You are very proud of your business. It has been supporting you and your family for several years. It has also supported great vacations each year, increased your bank account, and allowed you a couple of retirement accounts. You have decided it is time to purchase your commercial real estate, so you should consider contacting a commercial real estate professional. They can help you find your building and property as opposed to renting. There are many steps you need to understand before taking this big step. We will take a look at those in the following information.
First, you need to learn some real estate terminology. There might be words or phrases, with which you are not familiar. Knowing this information will help you with the process as well as help you with realtors and other people to understand what they tell you. The first is the LTV. This is the loan-to-value. This translates to the ratio of money you want to borrow vs. the full value of what you are looking to purchase.
The next is DSC. This is the debt service coverage ratio. This is the operating income you have over the total debt service. Or, how much of the debt your income will allow you to cover per year. The cap rate is the capitalization rate. Your funder will look at the income from the property and divide it by the full value of the property.
Cash on Cash amounts to the annual income over the total amount you have invested. The amount might be your down payment. The vacancy rate is the percentage of properties that are empty in a given area, during a defined time period.
The ad valorem is a specific tax on a piece of property based on the assessed value. After you learn the terminology, it is time to search deeper and ask yourself some questions.
- What type of property do you want?
- What are you planning to do with the building? Do you want to use it for your business, rent it out, or what?
- What is the specific you would like to be in?
- Is it possible to lease the property, or is a purchase necessary?
- How is your cash situation, your ability to make a down payment, financing?
- Are you open to accepting a partner to buy the property?
- Have you determined your risk tolerance?
- How much time and work can you put toward the property?
- Are you ready and willing to invest this large sum of money? You can work with 3CRE commercial real estate to help you reach some of your conclusions.
Next, visit many properties. Do not make your decision based on the first one you see. Each property will have something different to offer. You need to focus your consideration on the price, condition, location, and allowed uses. You can also gain a better understanding by knowing the following information.
- How is the surrounding area? Are any significant changes coming in the future, such as a freeway or a shopping center?
- Why is the owner selling the property?
- What will you need to repair or replace immediately or in the near future?
- How much are the taxes on the property?
- How much income does the property earn per year?
- What types of uses are allowed for the property?
- What is the property presently being used for?
Once you have worked through all of the above, it is time to find the experts you will need to help you. As you will discover, purchasing commercial real estate can often present several problems and result in being a complex process. You will need to hire professionals in their field. These include an accountant, a commercial realtor, such as 3CRE commercial real estate, a real estate lawyer specializing in commercial real estate, and a mortgage broker.
Depending on the complexity of the purchase, you might also need a tax expert, environmental specialist, engineers, appraisers, notaries, and a tax expert. You will be able to accomplish some of the steps on your own; however, it will usually be better to hire an expert.
The next step is to determine your financing. The first part of this is to answer questions such as: what credit unions, banks, and other financial institutions can you use? Based on your credit, approximately what will your interest rate be? If you know that traditional financing will not work for you, then you need to find other creative ways to finance your purchase. Perhaps the owner/seller will help with the funding. Or s/he may offer a lease option. Fortunately, there is more than one way you can find financing.
The time has come. You have found the property you want to purchase. You need to make an offer to the owner/seller of the property. The most important thing to remember is that you should not sign anything without first having your lawyer review the document. Your lawyer will want you to sign an LOI, letter of intent, for the property as well as all of the contracts involved. Your LOI includes all of the basic terms related to the transaction. Your lawyer will make sure the LOI is not legally binding. This is in case something goes wrong within the contract. Your attorney needs to explain the written agreement to you. You need to ask questions and make sure you fully understand your obligations as well as your rights.
You are nearing the final step. It is called Due Diligence and Escrow. You are about to pay your money. This is when you cross all the t’s and dot all the i’s. Usually, you will need to order an ALTA, American Land Title Association, survey. This is a part of the due diligence. This survey is very important as it gives you valuable information such as the boundary lines, location of any building(s), the location of easements, and so forth.
It is also time for you and the owner/seller to locate an escrow officer. This person will oversee the transaction and act as a neutral 3rd party. Their role is to help with the funds and the transfers of deeds. They also assure that you and the owner/seller are protected.
You are now reaching the closing of escrow. This involves many documents such as the non-foreign affidavit, the quitclaim deed, the bill of sale, the title affidavit, the assignment of contracts as well as warranties, and supplier guarantees.
You are now given a time period for due diligence. This is a time for you to make sure that everything is correct in the documentation about the property. You need to double and triple check this information to make sure everything is right.
When you make your final inspection, should you find something wrong or strange, then you can tell escrow not to transfer the funds. You can cancel this transfer. However, this does not happen too frequently. So, assuming everything has gone smoothly, you are now the proud owners of the commercial real estate you chose to purchase.
The first time you purchase commercial real estate, you can find it to be a daunting process. However, the above information will hopefully help you through each step. Just take your time!