Legal due diligence can be extensive and checking on the items in this list takes a team effort. But, from experience, we know that it gets easier as you go. When you begin to understand the importance of the many documents and the ins and outs of each, you can cut to the chase quickly.
Here are the items that you need to ask the seller for:
An environmental inspection: The environmental inspection most often used is called a Phase I Environment Site Assessment. During this inspection, the inspector explores the past use of the property and the surrounding area, looking for onsite and offsite environmental problems and liabilities. Phase I reports cost thousands of dollars and are very involved timewise, so plan if you want one or if the lender requires one. Keep in mind that every seller won’t necessarily have one lying around either.
This inspection can help answer questions like these: Does the property contain any hazardous materials? Is the property close to any endangered or protected animals or wildlife? Has asbestos been used in any of the construction? Is there an underground storage tank? These environmental issues are expensive to cure and can be potential deal-killers, so be sure to schedule an inspection if needed.
Make sure you take the time to read the environmental report. If you don’t understand everything, find someone who does and ask them to explain it to you. Just because the lender is willing to loan you money doesn’t mean that the property is free of potential problems. Find out now or pay later.
A survey and title inspection: With this inspection, a title company can verify the property size and that the title report has the same description as the survey. With this inspection, you’ll also review any liens, judgments, easements, or encroachments on the property that could drastically affect its value and use. If the title has any issues, it must be delivered “clear” by the seller before closing.
An inspection for building code violations: Some of the most common violations you might run into with this inspection include unauthorized construction, non-city-approved improvements, or substandard electrical or plumbing work. If a violation occurs after a building is built, it may be considered a nonconforming use and is grandfathered in. Going to the city’s planning department’s records will clarify this.
The zoning code: Every property has a specific use permitted. For example, a property can be zoned as residential or commercial. So, you need to review the city’s zoning ordinances to make sure that the property’s use complies with what it’s legally zoned for. If it’s used illegally, the property can be shut down. Lenders will not loan on a property that’s being used for what it’s not permitted for.
The insurance policy: The property’s insurance policy can be a treasure trove of information if you can get the claim history. The property’s claim history will tell you if the property has experienced fires, flooding, lapses of coverage, or policy cancellations.
In addition to getting a copy of the policy from the seller, it’s highly recommended to begin your search for insurance quotes. It can take up to 30 days in some cases just to get quotes. Get at least three, and then shop and compare. Don’t be afraid to negotiate for the best pricing either, as commercial insurance is a very competitive business.