A common theme amongst some of the wealthiest people in the world is their involvement in commercial real estate. This is because investments in commercial real estate generate some of the highest return rates. To attain these kinds of rates, it is important you first know the due diligence process for the industry. We have provided an overhead view of the steps involved in buying a commercial property, whether it be a retail outlot or a neighborhood shopping center.
Do Your Research
Before jumping straight into purchasing your first commercial property, it is best to perform plenty of research, stay up to date on industry news, and partner with a commercial real estate broker. Once you establish a general knowledge of the market, determine your specific investment needs. Now you can narrow down your options by analyzing market research for each prospective property.
Know Your Finances
The next step involves conducting a detailed financial analysis. Keep in mind, to know your business is to know your numbers. This analysis should consist of current data like taxes, utilities, and occupancy, as well as future performance estimations. In addition, a debt and equity source will be needed to determine your ability to acquire the necessary capital to obtain the property. Asking yourself the following questions could prove helpful in this stage.
- Do market conditions suggest I take a more aggressive or conservative approach?
- What is my estimated ROI?
- How can I reduce expenses?
- Do I have an exit strategy?
Draft Your Letter of Intent
The letter of intent, or LOI, represents a buyer’s intent to purchase real estate and is the first official action taken between buyer and seller. Its purpose is to address major points of interest and concern which are then negotiated over an allotted period resulting in the final Purchase and Sale Agreement. Familiarizing yourself with terms such as cap rate and debt coverage ratio will also be helpful during this step.
Do Your Due Diligence
The due diligence period is the step that reveals any rights, boundaries, development options, and more. It also exposes any issues that may affect the use of the property or its development. For example, some restrictions could include environmental issues, licensing requirements, or zoning restrictions. These kinds of restrictions are why it is important during this step to interview current tenants.
You’re Almost Closed
The pre-closing stage is the point in the process where prospective buyers are narrowed down to a select few who submit their final offers. Some common reasons buyers are removed from the seller’s picks are unattractive bid price and inability for buyers to execute. The chosen buyer then submits an acknowledgement of all relevant property information and exchanges.
This is the final step in purchasing a commercial property. It involves the use of an escrow agent to hold funds until all conditions are met by both parties. Commercial transactions are much more complex than residential, though they have far less regulations.