When looking to become involved in real estate, you are likely to find a range of property options. These can include commercial properties and residential properties.
A commercial property is one that is host to a business. For example, you would own a building space, and you would rent the space to the owners of the clothing brand.
Commercial property is a broad and diverse subject. There are a wide range of property types that investors look for. Office buildings, vacant lots, mixed-use, retail locations, industrial centers, and multi-family properties are examples of commercial properties that might appeal to you.
How To Know Which Commercial Property To Pursue
Finding a commercial property is easy compared to actually closing the deal and making the space profitable. After you find an area you are interested in that is showing economic growth and prosperity, it’s time to reach out to a real estate agent to facilitate the process.
Here are some tips to help you close your first deal and hopefully many more in the future:
- Despite what you may think, not every building lead is worth pursuing. Instead, you need to carefully screen your commercial prospects before you invest your time into viewing the building or plot of land. Before you get too deep in the process, you should do some research as to that location.
Take a walk around the area and ask nearby owners and renters what they think. Heavy foot traffic is usually a good sign. This investigation will help you determine what is worth investing your time and effort into.
- Once you have found a serious prospect, you need to deeply consider your budget, timeline, and needs. This step is especially important since commercial real estate is so diverse and can change rapidly. Does the building need more work that would put you over your budget? You do not want to get involved in a money pit.
- After you have found the perfect commercial property with your agent, you now need to actually close the deal. This will likely involve a lot of finessing.
For starters, your agent needs to create a sense of urgency with the seller without pressuring them too much. Furthermore, your agent will need to negotiate with the seller to ensure you get the best possible deal. This can get tricky, so it’s best to rely on the professionals.
What Is the Closing Process for Commercial Properties?
Unfortunately, the deal isn’t finalized just because the buyer and the seller have reached an initial agreement. Instead, you need to go through the closing process to actually finalize the sale of the commercial property.
This involves finding a mortgage lender you like and beginning the loan underwriting process. Then, the title search will occur. After the survey, inspection, and appraisal, there is only one more step. After escrow, you can officially call yourself a commercial property owner.
Here are the steps in the closing process that you need to know about:
Loan Underwriting
If a loan is being used to finance the purchase of the commercial property, as is common with high-value commercial real estate transactions, then you have to go through the loan underwriting process. This process is required even if a loan pre-approval has been received.
During the underwriting process, the lender essentially verifies all of the information presented within the initial application to evaluate the risk involved in granting the commercial loan.
Keep in mind that commercial loans are often different from residential loans.
All of the calculations are used to determine the maximum loan amount that the borrower is eligible for. In most cases, the loan underwriting process for commercial real estate transactions takes about a week but can take longer if any issues come up during the process.
As mentioned above, commercial loans are rather different from loans for residential buyers. Investors are used to conducting their own underwriting (although some do work with more traditional lenders). In the case of commercial properties, commercial real estate agents also typically do their own underwriting if working with investors.
Title Search
The next component in the closing process for commercial real estate is the title search. Similar to residential real estate, a title search is performed to ensure that the seller is actually qualified to sell the property. The title also contains information relevant to the property, for instance, unknown liens, illegal deeds, undiscovered encumbrances, public record errors, unclear boundaries, forgeries, and fraud.
With a list this long, many commercial property buyers opt to purchase title insurance. This protects them in the event that the title search company doesn’t find an issue with a title that can pop up and cause problems down the line. While this is an extra cost, it’s well worth it for the peace of mind it provides — especially when it involves a highly valuable piece of commercial property.
The Survey, Inspection, and Appraisal
Before buying a commercial property, you will generally want to conduct a land survey, building inspection, and property appraisal before moving forward. In fact, some lenders actually require these components in order to approve and close on your loan.
A property survey involves describing and mapping the boundaries of a piece of land. This process helps you make sure that you’re actually buying what you think you’re buying based on the legal boundaries of the property.
A property inspection involves examining the current condition, structure, and safety of the commercial building. This process helps you make sure that everything is up to code and there aren’t any hidden issues that could end up costing you down the line to repair.
A property appraisal involves determining the actual value of a property based on similar properties that were recently sold. This process helps you ensure that you’re not paying more for a property than it’s actually worth and is often required by lenders as a part of the closing process.
Even if surveys, inspections, and appraisals aren’t technically required as a part of your commercial real estate transaction, they are always recommended to ensure that you’re getting a good deal.
Escrow
The last component in the closing process for a commercial property relates to escrow. Escrow is also involved in the residential closing process but is even more important for commercial real estate dealings. This is because escrow essentially protects money in a separate account that is held there until all parties in the contract have met their obligations and conditions.
Since commercial real estate often deals with larger amounts of money, it’s vital to protect these funds during the closing process. Before any funds go into escrow, both sides need to agree to the terms of escrow. These personalized agreements are then drawn up and signed before moving forward.
A Commercial Success
Buying commercial real estate is a great way to open additional streams of income. With careful research, you can find a valuable commercial plot or building that can carry through generations of your family. Vaster can help make this happen.
If you are interested in getting started, you can reach out to Vaster today for more information on how to secure a loan to begin your commercial property investment journey.
Sources:
What Is Commercial Property? | Investopedia
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