ABSTRACT
Within the real estate industry, “due diligence” is the term used to refer to a structured and comprehensive investigation of a real estate investment prior to its actual purchase, net-lease, or financing. Due diligence is the cornerstone of every successful real estate deal. Such investigations help investors select the most promising opportunities and filter out those deals which are best avoided. The investigation process collects qualitative and quantitative data about a property and its ownership history through primary and secondary research methods. During the due diligence period, the real estate investment is analyzed from a variety of perspectives so as to equalize what economists refer to as “information asymmetries” between the current property owner, who possesses the most information as to the quality of the asset, and the prospective purchaser or lender who enter the deal with little or no information about the property apart from what is easily observable. In his seminal work on the economic effects of asymmetric information, George Akerlof used the example of a used car transaction. The seller of a used car knows the vehicle’s maintenance and accident history, whereas the buyer cannot know from the price alone whether or not a used car is a “lemon.” Since the seller may be dishonest, the purchaser’s problem is to identify quality and distinguish good quality from bad quality (Akerlof, 1970).
