Many investors approach the real estate due diligence process less seriously than they should. Even sophisticated investors can be guilty of doing this. Broker dealers and registered investment advisors can help protect impulsive (or know-it-all) clients from themselves by becoming more informed about the importance of doing due diligence before investing in real estate ventures.
Broker dealers and RIAs should understand why doing due diligence is absolutely necessary before investing in real estate. You should also understand why not undertaking a thorough due diligence analysis is akin to malpractice.
You may need to protect your clients, who often approach due diligence as something to check off the list rather than as a process that can protect their investments. It’s your job to help keep them from making a big financial mistake by arming them with as much information as possible when making investment recommendations. Broker dealers and RIAs should not blindly accept the sponsor’s numbers and analyses without question. Independent assessment and verification of material sponsor representations form the core of real estate due diligence. Clearly, the process should go beyond the numbers.
Why is Due Diligence Important?
Investors must mitigate financial risk to themselves by looking not only at the numbers but by understanding at the broader market, legal, regulatory, and operating environment in which the property exists. Every piece of real estate is unique. Thus, broker dealers and RIAs recommending a real estate investment product will need to review various types of information, and ask questions related to things ranging from lease renewal options to zoning compliance, in order to grasp the particular investment opportunity.
Only after a thorough due diligence review can you and your client understand the risks specific to the property and whether the offering terms comport with the investor’s risk/return profile and investment objectives.
What's in a FactRight Due Diligence Report?
FactRight's targeted, third party due diligence helps you identify and mitigate risks presented by a real estate offering. Our due diligence reports on private real estate offerings may include review and analysis of:
- Market and demographics data to predict future demand for property
- Independent site inspection to verify key sponsor representations about the property and neighborhood
- Local broker interviews to shed light on market conditions
- Major property leases to verify key terms that support projections, and identify risk related to termination, non-renewal, and maintenance obligations
- Rent roll to analyze the duration of tenant leases
- Credit ratings and financial information to assess creditworthiness of major tenants
- Recent valuations to substantiate purchase price
- Property condition assessments to determine capital needs, and assess sponsor’s provision of reserve funds for future expenditures
- Title insurance and surveys to verify sufficient coverage and identify material encumbrances, restrictions, and encroachments
- Environmental assessments to identify any material environmental issues
- Zoning regulations/land use classifications and entitlements to determine property compliance related to current use and/or intended development plans
- Sponsor financial projections, to assess reasonableness of assumptions, and model different performance scenarios through sensitivity analysis
- Relevant public filings with the SEC
FactRight prepares comprehensive and unbiased reviews of sponsors and projects. We provide support to advisors and investors seeking to verify identify and mitigate risk related to the offering. A third party due diligence review is an essential part of any investment process. Don’t rush into any investment without performing a complete due diligence investigation.