When it comes to commercial property there is one thing for sure, and that is that the seller always knows more about the property than you do. As a buyer it you job to gather as much information as possible about the property, find out the things that the seller might have left out, or perhaps wasn't even aware of, and use the collected data to make an intelligent decision about the deal.
As Hochfelder further explains, market analyses is always the first step of due diligence. During this process you need to gather and analyze the information related to demographic, socio-graphic, and geographic data, in order to determine if the market meets all of your criteria for investment. Because investing or purchasing a property is really a lifelong decision, going through the process armed with valuable information is almost necessary.
Once the market viability has been established and a specific property is under contract, the series of due diligence can begin at that point. All the data acquired during the due diligence period can be put into three main categories: financial, operations, and physical/legal conditions. Here, Adam Hochfelder will discuss in more details. The first category is called financial due diligence.
The amount of income being produced and the valuation of an income property are highly dependent, so if one was to determine the value of a certain property, he first needs to start with the financial data.
The whole purpose of having a of due diligence is in fact to collect the information needed to make an accurate study or presentation of the property's Net Operating Income, which according to real estate investor Adam Hochfelder, is the most critical number for accurate valuation.
To begin with, we first must design an accurate representation of the operations as they are in real time. Properties may be handled in different ways by different owners, and that means that we should value the property based only on how we plan to operate it. How anyone else does it is irrelevant for our decision.
Then, once we have verified each and every item of both income and expenses, we can start adjusting the statement and then utilize that information to accurately project the property’s performance under our ownership. This is also known as a normalized income statement.
Getting a pro forma statement of income and expenses is quite normal in initial sale offerings. The income as well as certain assumptions that may or may not reflect the actual conditions of rent roll and expenses required to determine the existing NOI, need to be included in the pro forma income statement.