Due Diligence Investigation & Asset Review for Troubled & REO Assets

Regrettably, the borrower is approaching or is in default.   With the handwriting on the wall and foreclosure action imminent, it’s time to perform your own investigation of the property to see what the bank may be getting – and the clock is ticking.

The accumulation of information, reports and research necessary to adequately assess any asset is important.  Unfortunately, due to the volume of material and the need for the coordination of independent third party consultants, the process is time consuming.  As result, it is necessary to seek the most efficient method of organization and analysis in accumulating data.  

This is where the experience of an independent third party consultant is useful.  Properly assembled and packaged, the data obtained will not only serve the purpose of allowing for thorough in-house evaluation, but in part, provide as a foundation from which future marketing information may be derived thus serving to vastly reduce the due diligence process for a prospective buyer once a contract of sale is executed.

SCOPE OF WORK:

Working in conjunction with the designated asset or credit manager, H.B. Springs Co. Real Estate will coordinate the following:  

Title:   The best resource in title inspection is the title commitment. The focus of a title inspection is mainly on the list of exceptions. Working in conjunction with the lender’s counsel, these and all of the recorded documents underlying the listed exceptions requires review in detail. Consideration of the type and extent of title insurance to obtain can also be an important decision, i.e. standard coverage or extended, are any endorsements necessary? These will largely depend on the type of property.

Survey: In order to adequately evaluate potential problems identified by the exceptions, each exception requires review simultaneously with a current survey of the land and improvements. The survey allows you to visually understand where any easements or licenses burdening the real estate are actually located and whether the scope of use set forth in the recorded document is acceptable based on its location. The survey will also identify encroachments or physical uses not shown by the title commitment. Consideration of the type of survey to obtain is another important decision and will depend on the type of property.

Building Inspection: Inspection of buildings on the property is essential to ensure sufficiency of construction considering the existing or intended uses and the surrounding geography and climate. Research and identification of as-built plans and specifications will be conducted.  A current inspection performed by a certified third party inspector qualified in the type of property to be inspected will be coordinated.  The focus of that inspection will be primarily on structural components such as the walls, roof, HVAC units and fire suppression systems.  Inspection will also seek to identify any regulatory or statutory violations.  For fractured or facilities incomplete in the construction process or those in need of repair, detailed cost estimates will be obtained together with a comprehensive scope of work.

Engineering Inspection:   Likewise, inspection of horizontal development property is essential to ensure sufficiency in services and infrastructure necessary considering the planned use.   Research and identification of as-built drainage and engineering plans and specifications will be conducted.  A current inspection performed by a certified third party inspector qualified in the type of property to be inspected will be coordinated.  The focus of that inspection will be primarily on existing infrastructure components.  For fractured or incomplete community developments or those in need of repair, detailed engineering cost estimates will be provided together with a comprehensive scope of work.

Zoning: The zoning, subdivision and land use matters are critical and zoning designation should be confirmed and uses at the property verified to conform to the allowed uses.  An investigation will be conducted for evidence of any current violations or potential violations, as well as a review of all current agreements affecting the property such as growth management agreements, covenants or public facilities agreements, as well as any current or proposed fees, assessments or a pending zoning changes either to the property or in the nearby vicinity which may have a bearing.

Environmental Inspection:  Coordinate with a third party inspector, a Phase 1 environmental audit.  In addition, for any unimproved property, a preliminary wetland assessment conducted under current USACE guidelines.   The depth and breadth of each environmental investigation will consider the past, present and potential uses of the real estate.  

Leases:   Perform analysis of existing lease(s) and supportive market research of market rents and vacancy rates.   All documentation, including existing leases, landlord and tenant communications, preparation of pro-forma operating budgets, review of property service agreements and evaluation of creditworthiness of each tenant, will be scrutinized.  Interviews with each of the tenant shall be conducted to ascertain condition of the property in the Tenant’s opinion as well as likelihood of tenant remaining.

A summary report detailing the results of all investigation will be prepared and all supportive examination material provided.  The summary report will include:

  1. Identification & Legal Description 
  2. General Property Description
  3. Property History
  4. Location Map
  5. Aerial Photography
  6. Regional & Neighborhood Descriptions
  7. Regional & Neighborhood Maps
  8. Utilities Verification
  9. Flood Zone Verification
  10. Property Tax Data 
  11. Title Investigation Results
  12. Survey
  13. Building Inspection Results
  14. Engineering Inspection Results
  15. Zoning Verification
  16. Environmental Audit Results
  17. Lease & Market Rents Review
  18. Market Research 
  1. Comparable Sales 
  2. Income & Capitalization
  3. Estimation of Market Rents, Vacancy
  4. Absorption Estimation
  5. Operating Costs Budget
  6. Estimate of Fair Market Value
  1. Conclusion & Recommendations   

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