Strategic vendor due diligence in real estate transactions

Abstract

PurposeIn light of the ever-growing complexity of real estate transactions, the need for vendors and buyers to better understand the role of vendor due diligence (VDD) is imperative. The purpose of this paper is twofold: firstly, it provides a detailed literature review regarding the role of VDD from both the vendor's and buyers' perspectives. Secondly, it analyses the value of VDD over and above the buyer's due diligence (BDD) in real estate transactions by proposing a theoretical model involving two-stage auctions.Design/methodology/approachReal-world examples from the industry are used as a motivation behind listing a set of practical questions. A theoretical construct is built to approximate the real estate environment under study. The construct is then studied from a game-theoretic perspective to obtain theoretical answers to the questions. These answers are then used to shape recommendations for the relevant industry and beyond.FindingsThe model suggested accommodates the feature that even though the VDD is broadly increasing informational efficiency in the market, its value is limited and sometimes harmful when the vendors have a sound prior understanding of their assets and the buyers' pre-transaction information about the asset is already high.Originality/valueThough the real estate market is considered here, the theoretical model we propose is applicable to any other complex asset transaction decision that supports endogenous information disclosure considerations using VDD.