Turning Due Diligence Red Flags Into Negotiation Pivot Points

When it comes to investing Due diligence is important… you don’t have to be a rocket surgeon to know that.

However, it can be, especially at the start of your investing career, sometimes confusing and scary…

How do you know what’s a deal breaker and what obstacles can be overcome and still keep the deal a winner?

The answer is not always easy, but it comes down to research and good communication.

Here’s an example I recently gave in a podcast of a property where the vendor was also the tenant. The deal was a lease back deal where he wanted to stay on as a tenant to the new landlord.

These kind of deals are fairly common and can be a great deal to get into. However, they are often fraught with problems.

When a business owns the building, they operate out of they can sometimes forget that the renting out of the property and the lease of the property that the business has are two separate businesses.

It’s not uncommon to find that this kind of deals is peppered with building issues due to lack of maintenance, and no upkeep of records on things like fire audits as required by many councils.

This deal was just that. The Annual fire audit requirement was not being maintained. This needed to be done by a professional – not the landlord – but is the landlord’s responsibility to make sure that it carried out annually.

If people are working in the building, then they must be deemed safe in case of a fire.

Anyway, this vendor had not done a fire inspection for years. Sometimes this can mean extensive works to rectify any problems.

For many people, this would mean that suddenly the deal is filled with unknown quantities and suddenly becomes much riskier.

Yes, building problems can be a red flag because your income and profit on a deal is going to be severely eaten into if there are major works that you need to undertake because you did not pick up on something at the time of purchase.

Depending on what the issue is, sometimes it could be a roofing issue or something wrong with the floor, you could look at these problems as a bonus.

It either allows you to negotiate a lower price on the building or gives you the leverage to negotiate those works to be completed before you actually settle on the deal. This can force the vendor or the tenant, in this case, to bring the building up to compliance before you take possession.

In this case, because it’s a safety issue you want to get it sorted out. I’d suggest you get these issues written into an adjusted contract so that there is no grey area as to what the terms of purchase are.

The moral of the story is that when these things come up your best course of action is to negotiate and get those issues dealt with in the contract, so they are resolved at no cost to you.

I’ve looked at properties before that have some quite substantial works needed. I looked at a property for a friend which had cracked windows, rotten sills, rusty roof sheets, and cracked tarmac in the carpark.

We made them an offer based on all those things being fixed thinking they might come back with a counter offer, or flat out refusing to do any of the works, but thankfully they agreed to take care of all those things.

What that meant was that the maintenance issues for that building were all taken care of before the building changed hands saving my friend a stack of extra money.

You don’t always have the leverage to get those things done but it definitely pays to ask and do what you can to get those things taken care of before settlement, and sometimes all it takes is some good communication.