Competition speeds up transactions' due diligence process.
Traditionally, commercial property buyers have had 30 days to 60 days to perform due diligence on potential
property purchases before putting down sizeable deposits. But in today's
competitive climate, diligence periods are shrinking to as few as five days to
15 days. To avoid being caught off guard when bidding for properties,
commercial real estate professionals and their clients should understand the
motives behind the movement to shorter periods of investigation.
In the past few years institutional investors with
significant sources of discretionary funds have competed to acquire investment
properties at a record-setting pace, especially in office and retail markets.
The rising number of aggressive buyers has caused many sellers to offer
properties on a competitive-bid basis. This process not only requires buyers to
submit the prices they are willing to pay for properties, but also their
definitive comments to sellers' purchase and sale agreements. In addition, when
a buyer is selected, it must be willing to execute the deal as revised.
To win bids, buyers must offer increasingly higher
purchase prices and make the purchase and sale agreements
favorable to sellers. To make their agreements as attractive as possible,
buyers often significantly shorten the due diligence period to convince sellers
they are committed to the sale faster than their competitors.
Is Shorter Better?
Many buyers have realized they can shorten the due
diligence period significantly without incurring risks for several reasons.
First, the high purchase prices involved allow buyers to be less concerned
about minor financial underwriting discrepancies discovered during the
Second, in the current environment, buyers are less
likely to receive price reductions based on information discovered during the
due diligence, so this time period has less strategic significance during
Third, sellers typically include prepackaged due
diligence as part of their bid-offer packages. This gives potential purchasers
a better understanding of a property's condition prior to submitting their bids
and purchase agreement comments.
Fourth, many institutional buyers have the means to
complete all-cash deals. With no lender requirements, buyers don't need long
diligence periods to obtain financing.
Fifth, because of marketplace competition, buyers are
more willing to commit funds and resources to investigate properties before
they are in an exclusive position to purchase them. Therefore, significant due
diligence is completed before the bidding process even begins.
Lastly, the pace at which diligence is completed has
increased dramatically due to large volume buyers who assemble teams of
internal and external consultants that are ready to perform their
Streamlining the Process
To compete effectively in today's marketplace of
shrinking diligence periods, buyers should consider outsourcing due diligence
as much as possible. Professional consultants have the experience and expertise
necessary to complete the diligence quickly and thoroughly, including the
knowledge of issues that need more-detailed investigation as well as those that
are unlikely to affect the purchase price. Many non-technical functions that
traditionally have been completed internally, such as reviewing leases, rent
rolls, operating expense budgets, contracts, and litigation, can be performed
by external consultants to save time.
In addition, buyers should have a combined
internal/external acquisition team assembled and standing by to conduct
environmental, seismic, and physical condition inspections. The team should be ready
to act before and immediately after purchase and sale agreements are signed.
In today's super-heated real estate market, buyers are
agreeing to shorter diligence periods than ever before to gain a competitive
advantage. But it is likely that shorter due diligence soon will become a
prerequisite for buyers to even be considered in a competitive-bid process.