Understanding the Commercial Real Estate Transaction
Completing a commercial real estate transaction can seem like an arduous task, particularly if you don’t know where to begin. While it’s true that there are many steps to the process and that skipping any of them would be detrimental, it’s not quite as scary as it may at first seem. If you are new to the practice of successfully closing a commercial transaction, it might be helpful to get a snapshot of what you should expect before taking the plunge.
The first step of any commercial real estate transaction is to identify the opportunities that are best for you. This might ensue by considering your geography and where you want to begin looking for commercial properties. Many investors will start this process at the macro level, scouring the region, state or city first to see where the best possibility for profit exists before narrowing their search down to a specific neighborhood, submarket or even a particular street. A seasoned investor with existing knowledge of the local market might choose to use this time as an opportunity to gain a better understanding of which property types are presenting the best possibilities in that market at the specific time. Either way, this is a time for extensive research!
Narrowing it Down
Once you have a clear understanding of the type of commercial real estate property you are looking for, it’s time to narrow down your choices. This will mean getting crystal clear on both your long and short-term goals as an investor (do you plan to hold onto the property for personal use or to lease, do you intend to renovate it and sell it, etc.) and also to determine what type of a budget you are working with by seeking pre-approval for financing, if necessary.
The Underwriting Process
The underwriting process takes a deep dive into analyzing the financial stability of a property using the current data available (occupancy, utilities, rental income, property taxes, etc.) and estimating the future performance it’s expected to have. This process essentially helps the investor to determine whether or not the risk of the investment is worth the potential reward by considering best and worst-case scenarios that might occur. It also helps to determine what the investor is willing to offer on the property.
Tour the Properties
If you’ve found a few commercial real estate properties that look as though they might be attractive investment opportunities, it’s time to take a closer look by doing an even more thorough walk-through. This will help to determine whether or not the seller is looking to unload the property due to possible problems with it and will either invalidate or further support the initial findings of the underwriting process. This is also the time to tour comparable properties in the area to gain better insight as to what potential tenants seeking out the space may be looking for to ensure you will be able to deliver.
Formulate a Deal
If all of the boxes have been checked and it feels right to pursue the investment, the investor will now be able to propose an offer. This is typically done through the process of structuring a letter of intent to the seller. The buyer obviously wants to get the property for the lowest price, but also needs to be mindful that the bid is competitive enough to be taken seriously. Once the seller receives the letter of intent, negotiations between the buyer and the seller can ensue.
The Waiting Game
In the commercial real estate field, there’s a large probability that there is more than one investor with their eyes on the same property, particularly if it has been deemed to be a lucrative investment. This means that the seller has likely received multiple offers and is going through the same negotiation process with them as well. The seller will narrow their sights down to 3-5 top bidders in order to see who will drive up their offer. The process is only completed once the seller has decided to accept an offer.
The Closing Process
While the entire commercial real estate transaction process up until this point may have been long and arduous, the closing process will not necessarily be as slow. Most buyers are happy to get through the sale quickly. Legal counsel will be introduced at this stage and a purchase and sale agreement will be created along with the commencement of due diligence. In the end, the hope is that both parties walk away feeling satisfied with the agreement.
Need Help with a Commercial Real Estate Transaction?
If you’re looking to start investing in commercial real estate, now is as good a time as any. Don’t worry if the process is new to you! The team at SVN | Southgate Realty, LLC is here to walk you through your transaction from start to finish and answer any questions you may have. Take a look through our available properties today and reach out to one of our team members to get started!