Due diligence and inspections agreed upon in the Agreement of Purchase and Sale during the negotiating stage should always be spelled out and understood by everyone. Be assertive and present ideas that will help the possibility of finalizing a transaction on the day of closing. Commercial transactions can be long and dragged out depending on many variables such as environmental issues known or unknown, latent defects, unexpected municipal inspections, and many other variables in and out of your control.
One of the most important inspections is the first inspection. Arranging an on-site inspection as soon as both parties have accepted the Agreement of Purchase and Sale is highly recommended and may save you and the seller time. Assuming you inspected all the common areas, roof, utility rooms, lockers, etc. during your initial showing before any offer, it is time to look at the remaining suites you didn’t see during your showing, it is quite easy to do a first inspection and confirm what was represented during your showing and the negotiations of the Agreement of Purchase and Sale to be true and to your liking. If your initial showing is done correctly, it will always give you a fair representation during the first showing and therefore your first impression should be confirmed during your first full inspection.
Let’s put on the seller’s hat for a minute and encourage the buyer to inspect all the units because as the seller you should want the buyer to view all the units and decide to move forward from an informed position. If the building is large with many units an inspection of random units may be suitable. I stress random with the possibility of viewing all units with proper notice being given.
There are inspections that you the Investor need to do and there are inspections that need to be performed for everyone’s comfort level including financing. These are the key components of any Agreement of Purchase and Sale and listing these key components will bring you halfway home and prevent people from changing their minds.
How extensive the inspections should be will depend on the age and condition of the building and the level of knowledge of the buyer. A building that needs repair requires extensive inspection by experts to determine which repairs should be mandatory or deferred and the projected cost of such repairs. All of this is going to directly affect the value and the level of effort and skill that will be required.
Some of these inspections take time and with the flurry of activity in the market there may be a waiting list you need to queue yourself on for any of the professionally organized inspections, such as engineers. These timelines should be known before any negotiations of condition dates. It isn’t always possible to arrange inspections and viewings for the same day so a little planning will go a long way. Signing amendments because these timelines were not understood or known can be time-consuming and can cause a change of mind. Even though you may not have included the time of the Essence Clause in the Agreement of Purchase and Sale, time is still the essence of all transactions.
There will always be potential delays that are natural to the process, and these will be easier to deal with when all other dates have been adhered to. Adhering to timelines builds confidence in the eyes of the Seller and their lawyer. You also need to make sure any professional organizations that will be providing reports will be accepted by the lending institution. As an example, not all Engineers are on the preferred list of the lending institutions and this approved list may vary from institution to institution.
When doing any inspections, unless arranged as an extremely specific inspection, access to the entire building should be available to you, the investor. It is in a seller’s best interest to allow full access when requested and the best way for a seller to give the impression that you the Buyer are in control is through the expression of full access. You can help the process by doubling up on some inspections that can overlap which will help by lessening the burden on tenants, management, and staff.
This way when the professionals draft their report(s) they can state they saw everything, and full access was granted. Many people will be relying on the reports throughout the process, and they need to feel comfortable with them. For plausible clauses see my section on the agreement of purchase and sale.