You’ve got your eye on a promising commercial property and want to move forward with the purchasing process. However, before you acquire any commercial real estate, you must do your due diligence to avoid any issues and ensure the investment pays off as planned.
To pinpoint potential problems and verify that the acquisition aligns with your goals, you’ll need to do your research. Here are some essential questions to ask before buying commercial real estate. Note: This is not an exhaustive list.
1. What’s the state of the local commercial real estate market?
Other properties and developments in the area could affect your property’s value, according to S&T Bank. Additionally, you should research the historical occupancy rate for the building in question to assess its probable future performance. For more information, please review our previous blog, “How to Do a Commercial Real Estate Market Analysis: 4 Key Factors to Consider.”
2. Who are the current tenants?
It’s common for commercial real estate on the market to already have tenants, according to Think Realty. Your broker should be able to obtain the rent roll and copies of any current leases so that you can review them before moving forward with an acquisition.
3. How is the property classified?
Different categories of commercial real estate have their own classification systems, according to the U.S. Chamber of Commerce. For example, office buildings can be Class A, B or C depending on the risk level, with Class A presenting the lowest risk.
4. What is the current condition of the building?
The Chamber of Commerce also recommends inquiring about the property’s level of wear and tear. You don’t want to purchase it only to discover it has serious issues like mold or asbestos. A thorough inspection is a must; for details, please see our previous blog entry, “Commercial Building Inspection Checklist: What a Comprehensive Assessment Should Include.”
5. Why is the property for sale?
Asking the owner why they’re selling the property is vital if you want to uncover potential issues and increase your negotiating power, according to S&T Bank. For instance, they might have decided to sell because of problems with the building or unfavorable market trends.
6. Can the seller provide a copy of the pro forma?
The pro forma will shed light on the expenses and income associated with the property, according to Think Realty. This will allow you to calculate the net operating income and your expected return on investment.
7. Is the title clear of outstanding liens and other complications?
If there are any problems with the title, you might not be able to obtain financing and could even face legal disputes and loss of ownership, according to S&T Bank. Subsequently, you must ensure the title confirms that the seller has the legal right to transfer ownership of the property and that there aren’t any outstanding liens or other factors that could interfere with the acquisition.
8. Does the zoning align with your intended use of the property?
Your broker can assist you in determining whether the zoning will support your plans for the property, according to Think Realty. Don’t count on rezoning or receiving a variance if there’s a misalignment.
9. What is the property’s assessed value?
Determining the assessed value will inform your negotiations with the seller and help you estimate future property tax liabilities, according to S&T Bank. It’s important to note that the assessed value might not match the market value, indicating the need for a comprehensive analysis.
10. Is the property in an area prone to natural disasters?
Commercial real estate in a location that’s likely to experience catastrophes like fires and floods could have higher ownership costs and be less attractive to prospective tenants, S&T Bank advises. You might also need additional insurance coverage for commercial properties in disaster-prone areas.
If you want expert assistance buying commercial real estate, the Avalon Realty Associates team runs a full-service brokerage system. We can handle every step of the acquisition, including needs assessments, market analysis, and contract and closing.
Get started by calling 847-506-1000 or emailing info@avalonreal.com. You can also view our current property listings and connect with our brokers via our Contact Us page.