The binder should contain all the necessary documents a potential buyer and lender will need during the evaluation period. This procedure will expedite the document-review process and wash out out likely problems. A due-diligence checklist of information that may satisfy a prospective purchaser’s needs includes:
- Bank statements (two years)
- Real property-tax invoices (two years)
- Rent roll including term and payment history
- Tax returns (three years)
- Insurance policy (including riders, risk assessments and carrier affidavit)
- Bank statements (12 months)
- Personal property
- Utility bills
- Income statements (current yield-to-date and last two full years, both detail and summary information)
- Occupancy reports (current yield-to-date and last two full years, both detail and summary information)
- Service agreements (cancellation rights/penalties)
- Environmental reports and surveys (phase one)
- Preliminary title report and legal description
- Site plan
- Lot size and zoning information
- Architectural drawings
- Narrative sections of the most recent appraisal
- Capital expenditures (detailed of last three years, current and planned)
- Government inspection reports (description and status of any violations)
- Licenses (description and name of licensed entity)
- Lease(s), sublease(s) and/or operating agreement(s)
- Natural hazard disclosure report
- Ground lease (if applicable)
- Key contracts
- Employment agreement
- Litigation-related documents
As with any real estate transaction, unnecessary holdups or information gaps cause deals to be delayed or cancelled. The potential buyer needs to be provided with all due-diligence info promptly and within the time frame documented in the purchase agreement. This will ensure the property doesn’t remain off market for an extended time in the event the buyer decides not to proceed with the transaction.
It’s useful to provide the buyer with a detailed checklist of documents provided. Include a short description of each item and the source of the information (public records, tax assessor, court, etc.), as well as contact information, such as e-mail addresses and phone numbers. In the event a document is excluded, provide an explanation. This procedure should prevent unnecessary delays during the buyer’s review period.
Remember, any errors in the information provided may cast doubt on the transaction and lead to greater reservations about the property. Increased uncertainty with the buyer may equate to further acquisition risk and negotiation, with a possibility of a reduced selling price or cancellation of the transaction. Make sure you’re prepared for questions and requests particular to your property.
A prudent and experienced investor will be looking for errors or lack of information. Unsurprisingly, inaccurate or incomplete disclosures result in the buyer spending more time evaluating the property. The additional review could exert downward pressure on property value as well as delay closing. Notwithstanding, with the lending market in partial paralysis, the buyer’s loan may be jeopardized in the process.
It’s always a sensible and practical policy for the seller to disclose all aspects of the property. Not doing so could lead to post-closing issues including but not limited to potential legal action.