Good property purchase negotiation requires effective technical due diligence.
In times of rising markets and especially prior to the global financial crisis many investors used technical due diligence reporting as a ‘tick box’ without giving the reports full content much attention. In many instances the purchased decision was already made and the technical due diligence report was simply leverage when closing the deal.
Post acquisition and once in the operational phase, investors wonder why they struggle with unexpected ‘operational or maintenance’ issues. The simple answer is, if investors undertake comprehensive technical due diligence before a purchase and acknowledge ‘all aspects’ of the report content they will make better investment decisions.
Why do so many investors still struggle with technical due diligence?
There are three obvious reasons:
- Not seeking the correct professional assistance to undertake the technical due diligence and seeking the cheapest service provider to act on their behalf
- Not being given adequate time for the entire due diligence process
- Not fully acknowledging or acting upon the advice given in the due diligence report
It can be difficult to cover all these issues when the vendor or their agent is pushing a purchaser to make a decision in seven to fourteen days on smaller properties and thirty days on larger acquisitions. That’s not a lot of time so why do they do that? Probably because time kills transactions and nobody wants to wait too long for a purchaser to make their decision. That means a vendor or their agent will press the purchaser to make a decision sooner than they probably should. Vendors and agents know that excitement and enthusiasm for an investment is at its peak early in the transaction period. However, that emotion can spell disaster for investors, usually to the tune of tens to hundreds of thousands of dollars or more.
More often than not investors make premature decisions that result in more operational and maintenance issues than they care to deal with when they finally take over a property. With a little more attention to the findings of the technical due diligence report and a long term strategy such issues can be reduced or even prevented during the purchase negotiations.
Technical due diligence has undoubtedly become a more important factor or ‘deal breaker’ in many property acquisition or disposal, but still we see many decisions made in compressed time frames.
Solution to the technical due diligence struggle
The following suggestions rely on building a long term relationship with your professional technical consultant. This builds trust and makes sure your business and current acquisition objectives are understood. (Long term versus short term hold can have a significant impact on the critical issues identified in the technical due diligence report and how they are addressed).
- Engage with your professional technical consultant early on. This is before there is a purchase and work through your processes, decision gateways, expectations and preferred reporting. Also engage your technical consultant early in the deal and have them ‘ready’. Many large transaction have 60+ days with legal and financial due diligence almost completed before engaging technical almost as an after thought.
- Push back on the vendor to provide ‘ALL’ of the required information to make an informed decision. Many vendors ‘drag the chain’ on providing information which eats into the due diligence period. Your technical consultant can provide a comprehensive RFI document from the outset.
- Work with your technical consultant post acquisition. They understand the nuances and complexities of your recent acquisition and are often best placed to talk to your operational team. This is especially pertinent for capital expenditure and maintenance planning which invariably reduces duplication (creation of budgets) and unnecessary capital expenditure surprises.
To conclude, effective technical due diligence is a relatively straightforward procedure if you have the correct strategy in place together with an experienced professional team to act your behalf. As to ‘getting it right’ technical due diligence should be considered a necessary component of the overall property management plan, not only during purchase but as the foundation for all future operational and maintenance services of a property.
For advice on your property management plan, please don’t hesitate to contact Keith Merry, Associate Director | Asset Advisor.