Why You Need a Property Condition Assessment Before Closing
Imagine yourself in this situation…
A slick, well-written brochure shows up on your desk. Someone is selling a property and has provided you with information on tenants, the great location, and basic building information. This piques your interest. What should you do next?
Lenders usually require a Phase I Environmental Site Assessment (ESA) as part of a typical due-diligence process. So the ESA is ordered, completed, and the report says there are no environmental concerns. The lender is happy – their concerns have been addressed. You’re happy, because the lender has just issued your mortgage commitment letter. You go to closing, sign your name a hundred times, and now you own the 20-year old building. Funny, it looked a lot newer in the slick brochure…
So you visit the property with an industry professional to take a good, hard look at your new asset. Unfortunately, the items that are pointed out don’t make you very happy now:
- The roof is leaking and the insulation is wet; the contractor recommends replacement.
- The pavement was recently seal coated. The coating covered up a large area of alligator cracking. Numerous areas need to be patched.
- The HVAC system is original and will require complete replacement within the next two years. Your jaw drops at the cost.
- A major tenant is planning to remodel their space within the next six months. As the owner, you are required to bring the facility up to code to meet ADA requirements. You don’t even know what’s involved, or how much that will cost.
There are so many items – expensive items – you didn’t plan on. What else can go wrong? And more importantly, what could you have done to avoid this costly, disappointing situation?
Before closing, lenders will require an updated survey, an environmental report, and a title insurance binder, but they usually don’t require a Property Condition Assessment (PCA). Why? Because once the purchase is complete, the property – and its condition – becomes your problem and your responsibility. It goes back to the old saying, “Buyer Beware.” While a PCA may seem like an unnecessary additional expense, it can actually end up saving you thousands of dollars.
So what is a PCA? It’s an assessment and report that provides information on the property’s condition. The assessment begins with a preliminary review of available drawings, specifications, reports and records. Property managers, maintenance personnel, and public officials are contacted to provide information about the building’s history, maintenance, and site improvements. The consultant conducts a walk-through to observe the general physical condition of the property. He or she also locates and documents any visible deficiencies in the materials, building systems, and site improvements. Components that appear to exhibit less than their expected service life or which have been poorly maintained are also identified. A more detailed assessment of the property’s condition and systems may also be recommended as part of the PCA.
A written report is prepared outlining the observations and findings. For items requiring remedial work, opinions of cost for immediate and short-term repairs can be provided. A table of capital expense reserve costs for a specified length of time may be provided. The process is outlined in ASTM E 2018 “Standard Guide for Property Condition Assessments: Baseline Property Assessment Process.” The written report can be customized to meet ASTM E 2018 requirements, the client’s goals, or the obligations set by a lending institution. And after you’ve purchased the property, this information can also help you develop budgets and schedules to maintain or upgrade your property.
So next time a slick property brochure hits your desk…
Be proactive and have a PCA completed prior to finalizing your purchase. The PCA can be used as an effective negotiating tool with the seller. A third party assessment of the condition of the property and estimated costs will allow you to negotiate a lower price, and/or require the owner to make some repairs before closing. If necessary, the report can also be revised to meet lending requirements once your purchase negotiations are complete. And once you’re the proud new owner, the information will help guide your future maintenance and improvement activities.