Point Solutions in a Variable World

Due diligence consultants are regularly asked to conclude a single right answer in a world dominated by variables. Appraisals, for example, provide an estimated value which, in combination with other variables, determines the amount of money lenders are willing to provide for a particular transaction. But how often does a property change hands for the exact amount of the appraisal?  A variation of +/- 5% is not surprising, and more significant variations can occur when highly motivated sellers or buyers are involved. Similarly, though a variation of 20% or more would not be unusual in an open bid process, property condition consultants generally provide a point estimate of costs to address conditions found or replace key system components over ten years or more. 

This phenomenon does not stop with hard dollars. Though due diligence reports frequently identify a single recommended action, different parties may treat the same problem in different ways. 

  • Some property buyers may require Phase II to evaluate an existing underground storage tank, while others are comfortable with tightness testing or even simple verification that operations are permitted.
  • Property owners will sometimes implement aggressive maintenance programs to extend the life of a roof in order to delay replacement costs, while others will replace the roof when leaks begin to occur near the end of their expected useful life.

Real world solutions depend on the objectives of the parties involved as well as other variables. Collaboration is an often overlooked component of the due diligence process. Given the same fact set, a single solution is probably not appropriate for all clients or in all situations. It is important for the consultant and client to work together to evaluate the significance of due diligence findings, and develop recommendations and estimates which support specific objectives.

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