Now that you've decided to invest in commercial real estate, make sure that your intended purchase is as golden as it seems and no hidden pitfalls lurk beneath its shiny exterior. An investment that looks lucrative can hide serious deficiencies that can make the difference between profit and financial disaster.
Before closing escrow, make sure you have an accurate understanding of the following seven critical factors:
Title—The condition of a property’s title is one of its most basic aspects. Title defects can prove disastrous for the value of real estate since an inability to deliver clear title makes a property unsellable. Always obtain and examine an up-to-date title report to be sure there are no unexpected title issues.
Survey—Boundary lines are another key characteristic of property that can seriously affect its valuation if a boundary dispute arises. While a visual inspection of the property can identify many issues, a professional survey provides certainty and peace of mind on boundary issues.
Building inspection—The beauty of a building can be deceptive: problems hidden to the naked eye can be serious—and costly to correct. A prudent investor has a commercial structure inspected by qualified experts to assure that it meets the investor’s requirements.
Zoning—Just because a property is currently being used in a certain way does not mean such use is allowed under the law. Always check the current zoning to be sure that your intended use of the property is not prohibited.
Financing—Most purchases of commercial real estate are financed, so it behooves the wise investor to find out as soon as possible whether the financing needed to purchase the property can be obtained based on the value of the property and the investor’s financials.
Environmental inspection—One of the most critical issues in evaluating commercial real estate is its environmental condition, especially given the liability risk posed by merely holding title to contaminated property. Leave no stone unturned in your investigation into this matter since there is no upside to owning brownfields.
Occupants—The value of a commercial property is frequently a function of the quality of its commercial tenants. Estoppel certificates (written statements regarding lease compliance given by the tenants) should be obtained from the tenants as early as possible to evaluate the financial strength of the property.
Completing a thorough investigation of all these factors helps a savvy real estate investor assure that a contemplated purchase will prove a wise purchase.