Whether you are expanding your property portfolio, opening a business, or taking advantage of falling prices, you’ll want to land a good-to-great CRE deal when buying commercial real estate.
Many investors consider owning commercial properties an integral part of a balanced portfolio. Here are some reasons why:
- While values may fluctuate, the property isn’t subject to the volatility that can affect stocks.
- Commercial real estate (CRE) can provide regular earning potential in the form of passive income.
- Business owners who plan to set up shop can avoid the costs and restrictions of paying rent by purchasing a property.
Securing a favorable property purchase takes advance planning and research. However, when you consider the possible savings, you’ll see that doing your homework can pay off big.
This article contains tips to help you purchase the ideal property, including how to find it and how to negotiate the purchase. Let’s start by looking at different CRE valuations.
How Much Is That Commercial Property Worth?
When negotiating a price for any commercial property, the appraised value will be a factor. However, there are several different methods for deciding these values.
For example, many commercial properties have few comparable buildings nearby, and both income and maintenance costs may be difficult to estimate.
Since many commercial areas are home to buildings of different sizes, ages and buildouts, obtaining accurate comps may be difficult to impossible.
Perhaps most important of all: how much are you, the buyer, willing to pay?
While you should have a budget in mind before viewing properties, you’ll want to be familiar with these popular valuation methods used by CRE sellers and brokers.
This is an estimate of what it would cost to totally rebuild the property.
A cost approach takes land values into consideration, plus construction material and labour costs. If comps aren’t available, this approach is often substituted.
This looks at the amount of income you can expect.
Here is an example: a building is priced at $1 million, and research says you can expect a 5%, $50,000 per annum yield. The new owner can improve yields by increasing rents and other cost-cutting measures. Usually, the expected future income is discounted to reflect a property’s present value.
Other approaches rely heavily on the type of property for sale.
For example, an apartment building may be priced by value per door, which determines an entire building’s price based on the number of rentable units.
If plenty of comparable sales data is available, this may be used to determine the price. However, this approach can be negotiated (or haggled!) by a buyer who’s familiar with the comps and can argue a lower price by pointing out differences.
Pricing the building by the rentable square foot. This is a popular method for office properties. This can be compared to the average rental cost per square foot to determine a ballpark value.
After you are familiar with the different methods used to determine CRE value, it is time to find the ideal property.
Why Shop When You Can Network?
Unless you’ve already spotted a commercial property that fits your requirements, you’ll need to find it. If you haven’t teamed up with a CRE broker, shopping online is a popular option.
There are websites specializing in listings of commercial property sales. Some have built-in filters, so you can search for particular types of property, locations, and prices.
But you may do even better by networking with like-minded buyers.
- For example, if you want a property that’s in a big city, such as Chicago or Houston, you can join their Meetup group.
- Looking for a long-term investment? Are you a beginner? There are groups for like-minded buyers.
Each group publishes a description of what they do, how often they meet, and what they expect from new members. For example, one group states: “We have put together a group of real estate investors on steroids.”
Nothing replaces the unique values of business networking, and today’s social media makes it easier to find these opportunities and meet like-minded buyers.
You can also join groups with a presence on social media, such as Facebook, LinkedIn, and Reddit.
Once you’ve found the ideal property through an online list, networking, or broker, you are ready to negotiate your purchase and prepare a contract.
Steps to Closing Your CRE Purchase
Like any other major buy, you’ll want to get the details in writing. Your CRE purchase contract should contain:
- A property condition assessment. This does more than describe its condition; it defines your costs for repairing damaged and non-working systems.
- Environmental review. Be 100 per cent sure that this is completed by experts. Cleanup could be extremely costly.
- Survey review. This will include site size, property boundaries, and any title encumbrances and/or physical encroachments.
- Title review. This states that the property doesn’t violate local or city government zoning rules.
- Deposits and escrow accounts, including amounts, deadlines, and responsible parties.
- Details of any legal issues that will be addressed before the sale is finalized.
- Inspection results. These structural, interior, mechanical, and electrical inspections should be carried out by licensed professionals.
Remember, no commercial property price is written in stone. If you have located any potential or genuine reason for a lower price, or feel the comps aren’t accurate, now is the time to discuss it.
While there are no hard-and-fast rules for a successful negotiation, offering solid proof that the property is overpriced will help you keep more of your funds.
Purchasing a commercial property is complex, and even a seasoned buyer or investor can feel overwhelmed by the due diligence required. This is why a closing checklist is important.
Closing a CRE Deal
You must make sure that you follow a closing checklist before closing a commercial real estate deal. Now it is time to:
- Ensure all of your lender’s requirements have been met;
- Review all the requirements of the purchase;
- Discuss any concerns about property rights, zoning laws, and possible legal issues; and
- Provide proof of your legal signing authority, if required.
Generally, the purchase isn’t legally closed until the property’s title has been transferred to the buyer, investor, group, or trust defined as the legal owners.
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I am Adeyemi Adetilewa, a media consultant, entrepreneur, husband, and father. Founder and Editor-In-Chief of Ideas Plus Business Magazine, online business resources for entrepreneurs. I help brands share unique and impactful stories through the use of public relations, advertising, and online marketing. My work has been featured on the Huffington Post, Thrive Global, Addicted2Success, Hackernoon, The Good Men Project, and other publications.