Due Deligence and Vendors

[acer]

Due Diligence and Vendors

Hi, been visiting this site for awhile and decided to sign on - great resource and interesting reading.

I have prev purchased comm property which we still hold, this was a few years earlier (2002/2003). It now seems that now there is less scope for purchasers to do any DD when looking at commercial property. Vendors either want unconditional offers or if auction, time limit and costs prevent thorough investigation.

Recently we had offer accepted on retail property, but when our solicitor sent off a few alteratios to contract and conditional on one basic report, the vendor refused and said sign today or its going to another party......well he wasnt kidding other party signed that afternoon. Very diappointing as the price was good, and we had invested 6-8weeks neg the deal.

I understand the vendors perspective, unconditional / straight sale with their contract conditions - first in best dressed.

But how are purchasers taking these risks? Basic reports such as fire safety reports and occupation certificates, shouldnt these be sourced before contract becoming conditional? Or is it matter of jumping in otherwise the premium properties are no go.

Any feedback on DD and at what point commiting to unconditional purchase would be appreciated.

Acer

 

[SillySausage]

Were the alterations to the contract really required ?

I guess if you could minimise risk to a point where you could get by with going unconditional on the purchase and the numbers stacked up in your favour then go for it.

But thats just me....

 

[Dazz]

Basic reports such as fire safety reports and occupation certificates, shouldnt these be sourced before contract becoming conditional? Or is it matter of jumping in otherwise the premium properties are no go.

Depends on the individual deal in question and the numbers involved. As the judges like to quote - "we treat every situation on a case by case basis".

....but clearly, if you are negotiating the finer points like building reports, white ants, fire infrastructure, and all that other gumpf that's nice to have and the things that your solicitors typically "insist" upon to reduce your 'risk', well, sometimes that is absolutely dreadful advice.

If you are looking to purchase a title for say 1MM with land content of 950K, well then really, how long are you going to **** around with all of the reports for. People are going to see a bargain and jump on it.

I've been putting offers on probably 8 or 9 properties over the past 18 months, most with a 20 day finance clause only. As you realise, it's a big deal going through all of the detailed DD and costing the DD....for me about 6K per attempt......but then you've got to be ready if you land it right ???

The REA's usually laugh in my face and say they have 5 super funds lined up with unconditional cash ready to jump. Trying to impose conditions and changing the pre-prepared contracts is a fantastic way of losing the deal. All depends on the property / situation / tenants / infrastructure and of course your immediate competition - which you never are made aware of until it is too late.

Incidentally, the only deal we've managed to secure and settle in the last 18 months was an unconditional contract, although I did manage to weedle a few concessions in the contract, bringing it back from outrageously in the Vendor's favour to just 'fair for both parties'.

Bottom line - my suggestion is forget conditions if you are serious. I know if I ever sold any of our holdings, I wouldn't entertain any conditions whatsoever on the offer. If there were, they'd be ripped up and thrown straight in the bin.

 

[acer]

Thanks for your replies, we recently changed solicitors and the new mob are far more thorough and professional (and expensive). My previous solicitor seemed to not be as involved with finer points, which let things flow. This firm have set processes that dont seem work in the real world (or at the market level Im looking at.

The property I missed was under market value and in a great location, and in the end (following legal advice) I missed out.

 

[Dazz]

The property I missed was under market value and in a great location, and in the end (following legal advice) I missed out.

Sometimes as experienced investors our greatest enemy is lack of faith in our own tried and tested abilities.

What was the capital cost of the property vs the value of the checks you were performing via your conditions. We've found if the value of the checks is under 5%, we sort of ignore them and carry on with the deal if it stacks up on all the major fronts.

We've also found that folks that have absolutely no equity "on the line", always appear wise and sage with their advice......but then if those extra impositions p*ss the Vendors off enough - to the point they dump you and deal with your buying opposition, well then that advice ain't so hot.

As you are acutely aware, wading through the intensive DD process such that you finally arrive to a position where you start negotiating on price.....of course if you are given the opportunity - most times you aren't, it's best foot forward first time or miss out completely.....well, the last thing you want to do is lose all of that time and research over some irrelevant issue worth 5K.

Do you have other fellow investors to bounce your concerns off, rather than solicitors ??

 

[acer]

"What was the capital cost of the property vs the value of the checks you were performing via your conditions."

The income return was great for the balance of lease, would have equated to 11%+ but lease was expired in 12 months. After that would have returned appx 8% so the yeild was excellent for blue chip retail. The reason the property was held back (not sold at auction) was the vendor originally wanted 3m+, didnt go to auction and we negotiated (over a 7week period) 2.05m sale with delatyed settlement. This put it under market as smaller retail 5 sites along sold 24mths earlier same price, with 5% yeild.

"...but then if those extra impositions p*ss the Vendors off enough - to the point they dump you and deal with your buying opposition, well then that advice ain't so hot."

Exactly how I felt, for the solicitor ir was cut and dry risk management, whilst I was looking beyond thinking hey this is blue chip RE with a 250K bonus waiting for a new home.


"...most times you aren't, it's best foot forward first time or miss out completely.....well, the last thing you want to do is lose all of that time and research over some irrelevant issue worth 5K."

This Ive learnt the hard way and would also stress to others, dont push too hard if you know its a goer, then away you go...


"Do you have other fellow investors to bounce your concerns off, rather than solicitors ??"

Not really, which is why Im glad to have found this site......amny of my friends are not into commercial property, mainly resi or developments (or nothing), and I prefer not to disclose too much personal detail as I have found it can sour or alter friendships. I have a commercial RE agent that I occasionally catch up with but again, I find if he thinks I have a $$ to spend he constantly pushing his stock......so I prefer not talk about any deals Im looking at.

Thanks for feedback Dazzling, I appreciate the time you spend replying......not just here but all the other posts also.

 

[Dazz]

...I'm always up for a chat, I suppose that's what this forum is all about....