Jim was a buyer who was pretty meticulous when he bought real estate investments. He would carefully go through every due diligence item, each lease, and research the market extensively.
While Jim was smart to studiously analyze a deal before proceeding to closing, the time it took him was quite extensive. He always asked for a long due diligence period when going under contract, which often put him at a disadvantage when negotiating price and terms up front, since most sellers understand that time is money.
What is the value of time in a real estate deal?
In basic terms, the value of the time asked for during a real estate contract relates to what else that money could be earning elsewhere. If the owner could park that money in a bond paying 4% right now, that’s the base value of that time.
Some level of due diligence timing is reasonable and must be accommodated by the seller, since the inherent risk in real estate must be evaluated by a buyer before purchase. There are basic terms that are reasonable to ask for in each deal type, since the terms directly tie into value.
Typical Due Diligence Timeframes by Asset Type
- Multifamily: in a deal with standard parameters, a due diligence period of 30 days or less is typical — smaller deals often need less time, while larger deals of 80+ units may need more.
- Self-storage: these facilities are usually sold without an actual review of the contents of units, so due diligence to review receivables and confirm leases and rents collected match is very important. A timeframe of 30 days to review financials in depth is prudent.
- Industrial: often comes with environmental screenings and challenges, so a 60-90 day timeframe for due diligence is within reason — environmental reports take time to complete, leaving owners little choice but to wait.
- Retail: properties with multiple tenants, or a single-tenant NNN lease where value ties to tenant credit profile, warrant careful research. A timeframe of 45-60 days to investigate the tenant, review corporate statements, and assess market stability is reasonable. Retail leases can be complex, with exclusive-use clauses, percentage rents, renewal terms, and more.
- Land: the expectation for a reasonable timeframe here is much longer. A typical land deal for development will be subject to a lengthy land development contingency, with due diligence running 30-180 days depending on complexity and size — and the addition of a land development approval timeframe can add several years on top of that.
Why Land Deals Take So Long
Sellers often don’t realize that the development value they want to sell for (much higher than a raw land price) is directly tied to the time a developer needs to secure approvals. Because of the dynamics around the land development process, the timing largely is what it is, and a reasonable seller should be open to waiting.
Some projects need a zoning hearing board approval, preliminary plan approval, and final plan approval, and the developer is often at the mercy of how quickly the township moves — which is usually slow. Developers may also be subject to the timing of their own professionals: if land surveyors, geotechs, or traffic study providers are busy, it can take months to complete their portion before moving to the next stage.
That said, some developers may want to leave a deal open for years and move slowly on approvals if they aren’t given a reasonable timeframe, so it’s important to build in guardrails that are reasonable relative to the project.
If a land project is larger and broken into multiple stages, keep in mind that the value of the land in the future may be worth more than it is today. If a developer settles on half the land and waits three years to settle on the rest, that remaining parcel may be worth more in three years due to appreciation. That increase in value, coupled with the return the money could have earned over those three years, represents a lost opportunity for the landowner unless the contract accounts for the additional time.
Money for Time
This concept can apply to any real estate deal: simply let the buyer know that if they want a longer timeframe, they’ll need to pay more for the property at settlement.
To minimize lost return to the seller if the buyer doesn’t settle, a non-refundable deposit for due diligence time beyond the standard amount is a reasonable way for both parties to get what they need — the seller gets compensated for the return they’re giving up, and the buyer gets the time they need.
Tip: as a seller, always write into the contract that all of the buyer’s due diligence items must be provided to you if they pull out of the contract. This can save you time the next time around, and represents thousands of dollars of value.
Conclusion
Timing in real estate deals is often a point of contention, but keeping in mind standard timeframes, what’s reasonable to ask for or allow, and ways for both parties to minimize downside can help bring a transaction to a positive result.
Looking to buy or sell investment real estate in Pennsylvania or Maryland? Reach out to us — we’re happy to help you find deals that work in your favor.
