligence is, I just needed to catch your attention. My actual question is, are there companies out there that actually perform due diligence work for the developers for a fee, or am I on to something?

Bart Pair · Answer

We are a civil engineering firm and we do this.  It is generally charged out as lump sum fee, but can also be done hourly.

The comments above are right that most civil engineering firms are banking on getting the engineering for the project, but don't count on getting a reduced fee because of this fact.

We only cut due diligence fees for clients we have worked with before and that have proven to pay their bills on time (most other firms are the same in this regard.)

But you may not want a deal on the Due Diligence.  That situation creates a bit of a conflict of interest.

Now, most engineers are honest and wouldn't knowingly sugar coat a Due Diligence report, but they also tend to be problem solvers at heart who think highly of their skills and love a challenge.

So, if I go into the due diligence phase with the mindset that I am doing the engineering portion of the project  there is a chance I might have rose colored glasses on when I find potential problems during the due diligence and unconsciously underestimate their impact on the project's feasibility.

Many larger development companies have gone to hiring separate engineering firms just to conduct due diligence because of this concern.  (In fact, we have clients that we only due diligence for and it is fine with us.)

Bob McIntosh · Answer

Any of the big consulting firms will do due diligence for a real estate deal, E&Y, KPMG, PWC, Deloitte, Crowe Horwath, Grant Thorton, etc... they all have people that specialize in due diligence.  There are also hundreds of regional firms that do this, and thousands of small or niche firms that do this.

The fees on a deal like that are 90% of the time hour based.  You agree to pay $xxx per an hour (usually a blended rate for the staff - executives that will be working on the project) and they bill you based on how many hours it takes to complete the diligence.

One of the advantages of going with a large firm is that they will have all the additional people you will need, or have firms on standby that they can call on to do those kinds of deals.

Corey Williams · Answer

Hey Tiara-
I have not been logged on for a while and I just noticed this post.  This is what I do on a daily basis and I work "in-house" for a development company.  Companies do exist that provide just due diligence services but they are few and far between.  You will mostly find that Civil Engineering firms and Land Surveying firms provide this service.  Most of the time they provide this service fairly cheap because they bank on getting the design work once a project happens.  If you check out some engineers web sites to find their fee structure for this work it is typically called a Feasibility Study.

Tiara Murray · Answer

So Taz, how does the compensation work, is the fee a percentage of the value of the land, or maybe a percentage of the sales, also, do you know the names of any such companies that perform these tasks?

Steve L. · Answer

Typically the people that do this are called consultants and will charge an hourly figure, plus travel time, of course.  Specific companies depend on what niche the property is in.

James Hiddle · Answer

I wouldn't trust any company to do any due diligence I rather do it myself.

Account Closed · Answer

There are companies and individuals who perform this service. As far as I know there are no licensing requirements but it is imperative you have the training and experience to do it right. The potential liability is very high if you miss something during the process that later surfaces causing the investor/developer to lose money.

Some of the skills you should have are a firm grasp on financial concepts and forensic accounting because sellers lie and they will cook their books too. Great interpersonal skills to continue to dig deeper and deeper until you find the truth in the numbers. Ability to find and identify areas of improvement and analyze the cost/benefit equation of each.

The fees can be great on a large deal, but as I said so is the potential liability.