Although residential real estate remains scarce, with bidding wars cropping up in even unassuming neighborhoods, there are many opportunities for those hoping to enter (or add to their holdings in) the commercial real estate sector.
With interest rates still low and many properties slashing their prices as workers remain remote, it's possible to snap up an income-producing property for less. But purchasing commercial real estate is far more complex than buying or selling a home, and if it's been a while since you embarked on this process, it may take some time to relearn the ropes.
Below, we'll discuss the various steps in the process of purchasing a commercial property and what you can do to make the transaction as smooth as possible.
Identify a Need for Commercial Property
Each commercial real estate purchase should begin with an idea, whether you're hoping to pick up a multifamily rental near a park or want to gain a retail foothold in a trendy downtown neighborhood.
By searching available properties online and spending some time evaluating what you'd like your parameters to be, you'll be able to cast a net as wide as you'd like, looking only at the properties that fit your needs.
Find a Commercial Real Estate Agent
The internet makes it simple to browse properties online—or so it would seem. Commercial real estate agents have access to information that isn't publicly available (including properties that haven't quite hit the market yet), so having an agent join you on your commercial property journey can ensure that you're able to see all available properties.
Agents can also dig into a property's history to see whether any red flags may warn you off.
Find a Commercial Real Estate Lender
The next step is to find a lender and get your financing documents in order. Your borrowing options for commercial properties may look different than your residential options; you might need to tender a larger down payment or provide proof of the commercial property's income to get the funds you need.
Some of the documents your lender is likely to ask for when evaluating your creditworthiness are:
- Income documents and financial statements
- Rent rolls
- Budgets and cash reserves
- Income tax returns
- Tax bills
You may need to submit additional documents based on the individual lender's underwriting requirements.
Find and Inspect a Commercial Property
Having your lender's approval on a purchase price range can give you more freedom to seriously consider your various options. Once you've identified a property and have taken a (real or virtual) walk-through, it may be time to order the necessary inspections.
Though not all these inspections are required, your lender will likely require some of them to be completed before they can underwrite the property. (Paying cash means you can waive all inspections except those required by federal or state law.)
Environmental Site Assessment
If there are contaminants or hazards on the property you're purchasing, you could ultimately be responsible even if you're not at fault. However, there are "innocent purchaser" protections for those who have conducted a Phase I environmental site assessment that has revealed no issues. (Depending on what your Phase 1 assessment turns up, you may need to follow up with a Phase II.)
Physical Property Inspections
Most lenders will require a physical property inspection that includes evaluating the heating and cooling systems, plumbing, foundation, and other major structural issues. Depending on the planned use of the property and whether it will be open to the public, this inspection may also need to include an ADA compliance survey.
Architectural or Engineering Inspections
If your plans for the property include some major changes, or if you're worried about the cost of necessary repairs, it can be worthwhile to pay for an architectural or engineering inspection that will identify structural deficiencies or cost considerations to evaluate when deciding whether to submit an offer.
Hazardous Material Inspection
Depending on the property's age, you may want to hire a local environmental engineering company to inspect the property for materials that will need to be disposed of carefully. From lead pipes to asbestos siding, replacing materials and remediating these issues can require trained professionals.
Check for Commercial Zoning Issues and Confirm Clear Title
The next step is to ensure that the property you're considering is free from encumbrances—both legal and financial. A deed and title search can provide information about the property, its title history, and whether there are any easements, liens, or other encumbrances to consider when making an offer.
Draft a Purchase and Sale Agreement (PSA) and Review Relevant Documentation
Once you've decided to purchase your chosen property, you'll draft the PSA. This agreement generally requires the seller to provide copies of all relevant documents, including:
- Any ongoing leases or rental agreements
- Operating statements
- Prior Phase I or II environmental reports
- Surveys of the American Land Title Association (ALTA)
- Warranties or disclosures
- A list of any recent upgrades, repairs, or capital improvements.
If you haven't already undertaken the Phase 1 environmental site assessment or physical inspections, now is the time.
You'll also need to complete an ALTA survey, a standard survey that addresses setbacks, zoning, easements, and lot lines. ALTA also offers a title insurance policy that can hold you and the seller harmless for any defects in the title that aren't uncovered until later.
Get an Appraisal for Your Commercial Real Estate Property
Lenders generally won't provide funding above a property's appraised value. This policy means that if the property doesn't appraise for at least your offer amount, you may be personally on the hook for any difference. Appraising commercial property can also be tricky, as it's harder to find apples-to-apples comparison points. If your property doesn't appraise, you're usually free to get a second opinion.
Finalize Funding and Schedule Closing for Your Commercial Real Estate Purchase
Once you've gotten an appraisal, signed the PSA, and completed all necessary inspections, it's time to get the ball rolling on your purchase funding. You may need to provide updated documents. Once your loan is in process, a closing date will be scheduled, and you'll be that much closer to signing the purchase papers.
At Wasatch Peaks, we're here to help you realize your dreams of commercial property ownership. Give us a call or visit our website today to learn more about the business products and services we offer.