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hey guys this is Justin for breaking to see re and in today's video what we're going to do is talk about real estate due diligence so what is due diligence what actually goes into due diligence for a commercial real estate deal and what do you need to do step by step throughout the process that's what we're going to cover in today's video [Music] [Music] if you're new here on this channel we talked about real estate investment careers and real estate financial modeling so if you're looking to break into the real estate industry for the first time or you're looking to advance your existing real estate investment career definitely make sure to subscribe to this channel and hit that notification belt to be notified every time I release a new video so what is real estate due diligence well essentially due diligence is the process of really making sure that everything is as it was presented to you before you actually put the property under contract so this is going to include things like physical inspections lease audits financial analysis and a lot more so in this video what we're going to do is break down the two key components of real estate due diligence and some main things that you need to do in each now the first part of this is physical due diligence and that's really what most people think about when they think about inspecting a home or a real estate investment but what do you actually do for physical due diligence on a commercial property and how do you need to inspect the property well usually this process will start with a report called a property condition assessment or PCA for short now the PCA is going to tell you all about the physical structures of the property but it's also going to tell you some capital needs that you might have immediately that you need to address as soon as you buy the property and also some capital needs that you might have five or seven or ten years down the road from now now from there you'll usually have some sort of environmental testing done so the first step to this environmental assessment is going to be the phase one report now the phase one report is really just a desktop historical analysis of what has existed on that property and what kind of environmental contaminants may actually be present at that property now if the phase one is clean meaning that there isn't any sort of potential risk of environmental hazards at that point there's no more testing required however if there may be environmental contaminants at the property you'll move on to a second report which is called a phase two investigation now the Phase two investigation is actually a physical investigation so while the phase one was a research and desktop report the Phase two actually involves physical testing with teams going on-site to test for whatever environmental contaminants they believe might be present at that property now from there you'll usually have some sort of a survey done to test what the metes and bounds are of that property now a lender will usually require something called an Ulta survey which is going to show clearly the meets and bounds of the property where your property starts and ends now as part of due diligence you may also include things like an asbestos survey for older properties built before 1978 you may do a more formal building measurement to confirm the exact square footage of the property and you may even do a historical capital expenditure analysis to analyze what the seller has spent money on in the last five or ten years and what you may need to spend outside of what was in that PCA going forward now the second key piece of due diligence is going to be your financial and operational due diligence now this is really to verify that your underwriting the property correctly from a financial perspective and everything that was presented to you before you actually sign the contract is actually current information and accurate now one of the first things that you'll want to do especially on a commercial property is to abstract your leases now when you're buying a piece of commercial property you're really buying an income stream and that income stream comes from the contractual lease agreements so you want a really solid understanding of the terms and clauses in each specific lease and you want to confirm that everything that was presented to you when you actually first underwrote the deal is correct and verified now with this you'll also want to do something called a title review now this is usually done by a title company and if it's complicated it could be reviewed by an attorney but essentially what this report does is make sure that there's not anything on that title report that could do what's called cloud titles and clouding title is essentially referring to an irregularity in the chain of title or chain of ownership on the deal so this could include any sort of claims liens or other encumbrances on the property that might actually invalidate your ownership if you were to close on the property in own City from there you'll also want to make sure that you review any sort of third-party contracts that are in place at the property now many of these can last for five or seven or ten years so you want to make sure that the contracts that the seller is assigning to you are contracts that you actually want to assume and if that's not the case you can address that before you actually close on the deal otherwise if those are assigned to you and you don't review those then there's not much that you can do after you actually closed on the property now two more important pieces of the puzzle are tenant nest apples and s and VA s now a tenant estoppel is essentially a document that confirms that the tenant understands the lease terms the same way that you do as a potential owner so this makes sure that you don't have any sort of conflicts on who owes what when if there's any sort of funds outstanding that are owed to that tenant before you actually close on the property and this is really meant to clear up anything that might be a discrepancy financially or operationally down the road now as far as SN das are concerned these are often required by lenders and essentially what this does is it protects the tenant and keeps that lease in place in case of foreclosure by the lender and it also protects the lender to make sure that lease stays in place and the tenant can't just void the contract in case the lender forecloses on that property now finally you'll want to run one more market analysis on the deal so the closing process can be a 30 60 90 day or more process so things can move a lot during that time so our market rents the same as they were when you first underwrote the deal and if not you need to update your underwriting ingly our interest rates the same interest rates can have a huge effect on the returns of your deal so if you first underwrote an interest rate of four and a half percent and today your interest rate is four point seven five percent you need to update your underwriting to make sure that you include that now in your financial projections you also want to make sure that you incorporate everything that you've learned throughout the due diligence process so everything with the physical inspection all of the capital needs that you have at the property and any other financial considerations that are going to affect your final pro forma on the deal so there you have it those are really the two key components of real-estate due diligence you have the physical due diligence and you have the operational and financial due diligence as well now if you want to go deeper into the details of the due diligence process and actually learn how to close on a commercial real estate acquisition step-by-step definitely make sure to check out my course the real estate syndication process I'll link that in the description below but it's really a step by step walkthrough through a commercial real estate acquisition and what you need to do every step of the way now if you like this video please let me know by hitting that like button subscribe to the channel and share this with anyone else who might find this helpful thanks so much for watching and I hope to see you in the next video [Music]