I’ve always been a car nut and one of the models that makes my head turn every time is a Chevrolet Corvette. So, many years ago, when I had a chance to buy one as a result of a co-worker looking to sell his, I jumped at the chance. But I was in my early 20s and really didn’t know that much about what I should actually be looking for.
Rather than scratching a check and rolling down the highway, I decided to take it to a friend’s father for a good once-over. He really knew his way around used cars in general and Corvettes specifically. Talk about a buzz-kill; within five minutes, he pointed out several things that I would have never seen. The front gaps on the hood weren’t even and the front fender intake strakes were from the previous year’s model, indicating that the car had probably been involved in an accident. Various pieces of the engine weren’t correct and, in digging further, he discovered the engine was from a Corvette but it wasn’t the original engine. The interior carpet wasn’t original and after pulling it back, he found rust on the floorboards.
My dreams of rolling around in the Sunflower Yellow 1972 Corvette were dashed – but I learned a lesson on the value of due diligence.
This month, we are going to discuss some easy due diligence items that a buyer can do when considering a real estate investment. And, unlike the usual things, like a survey, appraisal and Phase 1, these are easy to perform, often at low to no cost.
FREE LUNCH
Take the maintenance tech and key vendors out for lunch or a cup of coffee. They can offer a wealth of information regarding not only major repairs that have been completed but, more importantly, ones that they believe should be completed but haven’t. Ask them this question: If they get an emergency call at 3 a.m., what is the first thing they think that broke or went wrong?
SWITCH PERSPECTIVES
Visit key tenants as a customer. How does the space look? How are you greeted? If it’s a retail space, is there stock on the shelves, customers in the store and adequate staffing? If it’s an office tenant, is the space actually occupied with employees or are there large portions that are dark? If industrial, is there inventory and activity inside of the space?
GOOGLE IS YOUR FRIEND
Look up the reviews for key tenants using Google reviews, Yelp, Angie’s list, etc. These can offer valuable insight into the business practices and reputation of the companies. Although consumers sometimes will use these review sites as a result of sour grapes, they often provide a good feel for the business practices of the companies. You can also look up social media accounts that the tenants may have established. Are the accounts current or are the entries dated? Do they have a lot of followers? How are the comments?
A-TEAM
Interview the current leasing person/ team. Find out why they were able to make the last few deals completed at the property. And why they were not able to make the last few deals that they lost to competing properties. Ask them for three things they would do if they were to buy the property. Ask to see their current transactions in process.
B-TEAM
Speak to the most active tenant rep agents in the market. Ask them how they feel the property compares to a peer group of competing properties. If they have completed deals at the property, what made the tenant choose this location over the others? If they haven’t completed deals at the property, why not?
MRS. KRAVITZ
Every property has a person that loves to know everything that’s going on at the property. Typically an employee for one of the tenants, a day porter or maintenance person, this individual tends to know everyone and everything – who has already moved out and why, who is planning on moving out and why, what issues have plagued the property, etc. Once you identify that person, a cup of coffee can offer valuable insight.
ROAD LESS TRAVELED
Drive to the property from at least three directions. Often, there is a primary route to the property but by using these less popular routes, you will often be surprised at what you see. Not only will you be able to view the property from different perspectives and angles, but you will also be able to observe changes in the neighborhood, traffic patterns and competition that you may have otherwise missed.
UNPRIME TIME
Visit the property during different times of the day, including early morning and early evening. You will often notice different aspects of the property as a result of how the property is illuminated. And the surroundings can also change, depending on the time of the day. For example, that restaurant across the street that is pretty sleepy during the day may suddenly become very popular, and raucous, in the evening.
Visit the [prospective]property the day, including early morning and early evening. You will often notice different aspects of the property as a result of how the property is illuminated. And the surroundings can also change, depending of the day.
HOT AND COLD
One of the best places to spend money is a thorough inspection of the HVAC units. The interior comfort is largely dependent on the effectiveness of these units and the majority of tenant dissatisfaction is related to space that is either too hot or too cold. Major repairs or replacement of an HVAC unit is not an inexpensive event so the better handle you have on this component, the more likely you are to avoid an unexpected surprise down the road
DEEP DIVE
As part of the financial due diligence, be sure to review the general ledger for the past few years. This report often includes blemishes that aren’t revealed in an aged receivables report or a tenant estoppel. For example, if a tenant is granted forgiveness on past due rent, the only place this will stand out is in the general ledger.
The five minutes spent with my friend’s father not only helped to steer me clear of that specific Corvette but also opened my eyes to what was really important when purchasing a car. By looking past the cool styling and roaring engine, the true character of the car will show through, for better or worse.
The same goes for real estate – investors need to look past the cosmetics and allow the true characteristics to show through. But has anyone seen the ’24 Corvette Stingray?!
WHAT I C @ PVC
TESTING THE MARKET 1100 Superior Ave., formerly known as Oswald Centre, recently hit the market for sale. Plagued by the loss of several key tenants, including Oswald Companies, the asset fell into special serving 18 months ago. It has an asking price of $22.5 million or $39 per square foot.
Alec J. Pacella, CCIM for Properties Magazine, May 2024
NAI Pleasant Valley - Cleveland, OH 