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Due Diligence is “an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.” ("Due diligence," 2015). Due diligence can further be described as the process employed to evaluate a potential business decision ("BizLaw definition," 2015). Due diligence in a retail transaction is a process that each person/entity involved should undertake. The buyer should do his due diligence to assure that the property meets his needs and the financial information allows him to meet the targeted goals for the business. The seller of the property will do her due diligence to assure that the buyer is qualified to purchase the property and can do so as outlined in the terms of the purchase contract.
It is important to understand that due diligence is in fact a process that takes time, attention and money. For a commercial contract, due diligence is the period of time between intent to purchase and the actual execution of the agreement to purchase (Murray, 2015). The process primarily involves:
- Reviewing all records and documentation regarding the property and verifying the accuracy as compared to what the seller reports,
- Working through and understanding the financials to verify what the seller reported numbers as well as to determine whether the financials work for your business
- Conducting a physical assessment of the property including speaking with existing tenants
- Employing an attorney for title searches and review of other legal concerns
When due diligence is not employed or is not complete, the results can be disastrous for all involved. This includes due diligence on the part of the real estate agent. For example, consider the case of a real estate agent who decided to purchase acreage from her next door neighbor. The agent had mentioned to the neighbor that she may want to purchase the acres. Initially the neighbor said no, but when they decided to move, they went back to the agent and told her they would sell the two acres for $22000. The agent told them she did not understand everything regarding the sale of land and advised them to get a realtor to represent them. The neighbors felt they did not need a realtor or any representation, so the deal was completed. When the details of the sale appeared in the paper, someone felt the real estate agent had taken advantage of the neighbors and sought action. In the end the agent had to give back the land and the neighbors kept the $22,000! (Lee, 2015).
The real estate agent felt she had done her due diligence by repeatedly suggesting that the sellers obtain the services of a real estate agent. The sellers were comfortable with the amount they asked for even though they thought they probably could have gotten more, but they wanted a quick and easy deal. As it turns out, the real estate agent/buyer had to shoulder more of the burden of due diligence because she was seen as having superior knowledge regarding real estate as compared to the seller. The real estate agent in that case should have done the due diligence to be sure the property was being acquired at a fair market rate. Link to story: Due Diligence
Definition: Due diligence. (2015). Retrieved from http://biztaxlaw.about.com/od/glossaryd/g/duediligence.htm
Due Diligence. (2015). Retrieved from http://www.investopedia.com/terms/d/duediligence.asp
Lee, B. (2015). Real estate agent forced to return land in “Too good to be true” deal: A cautionary tale. Retrieved from http://www.biggerpockets.com/renewsblog/2015/06/09/real-estate-agent-forced-to-return-land/
Murray, J. (2015). What is the due diligence process? How do I perform due diligence? Retrieved from http://biztaxlaw.about.com/od/buying-a-business/f/What-Is-The-Due-Diligence-Process-How-Do-I-Perform-Due-Diligence.htm
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