The Due Diligence Clause

Everyone has a different interpretation of what that means. Some people think that it means that you are going to research the property and then determine if it is in good condition. Other people think that it means that you are going to evaluate the financials and make sure that the property is profitable. Other people may think that you are going to do a Feasibility study. While all of these are true, it is also a great get out of contract free clause. If you have a due diligence clause, you can back out of your contract for any reason. You always want to have a due diligence clause in your offer so that if you find a problem with a property, you can back out.

Because you are working on a commercial property, you will need a lot longer than usual to find out about the property. You may need up to a year depending on what you are doing. If you need building permits you will need to find out typically how long the city takes to approve a project so that you know how much time you will need.

When you are doing your due diligence, there are several things that you should look at other than the financials. The expression location, location, location is critical in every type of real estate. One of the things that you want to check is where the other self-storage facilities are. People typically like to rent as close to home as possible. They are not usually going to drive past other facilities to get to yours. Are you out located or are you in a good location?

Next you need to look at your property. How does it look? Would you want to store your belongings there or would you be afraid that they would be stolen? Clean, easy to access properties draw tenants. If this property is run down, what can you do to improve the self-storage facility to increase the upside potential of the property?

How do your rates compare to other facilities rates? Will you be able to raise the rents on the property to increase the future cap rate? Is this a mom and pop shop that has never raised rents or are they already at the top of the market?

Finally, the most important piece of the due diligence puzzle is a feasibility study. You want to do preliminary research to see if a project is possible, but ultimately, if your research says that this is a viable project, hire someone to do a feasibility study. This will back up what you are saying when you approach your lender and your investors.

If at any point during your due diligence you discover that the property will not work for you, you can back out based on your due diligence clause. Whether or not you get your earnest money back will depend on how you structured the contract, but if you have a dud, you don’t want to be forced to buy it. As always, happy investing.