The due diligence period, also called the contingency period, is the buyer’s chance to learn everything he can about the building before making a decision about whether to buy it. If you don’t ask your questions during the diligence period, and something comes up later, it will be too late to back out.
Remember: You’re buying a small business (often with a lot of debt!). Would you buy a dry cleaner or florist without asking a ton of questions about how the business works? If you did, you would be an idiot. What makes real estate any different?
So, what kinds of questions should you ask? To give you a sense for the level of detail I think you should go into, I’ve pasted a list of questions I sent to a listing broker yesterday on behalf of a buyer with whom I’m working. (It’s worth noting that the buyer is very savvy and contributed some of these questions).
Sample diligence questions:
1. The following is a list of units together with the number of occupants allowed per the lease. Please let us know if you are aware of any unit having more occupants than allowed under the lease:
Unit 1 – 2 occupants
Unit 2 – 2 occupants
Unit 3 – (no lease)
Unit 4 – 1 adult occupant, 2 children
Unit 5 – 4 occupants
Unit 6 – (no lease)
2. The leases for the following units do not allow pets: Units 1, 4, 5, A. Unit 2 allows a cat but no other pets. Have you made verbal or written agreements with the tenants in any of those units to keep any pets?
3. Please provide a list of occupied units for which you have raised the rent during the last 12 months.
4. Do you have a written or verbal agreement with Unit #A that they can have 2 parking spaces? Do you have a written or a verbal agreement with Unit #A that they can have storage? Where is the storage?
5. Do you have a written or verbal agreement Unit #B that they can have 2 parking spaces? Do you have a written or a verbal agreement with Unit #B that they can have storage? Where is the storage?
6. Do you currently bill any tenants for water, sewer or trash? If so, which units and how do you calculate the charges?
7. The tenant in Unit B was originally paying $550 and is now paying $1095. This does not appear consistent with the city-mandated annual rent increases (we would not expect to see a round number, since increases are typically for 3% / year). Did you make a special agreement with the tenant to get the rent to that level? Is this agreement documented in writing?
8. The tenant in Unit A was originally paying $1300 and is now paying $1450. This does not appear consistent with the city-mandated annual rent increases (we would not expect to see a round number, since increases are typically for 3% / year). Did you make a special agreement with the tenant to get the rent to that level? Is this agreement documented in writing?
9. Did you install AC in any units? If not, did you agree to allow the tenants to install AC? Was this agreement written or verbal?
P.S. If your broker isn’t going into this level of detail on your deal, get a new broker.