CRE Due Diligence Checklist: Key Steps to Protect Your Investment

Most investors think due diligence begins once they have a deal under contract. In reality, the best commercial real estate (CRE) investors start long before a deal even crosses their desk.

Every property has risks – some obvious, others well-hidden. The goal of due diligence isn’t just to confirm a deal’s potential but to uncover the hidden pitfalls that could turn a promising investment into a financial drain. The worst thing you can do as an investor is rush into a deal, relying solely on seller-provided data and surface-level analysis.

Too often, investors make these common mistakes:

  • They chase deals without a strategy, wasting time on opportunities that don’t align with their investment goals.
  • They trust but don’t verify, assuming that financials, tenant information, and operating expenses are accurate.
  • They use due diligence as a “free look,” getting a property under contract before they have financing secured, which often leads to retrading and damages their reputation.

You need a structured approach to due diligence if you want to avoid these pitfalls

The following checklist ensures you systematically analyze financials, legal concerns, market conditions, and property operations before committing to a deal.

TL;DR: CRE Due Diligence Checklist in 60 Seconds

  • Financial Review: Focus on the quality of revenue and expense structure
  • Market & Asset Check: Compare to competitors and assess new supply risks
  • Legal & Operational: Confirm zoning, vendor & lease terms, and title history
  • Physical Inspection: Hire third-party experts for specific areas
  • Build a Team: Align with attorneys, contractors, and analysts before you need them

Why Most CRE Investors Fail at Due Diligence

Many investors treat due diligence as a box-checking exercise, assuming that if they skim through financials and conduct a quick property inspection, they’ve done enough.

Back in 2020, an investor acquired a 200-room hotel at what seemed like an excellent price and benefited from seller financing. The property was largely vacant, and everything seemed to be in good working order. On the surface, it looked like a solid deal.

During the first year of ownership, occupancy was slow to return, even though the rest of the market started booming. To add insult to injury, mechanical and plumbing issues started emerging once guests started stressing the systems.

The new owner uncovered almost $3 million in property improvements because of inadequate due diligence.

This example illustrates a critical lesson: due diligence is more than just confirming a seller’s story – it’s about uncovering risks before they become your problem.

Financial Due Diligence

The financials are where most investors focus first – and for good reason. However, simply reviewing numbers isn’t enough; you must understand the quality of the data and where risks may be hidden.

Analyze the Trailing 12-Month Financials (T-12)

A good analysis of trailing 12-month financial statements helps you understand seasonality and how the seller’s strategy played out in financial terms.

  • Compare the T-12 with previous years – are there any sudden changes in revenue or expenses?
  • Look for one-time revenue spikes or expense reductions that artificially inflate net operating income (NOI).
  • Verify whether all income is recurring or if there are temporary incentives (e.g., rent or fee concessions to boost occupancy).

Pro tip: Be sure you verify whether the income statements you’re reviewing are accrual or cash basis. This will help you determine the timing of cash flows, as you’re unlikely to get a cash flow statement.

Scrutinize the Quality of Revenue

Revenue quality comes down to the strength and diversity of your customers. Like a well-designed investment portfolio, concentrating revenue in one area amplifies risk unnecessarily.

  • Are lease expirations staggered or clustered? A property where most leases expire in the same year could face a massive turnover risk.
  • Are rents above or below market? If they’re too high, tenants may leave when their leases expire.
  • Are there rent escalations in place, or will rents remain flat?
  • Is your business mix concentrated within one industry or tenant type?

Stress-Test Operating Expenses

Operating expenses are where you’ll see your biggest opportunity. It’s important to remember that the expense structure reflects the seller’s strategy. It’s not the basis for your new, sound strategy.

  • Are property taxes underassessed? Many municipalities reassess after a sale, potentially increasing taxes significantly.
  • Are insurance costs reasonable? Rates have been rising sharply in many markets.
  • Have major capital expenditures (CapEx) been deferred? A seller might be cutting costs in the short term to inflate NOI.

Market and Asset-Specific Analysis

Even if a property looks great on paper, it’s only as strong as the market it operates in. That’s because most real estate operators are price takers, not price setters.

Evaluate Market Fundamentals

Market fundamentals come down to basic economics – supply and demand dynamics. Your goal here is to determine where are the barriers to entry and what is keeping people in and coming to the market.

  • Is job growth strong? A shrinking employment base can lead to declining rents and occupancy.
  • What is the current vacancy rate in the market? If vacancy is high, filling empty spaces could be a challenge.
  • Are new developments coming online that will increase supply?

Knowing the difference between new supply that dilutes your share and new supply that increases market demand is important. Sometimes, supply constraints hold a market back. For example, a convention center hotel may increase supply by 10%, but it enables more and bigger groups to enter the market, lifting all properties.

Competitive Property Analysis

Your customers have a choice. Your job is to identify your ideal customers and give them what they want.

  • Is the property priced in line with the market, or are you overpaying?
  • What are competing properties charging for rent?
  • Are similar properties experiencing rising or falling occupancy?
  • What amenities can you provide that set you apart from the competition?

The best real estate investors understand the intricacies of a market before they start chasing down specific properties. Over time, opportunities may be revealed that pull you into other markets. Take an incremental approach to avoid over-investing in a market with little potential.

Legal Due Diligence

A single overlooked legal issue can derail your investment. Remember, you’re not just buying property. You’re probably also buying a lot of the seller’s liabilities through vendor and lease agreements. Some can be renegotiated, but most must transfer as-is.

Title and Zoning Review

Too many sponsors rely solely on the title company to highlight title and zoning issues. This opens tremendous risk, as future land use and other factors (political and property-specific) can materially impact the value of your property.

  • Ensure clear title with no outstanding liens or legal disputes.
  • Verify zoning compliance – a property may be legally non-conforming, limiting redevelopment options.
  • Look for easements or restrictions that may affect future use.

Vendor and Lease Agreement Review

Understanding what contracts you’re assuming and what can be terminated is critical. Like it or not, many agreements you assume weren’t negotiated to your standards. Approach them with a healthy dose of suspicion.

  • Are there clauses that allow for early termination?
  • Who is responsible for property operation expenses?
  • Are there restrictions that could impact future flexibility?

Of course, your legal team will play an important role in legal diligence. However, this is an area where all investors must “sharpen the saw.” Always look for ways to build independence and ask better questions.

Operational and Physical Due Diligence

If you buy a property, you’re also inheriting how it’s been managed – for better or worse.

Third-Party Inspections

A thorough inspection should include:

  • Structural integrity
  • Building envelope: roof, windows, doors, hardscape, landscape
  • Building systems: HVAC, plumbing, electrical, fire system, elevators
  • Environmental concerns (asbestos, mold, underground storage tanks)

Review Property Management and Maintenance Records

Some operations are more complicated than others. This is often where you can have the biggest immediate impact. It’s also an area where you can lose everything but the intrinsic value of the real estate.

  • Are there recurring maintenance issues?
  • Is the property operating efficiently, or are there excessive repair costs?
  • Has the seller maintained inspection records?
  • What is the tenure and compensation structure for current staff?

Each property type and business plan will have different levers to pull. Operational strategy and execution is where the great sponsors separate from the pack.

Build a Pro Team Before You Need One

Too many investors scramble to find legal, financial, and operational experts only after they’ve secured a deal. This puts them at a disadvantage. The best investors build a trusted team ahead of time.

Key Professionals to Have in Place

  • Real estate attorneys for contract review and negotiations
  • Zoning and title specialists to assess compliance risks
  • Environmental engineers for site inspections
  • Property management teams to evaluate day-to-day operations

Having the right people in place ensures you move quickly on good opportunities and avoid costly mistakes on bad ones.

Play the Long Game with Due Diligence

Due diligence isn’t just about avoiding bad deals – it’s about buying with confidence and clarity. A well-structured process will help you:

  • Identify red flags before they become costly mistakes.
  • Negotiate from a position of strength, not desperation.
  • Build long-term credibility with brokers, sellers, and investors.

The best investors aren’t the ones who chase the most deals – they’re the ones who make disciplined, informed decisions every time.

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