S.E.C. Real Estate Observer

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We’re going to discuss extreme due diligence. I call it “extreme due diligence” because a few years ago I started asking for additional information about properties, lenders, and owners than traditionally requested. Someone asked, “Isn’t that a little extreme?” to one of my inspection requests, and Extreme Due Diligence was born.

I started asking for additional due diligence items because I had gotten “blindsided” by a huge thing that wasn’t on any of the checklists.

Over the years, I collected different checklists from other people, including brokers and associations, and I was continually surprised by something that wasn’t on any of their checklists. Clearly something extreme was needed!

In terms of the property due diligence and the people due diligence, I’ve started to work not only with what is on the seller’s or buyer’s checklist but also to build my own checklist for any particular deal. I encourage you to do the same. Whatever deal you’re working on, there are standard checklists that you have or you work with, but to conduct due diligence that will carry you through when things don’t turn out the way they should, you’ll want to add items to your due diligence checklist based upon what could happen. And I mean everything you can think of that could happen.

Now, you’re not necessarily going to show these checklists to your clients or your partners. This extreme due diligence thing is designed for you. Part of it is working with the client. Then you can bring more value to the client by being awake to things that can go wrong. Being awake to issues that you might want to get resolved prior to closing is worth it.

And in dealing with this due diligence, you also need to be awake to the laws of your state in terms of the laws of agency if you are acting as a broker. If you are representing a client, you owe them a certain level of confidentiality and loyalty, but you also have a responsibility to other parties in the transaction to disclose material facts. I say “facts” and not “your opinion about the facts.” But I advise you to go way beyond the routine due diligence for your own protection and peace of mind.

Property due diligence includes all the items that are required for a buyer to determine if they are willing to close the transaction or to ascertain the impact of closing with what they discover during the process. Many buyers, most attorneys, and all lenders already have their own due diligence checklists.

I’m suggesting that you create your own due diligence checklists, whether you are the buyer, seller, broker, partner, syndicator, or lender. And you want to include as many items as you can on your checklist, whether you are going to require that information or not. Knowing what you have and don’t have will keep you present to possible issues that you haven’t considered.

Everybody has a lot of things on their checklist, but you want to make sure that you build your checklist from a couple of things. First, include things that are relevant to the kinds of property that you’re working with. You may already have to use one particular set of checklists for your deal tracking, maybe created by a company, franchise, or lender. But regardless, you want to have your checklist that you use that goes beyond that basic checklist.

It’s not the thing that you know that will get you in trouble; it’s the thing that you don’t know and that you don’t even know that you don’t know. In other words, it’s invisible. You want to start listening for the horror story people have on closings as an opportunity to build your own due diligence checklist.

You want to create a checklist that you are comfortable with, that includes things that you know about particular product types, and that is based on your state, your industry, and your company. There are lots of different things that can go into your own due diligence. With people due diligence, you want to find out as much information as possible about all of the people involved in a transaction. That includes the seller and all the seller’s formal and informal advisors. The same goes for the buyer, the attorneys, the lenders, the tenants, the closing agent, the lender, your partners, and—again—all of their formal and informal advisors.

Now, you’re never going to have perfect information on everyone, and there will always be gaps in your information. But the more you know about each of the parties involved in a transaction, the more you will be able to assess the risks and the ways to reduce those risks in a transaction. I now gather as much information as I can about people. You might call it a “mini-dossier.” When I have uncovered some important fact using the Extreme Due Diligence Checklist that I created for that transaction, I have found that clients or partners are highly grateful. And when they are highly grateful, they stick with me over the long term. I now see the added work and responsibility involved in creating the checklist to be a highly effective return on my investment.