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Due diligence is the investigation conducted by a prospective financial stakeholder in a transaction prior to putting their capital at risk. It involves analyzing both the facts about the property and competitive market, as well as the robustness of the assumptions made for your financial model.
The following is a basic breakdown of what is covered during the due diligence process for real estate:
These are the types of questions you’ll be able to answer after studying the full chapter.
1. What are easements and why are they important to understand?
2. Why are environmental issues critical?
3. How can loan covenants hinder a transaction?
4. What does structural due diligence include?
The least flashy, most important investing activity (4:03)
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The investigation made by a prospective financial stakeholder prior to putting capital at risk.
A signed statement by a tenant certifying that a lease exists, confirming certain lease terms such as reimbursement obligations, and stating that there are no defaults, and that rent is paid to a certain date.
The process of retrieving documents evidencing events in the history of a piece of real property to determine relevant interests in and regulations concerning that property.
A comprehensive investigation and evaluation of significant factors affecting and influencing boundary locations, ownership lines, rights of way and easements within or immediately surrounding a certain lot, parcel, or quantity of real estate.
Encumbered real estate has a lien, charge, or other financial liability attached to the property.
When a property is free and clear of any encumbrances such as creditor claims or liens; an unencumbered asset is much easier to sell or transfer than one with an encumbrance.
A right to keep possession of property belonging to another person until a debt owed by that person is discharged.
An enforceable claim or lien on a property created by a security agreement such as a mortgage.
A right to cross or otherwise use someone else’s land for a specified purpose.
The right for someone to cross through the property for transportation, ingress, or egress purposes.
U.S. federal environmental law that states that a property’s current owner is liable for the environmental damage on the site regardless of whether the current owner was the source or not.
A test of a building’s structural integrity. The higher the building’s score, the worse its structural integrity.
The act of having the jurisdiction re-evaluate a property’s current assessed value given new information or circumstances related to the property.
The cash amounts set aside for funding future capital projects such as major renovations or roof or elevator replacement.
Payment of a property’s purchase price in a piecemeal manner over time.
Debt on a property that can be transferred from the current owner to a new owner along with the transfer of title.
A study conducted for contemplated retail developments to determine whether the area is “over-retailed” (over-served by other retail properties) or “under-retailed” (under-served by retail).
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