The Full Nelson

THE IMPORTANCE OF HAVING THE RIGHT DUE DILIGENCE TEAM IN PLACE

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Often, first time and out-of-town buyers are shocked when I inform them that a seller will not offer a due diligence period post contract signing. There is a great deal of hesitation on their part to spend money to go hard on a contract without their knowing they have exclusivity.

It is truly a function of the market that almost all NYC contracts are signed non-contingently. Many buyers are competing for the few listings available, and many try to sweeten their offer by proposing a quick closing with no contingencies. In some cases, this even means contract closing.

An extreme example was a development site I sold in the East Village a few years back. We knew that there were environmental issues as we had a Phase II report. We shared the report with potential buyers, but did not represent its accuracy. Buyers had to come to their own conclusions.

The ultimate buyer spent tens of thousands of dollars drilling borings and identifying the extent of the contamination, without a signed contract. He performed this work simultaneously with contract signing.

The buyer's risk was rewarded with a successful condo sellout and tax credits since the site was designated as a brown field.

A buyer can rack up thousands of dollars in due diligence costs including legal, engineering, environmental, title, lease review, ect. For that reason there is legitimate fear that during the time it takes to conduct ones due diligence review, another buyer could swoop in and outbid them.

To address this, I try and ease a buyer's concern by telling them that I never want to pull the rug out from under them while they are working in earnest. As the broker is the intermediary, he or she should aim to over communicate. If a higher offer looks like it will come in, the buyer with a contract should be advised right away and be given a chance to compete.

Due diligence needs to be completely quickly. Today more than ever, well priced properties often sell in a matter of weeks. This year I have already had five sales that came to market and contracted in less than a month. These include 37 West 10th Street, 14 East 11th Street, 22 East 13th Street, 40 Morton Street, and 74 Washington Place. With all this in mind, buyesr needs to have their due diligence team in place.

A broker's job should also entail helping the buyer assemble the best transactional team. It is essential to have a complete and responsive transactional NYC attorney, a physical due diligence inspector who can give a quick verbal before a lengthy written report, and a title company that can indentify any potential issues quickly.

New buyers with a competent team in place can move as quickly as experienced buyesr, unless the competition waives their due diligence all together. In many cases I have seen buyers buy properties site unseen.

Many buyers have told me that they have been able to secure due diligence periods elsewhere in the city. As a buyer, I congratulate them to be able to tie up NYC property with soft money. It is a rare feat.

I, however, advise my sellers to resist a due diligence period no matter how attractive the price. A soft period can often be followed by a re-trade in price, or the buyer pulling out. After that, going back to market with a broken deal could result in loosing momentum and being in a weaker position to negotiate with the other bidders.

NYC sellers are spoiled in the sense that if they insist, they can receive a 10% hard deposit or greater at signing. As a result, closing are much smoother and give the seller the certainty they need to make their next move.

James P. Nelson, Partner

James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 200 properties and loans with an aggregate value of over $1.3 billion in the NY Metro Area. He can be reached at jnelson@masseyknakal.com or 212-696-2500 x7710.

To follow James on Twitter, please go to http://twitter.com/JamesNelsonMKRS or LinkedIn at http://www.linkedin.com/in/jamesnelsonmasseyknakal.

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