The value of a commercial property for sale is determined by using some simple formulas that are based upon the amount of net operating income that the property produces each year. So when you are looking at a commercial property for sale, one of the first things that you’ll want to ask the broker for is the profit and loss statement.
Some brokers who have listed a commercial property for sale may refer to this profit and loss statement as an IPOD, or income property operating data sheet. Once you get the IPOD, or profit and loss statement, you can then compare the information provided by the broker or seller to your other sources to help determine what the real numbers are. The challenge when looking at any commercial property for sale is that the broker and/or owner will often tend to exaggerate the amount of income that the commercial property for sale produces while also trying to minimize the amount of operating expenses that are reported.
How to Determine the Value of a Property for Sale
The reason for this is simple. The value of any commercial real estate is based on the amount of net operating income the property creates each year. In fact, each additional dollar of annual income increases the value of the property by roughly ten dollars, depending on where the property is located, and how old it is. Note that this extra net income can come from either getting additional revenue in rents, or from reducing expenses by managing the property more efficiently.
Once you understand that owners of commercial real estate will tend to present unrealistic numbers in an attempt to get a higher price for their property you’ll understand better why it’s necessary when looking at any commercial property for sale to get to know the market you are investing in. When you know what the rental rates in an area tend to be or what the typical expense ratios are for a twenty-five year old apartment building then it’s much harder for the broker or owner of a commercial property for sale to attempt to pull the wool over your eyes.
Verifying the Income and Expenses
The first step in verifying the income of a commercial property for sale is to ask for the rent roll. The rent roll is a list of what each apartment, self storage unit, mobile home lot, or office space rents for. Make sure that you get the actual rent roll because the owner or broker of a commercial property for sale may try to give you a Pro-forma rent roll instead of the actual rent roll. Pro-forma means that there is an expectation, realistic or not, of getting higher rents than the property is currently getting. My response to this has always been, “If you raise the rents up to match the pro-forma, then we’ll use the higher income amounts, otherwise we’re going to base our valuation on what the property is currently producing in income.
When looking at the expenses from a commercial property for sale, remember that you’re trying to come up with the actual amount that it will cost you to operate the property rather than what the seller’s expenses have been. So while it’s helpful to know exactly what the seller’s costs have been, I’ve learned NOT to rely on the information provided by the seller when looking at a commercial property for sale because this information is almost always inaccurate.
A Simple Formula to Use for Expenses
The expenses will vary depending on the type and age of the commercial property for sale. For example, if you are looking at buying a Class C apartment building which is at least twenty-five years old, then the expenses will run between 45 to 50 percent of the collected income each month. The collected income, known as the Effective Gross Income, is what’s left after the cost of vacancies are subtracted from the total amount of rents on the rent roll from the commercial property for sale.
The final step in determining the value of a commercial property for sale is to divide the net operating income by the capitalization rate, which varies from about 6 to 12 percent depending on the type of property, the age, and the location of the commercial property for sale. The fastest way to get an idea of what capitalization rate you should be using when looking at a commercial property for sale is to ask another broker who is not involved in the transaction.
Using Escape Clauses to Limit Your Risk
Another way of protecting yourself when looking at any property for sale is to make sure that your purchase contract allows you a period of time to get out of the deal if you are not comfortable with anything that you find. Done properly, you can often tie up a property for 60 to 90 days so that you have time to accurately determine the real value. This makes it easier to look at commercial real estate, because you can get out if you have the right escape clauses.
Learn how to tie up any commercial property for sale for 90 days using a simple addendum when you get your Free Multiple Streams of Income Insider’s Guide at http://RealEstateInvestments.net/free-report
Peter Conti is a Wall St. Journal bestselling author who lives in Annapolis, MD with his wife, kids, and his dog, Snickers.
FORTUNE — Back in 2009, when there was no market for securitizations and credit was still mostly frozen, a group of experts including Paul Volcker called for a return to an old strategy as a way out of the financial crisis: Start up another Resolution Trust Corp.
The RTC was a government-backed asset manager that unwound and sold all the problematic loans — particularly real estate — from troubled savings and loans in the 1980s. More recently, Elizabeth Warren, who scrutinizes TARP, warned that the commercial real estate market needs a specific bailout of its own for its commercial mortgage-backed securities problems.
Yet even with big names behind these ideas and a big financial reform bill to stick them into, CMBS’s have largely been left out in the cold. So the market has had to muddle through with its own strategies — and while they haven’t been a perfect palliative, they’re not doing half bad.
Holders of commercial mortgage-backed securities — which are bundles of loans on hotels, office buildings, malls and apartment buildings — have found that unlike other asset classes, there are and were investors willing to buy and sell their holdings, essentially because they needed to, for returns or liquidity.
It hasn’t been neat — there are plenty of losses and will be plenty more. And the market is still working through old CMBS deals that are being marked down in value every day — mostly through modifications to keep zombie loans alive until the economic environment improves.
More loans will be liquidated, too. About 40% of the $32.3 billion in loans coming due in 2010, for instance, were five-year loans created in 2005 with high leverage, according to research from J.P. Morgan (JPM, Fortune 500). Yet very few delinquent loans have been liquidated in 2010, perhaps because the holders of those loans believe they won’t get as good a price by liquidating now. The worst loans were written in 2006 and 2007, and the predicted loss rate for those could be as high as 12% to 14% when they come due in 2011 and 2012.
CMBS: Not pretty, but not ugly
But a ragtag mélange of solutions created by free-market self-interest so far has prevented the widespread crash that many people expected. And those who have held on, waiting for better prices, have sometimes been rewarded. Life insurer The Hartford Financial Services Group (HIG,Fortune 500), for instance, sold $600 million of commercial mortgage loans in the first quarter of this year because, it said, market prices continued to improve.
Against this messy, ad-hoc backdrop, it seems odd to suggest that the CMBS market is doing well, but most investors agree that it’s better off than it might have been, and that the worst of the crisis passed last year.
CMBS’s were in a complete freeze in 2008 and early 2009. They weren’t saved solely by government programs or a concerted “save CMBS” movement. Instead, a game of financial hot potato accomplished the necessary work of turning up the right buyers at the right times. Again, the prices weren’t always right — at one point, the “super-senior,” highest-rated tranches were trading at a paltry 50 cents on the dollar — but they reflected what people were willing to pay and represented a market nonetheless. That’s better than RMBS, CDS and CDOs could ask for at the height of the financial crisis.
One reason the “free market” bit: government guarantees
The green signal that gave the go-ahead for investment activity was the government’s decision in March 2009 to open up TALF, the government’s toxic-asset buying plan, to CMBS. It soon followed by opening the PPIP plan to investors. Together, these two moves didn’t clean up many actual CMBS, but they did provide a go-ahead to many large institutional investors including hedge funds and money managers, who immediately started trading as much CMBS as they could. J.P. Morgan analyst Alan Todd calls this the “indiscriminate price discovery” phase of the CMBS recovery. We might call it “the market figuring it out for itself.”
The way CMBS investors worked out the market was a kind of compartmentalization. They drew sharp lines. Some investors maintained an interest in highly rated triple-A CMBS tranches, which were and are still considered mostly stable with relatively high yields of around 6%, higher than U.S. Treasury bonds. Others took an interest in the more speculative, more troubled “B-piece,” which carries with it lower ratings and greater chances of delinquency, but also provides the opportunity to push a loan into default and take control of the underlying real estate properties.
Each of the groups of buyers had its own motives: Insurers, for instance, normally like to own a lot of CMBS, because the insurers have long-term liabilities and look for long-term investments to match their policies. Hedge funds, which entered the market in a big way in 2006 and 2007 and are all but gone now, like to speculate. Money managers look for yield, and CMBS yields between 4% and 8% often beat Treasurys. Banks, similarly, either liked the relative stability of CMBS or got stuck holding the bag when they underwrote the loans and didn’t sell them off in time.
Each of those groups also took some pain. The banks, we’ve heard about: When the crisis hit in 2008, the nine largest banks held $121 billion in CMBS, and several, particularly Wachovia, took big write-downs as values fell. Life insurers suffered write-downs of hundreds of millions of dollars. Hartford Financial, for instance – which recently sold that $600 million of CMBS – simultaneously upped its loan-loss reserves by $264 million, mostly because of CMBS losses.
The CMBS market’s recovery, then, can be traced through the underlying shift in who was buying. Trying to judge who the real holders of CMBS are is challenging. Many values have dropped, which have caused banks and insurers to mark down the value of the holdings and therefore provide a skewed view of how much CMBS they might really own.
But market participants and analysts give some hints. The boom started in 2006, when life insurers, hedge funds and money managers bought 60% of all triple-A rated CMBS tranches. As demand grew, underwriting standards sharply fell as banks bundled more and more CMBS with less thought as to its quality.
In 2007 and 2008, hedge funds received margin calls and started selling, purging CMBS into the market. Life insurers and money managers, believing they could buy the CMBS cheap, snapped up some of the excess inventory. As the crisis deepened, those insurers and money managers ended up trying to sell to raise liquidity, but the only buyers at that point were those who were unwilling to use leverage, such as opportunity funds and macro funds, who drove hard bargains and drove prices as low as 50 cents on the dollar.
Hedge funds have now largely sold out, according to research from J.P. Morgan’s Todd. Of the highest-rated tranches, called “super-dupers,” or just “dupers,” money managers are the biggest holders, with 40% to 45% of the total, and insurers own another 20%. The rest is owned by proprietary desks, macro funds and broker-dealers, his research shows.
The new CMBS buyers
More recently this year, there has been another trend that has focused interest on legacy CMBS. Another group of buyers has stepped in: real estate investors looking to control the underlying properties by buying into the CMBS, helping to choose the “special servicer” that extends the loan, and influencing the way the loan modifications work.
The biggest play in the future might well be CMBS investors trying to get close to these special servicers. There are 18 of them, including LNR Partners — the largest, with $185 billion of exposure, according to Todd — CWCapital Asset Management, Midland and Centerline. The servicer business is also attracting big investors, including Cerberus Capital Management and Warren Buffett.
Once the special servicers take over a loan, they can sell the underlying property, usually at a fair market value that is much cheaper than appraisal value. “You’re not seeing money managers buying legacy CMBS; you’re seeing real estate industry experts buy so that they can have inputs on the workouts of all of these loans,” said Keith Mullen, head of the financial services industry group at law firm Winsted, and a founder of the commercial real estate blog toughtimesforlenders.com. Whatever the reason, the CMBS accidental, experimental, free-market, government-backed recovery, somehow continues.
If you’re thinking about purchasing office space, this guide will help you evaluate the pros and cons of leasing vs. buying, assemble a real estate search team, choose a location, and make the purchase.
Every few years, the real estate market suffers through a crash or a correction and underscores a perpetual dilemma for small and mid-sized businesses: Is it better to rent or own commercial property?
Buying commercial real estate is a complex undertaking that is difficult even for experts to time right to maximize their investment value, let alone entrepreneurs or business executives whose areas of expertise are in different industries. It’s also a venture rife with risk, as buyers, sellers, agents, and renters alike can suffer the consequences of a dip or spike in demand. At the same time, for a business, on the upside the potential rewards can be substantial.
Why should a business buy? “To get a greater control over the cost of the real estate component of overhead, as opposed to leasing, where you can be victimized by the market if the lease rolls over when the market is tight and, as a result, you have higher rental costs,” says William Martin, chair of the real estate group in the Denver office at Kutak Rock LLP, a law firm with 400 attorneys and offices around the country. “The other benefit would be investment benefits, including depreciation of the property for tax purposes and, over the longer term, asset appreciation.”
There is no one-size-fits-all strategy for purchasing commercial real estate. That decision must be weighed by each business. The following guide will help a small business assemble a real estate search team, choose a location, and purchase property.
Purchasing Commercial Real Estate: Deciding to Buy Versus Lease
When deciding whether to buy commercial real estate, it’s important to understand the potential risks. The last thing you want is to buy property and realize a year or two later that you would have been better off renting. Here are some of the potential risks a business faces when buying:
Location may backfire. Today’s “hot” neighborhood can become tomorrow’s “not” neighborhood. Locations are trendy. Gentrification may stall. The market may go bust. The area you choose one day may become undesirable the next. Of course, the reverse can be true, as well.Loss of liquidity. Businesses may tie up much of their liquidity buying real estate. It’s not always easy to sell real estate, particularly in a slump. At the same time, businesses that own real estate at least have something to sell if they need a cash influx to revive a lagging business.Tenuous cash flow. Tenants sometimes stop paying their rent. Other times, buildings are in need of unexpected — and expensive — repairs. Your cash flow can become compromised, especially if you are forced to simultaneously pay repairs and attorney fees to handle a tenant situation.
In order to be aware of risks, do your homework. Undertake extensive due diligence before signing any contract. You also need to be hands-on with your commercial property by overseeing every level of operation and making frequent on-site visits — otherwise, you may learn about problems after it’s too late to do anything to fix them.
The decision ultimately comes down to the economics. You may want to have a real estate expert help you undertake a rent versus own analysis, taking into account growth forecasts for your business and real estate market trends. “It’s really beneficial to sit down with an expert that can lay out options for you and discuss scenarios, such as in three years this is where business will be in terms of revenue, size, or people. This is how many locations we will have. This is what our space needs will be,” says Hessam Nadji, managing director ofMarcus & Millichap, a national brokerage focused on real estate investment. A real estate expert can also help you figure out the costs of renting versus buying, factoring tax benefits such as depreciation.
Purchasing Commercial Real Estate: Assembling a Team of Experts
As a small business owner, you’re most likely not a commercial real estate expert. That’s why it’s important to surround yourself with the right team of experts. They can help you determine the right time to buy or sell, the right locations to consider, and the nuts and bolts of closing the deal. Here are some of the experts you may consider contacting:
Accountant. An accountant can help you figure out what your business can afford and analyze the tax and operating budget benefits.Lawyer. A lawyer can help you complete the transaction, negotiating with the seller and lender on your behalf.Commercial broker. A real estate broker can help you identify potential properties and what you can afford.Mortgage broker. A lender or mortgage broker will help you sort through financing options, from bank loans to those guaranteed by the U.S. Small Business Administration, such as the Certified Development Company (CDC) 504 Program, used to finance primarily real estate or equipment.
Purchasing Commercial Real Estate: Identify the Right Property
There are a number of factors to consider when looking for suitable commercial real estate to purchase. The old adage “location, location, location” is true for commercial properties just as much as it is for residential. But there are other issues at play, as well. Here are some things to consider:
Location. This is still the No. 1 issue. You want to be close to your customers, your workers, and your vendors or suppliers. “You want to be convenient to customers to the extent that you have a business where the customer comes to you,” Martin says. “But depending on the type of business, access to rail and highway and shipping lanes may be important, too.”Physical condition. After identifying the general location, consider how the property was used, the wear-and-tear, whether there are any environmental issues or potential liability issues, such as asbestos or lead paint.Allowable uses. If your business is an accounting firm, you likely need commercial office space. If you are a manufacturer, you need an industrial space. Either way, you need to make sure the zoning allows you to do what you need to do on the property.Limitations on exterior and interior. Whether due to zoning laws or building codes or covenants, there may be limits to changes or alterations you can make to the property. A good example is a building that is in an historic area and subject to restrictions on changes that can be made to the façade.Adequacy of access and parking. You need to make sure your customers can park and take into consideration whether access is compliant with laws such as the Americans With Disabilities Act.Opportunity for expansion or leasing. Entrepreneurs often have a rosy outlook about growth and so the potential to expand is a consideration as is the flipside – if you don’t grow as much as planned, can you lease out extra space?
Purchasing Commercial Real Estate: Do Due Diligence and Evaluate the Property
After you locate the right property, you go to contract and commence a one- or two-month period during which you need to do your homework. Now is the time to revisit your objectives, and ask yourself if the property you have identified helps you meet or further your stated objectives.
Beyond that, this is where your team of trusted advisors plays an important role. A broker will often help bring in third parties — engineers, appraisers, environmental analysts — to help verify the condition of the property, its prior use, and any potential liability issues, whether structural soundness or necessary upgrades of electrical wiring. You should also be involved to make sure that there isn’t any potential for changes in adjacent properties that could negatively impact your business or property value, such as development, road or infrastructure construction, etc. A title company can also make sure there are no prior or existing litigation and/or insurance claims affecting the property.
If you find any problems, you may have the opportunity to renegotiate with the seller or sometimes to walk away from the deal.
Purchasing Commercial Real Estate: Taking the Plunge and Making the Purchase
Once you’ve found the right property and worked with the owner on the right price, the next big step is to secure financing and come up with the right mix of how much cash you’re putting down and how much you need to finance, Nadji says.
During good economic times, there are a host of attractive financing options available to small and mid-sized businesses. After the global economic meltdown, starting in 2008, banks tightened up credit and limited many of these options. In order to get a loan during a tough economy, it’s doubly important to make sure your business has sufficient cash reserves, has a good credit rating, and is profitable.
Your attorney and accountant play key roles here to ensure contracts are sufficiently detailed, and structured to your maximum advantage. You need to envision every possible contingency, and make sure it is covered — clearly and unambiguously — in the contract. Everything from air rights and other zoning laws to the nuances of existing tenant leases and tax requirements must be understood here. You also need to verify — and re-verify — the financial terms associated with this purchase, to confirm you are ready to pull the trigger.
At this step, you should also update or add to your original business plan, to cover the specifics of this acquisition; this is when your plan comes to life. Once the purchase takes place, it is imperative that you implement and execute on the plan without procrastination. The cliché “time is money” is never truer than when you are building or renovating a commercial real estate property.
Before buying commercial real estate, it’s important to make sure that buying is right for your business for the long-term. “The most important thing is to think carefully about what could happen in the first 12 to 24 months after buying a building that would make you look back and say, ‘I made a mistake,'” says Nadji. “If you’re very aggressive with revenue growth projections or overshoot how much space you need to occupy or buy and then the business doesn’t grow fast enough into that, you may have a problem.”
It is so easy to forget what really happened to cause the financial Crisis situation we are living in today. Sometimes a good reminder as well as a ‘visual’ helps…especially with regard to explanation we give our kids. Leaving our kids unaware of the facts is NOT using it all as a powerful learning experience, which is exactly what it is and should be.
“I wanted to be in a band that gave bang for the buck. I wanted to be in the band who didn’t look like a bunch of guys who, you know, should be in a library studying for their finals.” – Gene Simmons
I just got done reading the book “Sex, Money. Kiss” by Gene Simmons, yes from the band Kiss. He is a very, very successful entrepreneur and a dynamite pitchman. I was very impressed with his thinking as it came to making money and business. Here are some of the points he made.
You should love what you do so much that you don’t have to take a vacation. He says that he has never taken a vacation.
You always have to be selling and promoting. When talking about rock stars who don’t like to promote their new albums he said, and I’m paraphrasing, “If they don’t want to promote their albums, they’ll soon be saying ‘Would you like fries with that.’
You need to dream huge dreams and then work to fulfill them.
Don’t wait for inspiration, get your butt off the couch and go to work. People who say they need to wait for inspiration are just lazy.
Be a professional and only work with professionals. No losers allowed.
Be bold, straight-forward and tell people exactly what you want.
Only people who don’t have money say that money is not important. Now, I’m going to tell you another thing he said, that might offend you, especially if you don’t live in the United States but, I was so glad that he said it and I’m going to paraphrase it now:
“No matter what country you live in, it pales in comparison to America.”
Why am I glad he said it? Because it’s nice to have a celebrity, who made their fortune from living in this country and because of the freedom we enjoy, say something nice about her and stand up for her.
You might not agree with what he says but you do have to respect him for saying it. Hopefully you feel the same way about your country.
By the way, you should get your hands on Gene’s “Sex Money Kiss”. Even though I do not agree with everything that he says it is a great book for the entrepreneur. I recommend it big time.
Would you like more “NO B.S.” apartment and commercial real estate information like this? Visit my site and get my FREE NO MONEY DOWN REPORT & TELESEMINAR “How to Buy Apartments and Commercial Real Estate With No Or Low Money Down.” Find out what it takes to truly succeed in Commercial Real Estate http://www.MyPlatinumClub.com/wealthy-investors
Home Staging is vital for presenting to your potential sellers. Remember that everything is a feeling and when your potential buyers are walking into a home you want them to get a good feeling. The Fireplace is representative of a feel good center piece and should not be ignored when decorating and setting the stage for a quick sale. Frank Clarke explains how to get maximum value for your house.
The first step is clearly defining what type of property you want to purchase and how you want to use it. The following information will help you maximize your investment dollars to get the best possible deal when purchasing your property.
2. Build Equity With Your Investment
Equity is Money
Building equity is the primary if not the ultimate reason to buy instead of rent a commercial property. Let’s face it. It’s money in the bank. In fact, it’s better than money in the bank because you can’t get the same kind of return on your money when it’s sitting in the bank as opposed to when you’re building equity. Moreover, if you choose the right financing for your commercial real estate purchase, you can not only build equity through ownership, but you can also leverage your capital saving in order to grow your business, hire additional employees, or even purchase an additional location when the time comes.
Owning beats renting because you can sell your investment once you outgrow the space or sell the business. Even if commercial property in your area has not appreciated (which is unlikely), you can recoup your investment by renting out the space once you move out and by selling when the time is right.
If you plan on growing into your building, buy something larger than your current needs, and rent out the extra space until you need it for expansion. This will provide you with steady income that you can use to help pay your mortgage or invest in your business.
3. Calculate Your Savings And Your Potential Profit
Lower Monthly Payments
Consider buying commercial real estate as a savings for your business. Real estate costs are the third largest business expense, behind payroll and taxes. Long loan amortizations mean that your monthly payments could wind up being less than what you would pay for rent, since landlords usually charge more than their monthly loan payment. In other words, owning your own commercial property may actually be more affordable, depending on current market conditions.
Ask your lender to provide you with an analysis of the current market in your area so that you can see which scenario is best for you (renting or buying). The lender should be able to explain your options in detail with examples of monthly rental costs vs. monthly loan payments and the benefits of each.
Analyze the Rent Value
Upon finding a property that peaks your interest, find out the status of the current tenants (if it is a multi-tenant property) in terms of how much rent they are paying. Check the current market to see if the rents are undervalued, meaning below what you can get in the current market. Your realtor or lender should be able to help you figure out how much you could charge for rent and determine how much of a profit you can make each month.
Tax Advantages
There are many tax advantages to becoming an owner of a commercial property. In most cases, you can deduct part of the value of the building at tax time, as well as improvements you’ve made as depreciation, which can save you more money on your taxes. Buying the property under your business or corporation’s name is also a better tax strategy than under your personal name.
4. Do Your Research
The more you can learn about property types and options, mortgages, financing, zoning and remodeling; the better position you’ll be in to make wise decisions concerning the acquisition of a commercial property.
However, you don’t have to know everything. That’s where putting together a powerful team of professionals proficient in their areas of expertise may be your most important step. Building a team of advisors – people you can trust to steer you in the right direction is critical to your success.
Understand Current Market Conditions
Keep your eyes open for news articles pertaining to the commercial real estate market. Is it “hot” right now? Is it a buyers’ or sellers’ market? What kinds of interest rates are available?
The Internet is a great place to start. Conducting a Google search for “commercial real estate market,” for instance, will give you results that include news and resources for national trends, analytics and market research.
In addition, many realtors, lenders and lawyers across the country offer free and timely articles on their websites that shed light on current commercial real estate trends nationwide. Again, make sure you listen to both sides of the story.
Tap Expert Resources
National market research companies can give you specific information about the area where you’re preparing to locate your business. You can also find information on demographics including the median age, household income, breakdown of ethnicities, and more from censuses available from the U.S. Census Bureau.
Also contact commercial lenders or realtors for additional resources. In looking for help, it’s usually better to talk to a lender or realtor with nationwide experience and up-to-date information than a small-time operation that might not have recent data for you. If the lender/realtor hasn’t gotten updated demographics since 1996, you’ve essentially wasted your time. Also, a lender or realtor that specializes in the type of property you’re looking for will be more likely to have the specific information you need, which will save you time in research.
Study the Current Vacancy Rate
Research what the vacancy rate has been over the past few years for the area you’re taking into consideration. If there seem to be high levels of vacancies, try to find why. Is it a bad neighborhood? Talk to store owners in the immediate area and find out how long they’ve been doing business there. Ask if they have any concerns that you as a potential property owner should know about the area.
Research Commercial Realtors
It’s important to research commercial realtors that specialize in the type of space you’re looking for. Grill the realtor you are considering selecting on the entire purchase process so you know what to expect. Ask how long the process usually takes so that there are no surprises. Check their references and their track record (more on finding a Commercial Realtor in #5).
Examine Experienced Commercial Lenders
Choosing a lender and financing program is just as important as choosing the property. Again, find out the entire process of financing, as well as your different options. Don’t assume that just because you’ve had a relationship with your bank for years that using their financing is the best choice.
Banks don’t always offer the lowest rate for commercial loans, and sometimes have a far longer turnaround than non-bank lenders. Some banks require that you transfer your accounts to them in order to qualify for a loan. Be aware of any stipulations when seeking a bank for a commercial loan.
5. Choose the Right Commercial Realtor
As mentioned before, you need qualified partners to help you with the process of buying commercial property. Start with a terrific commercial realtor.
Some commercial realtors work exclusively with individuals interested in investment properties. Others work with owners/users of commercial real estate, and among those some specialize in property management, which can be an added value to you.
Who Do You Know?
Referrals from trusted sources are usually the best way to find a good commercial realtor.
Ask Questions
Set up a meeting with more than one potential commercial realtor. Find out as much as you can about their professional background, education, and experience with your type of property. You can ask for a list of recent transactions to give you an idea of what they deal with on a regular basis, and how many properties they’ve actually sold in the last year or two. And most importantly, ask for client references (testimonials)! Real client feedback is the most effective measure for potential success.
The Right Match
Make sure you choose a realtor that understands your specific needs. If you are a small business, you don’t want to work with a realtor that normally handles multi-million dollar deals. Your project may become less of a priority when that particular realtor gets a bigger commission to worry about.
6. Consider Your Time Frame
If the reason you are looking for commercial property is because your lease is ending, think twice before jumping into a decision you might regret. Finding just the right space, securing financing and going through the process of obtaining a commercial property can take months. If you don’t have that kind of time, you may need to rent month-to-month for now.
Take Your Time
While you may be in a hurry to move into a space, take your time. Buying any kind of property is a major decision, and buying commercial property is even more important for the development and growth of your business. Selecting a property in the wrong area, or a space that doesn’t allow you to grow can hinder your company and even cause it to fail, so plan carefully.
If the realtor or lender gives you an estimate of three months from start to close, plan for longer – just in case. Keep in mind there are many people involved in the process of buying property, from the seller, realtor, lender, appraiser, surveyor, paperwork approvers, secretaries, and more and this process can often take slightly longer.
7. Location, Location, Location
One of the most important factors in considering commercial property is location. If a property is located on a busy corner that is difficult to get to, your business may not do well (in fact, that’s probably why the property is for sale). If you want to operate a dog kennel and the property you’re considering is in a residential area, not only will your business disturb the residents, the zoning laws may prevent you from operating there.
Foot Traffic
For a retail business, look for areas with high foot traffic that will give you the exposure and increased walk-ins you need to be successful.
If you are looking for an industrial or manufacturing facility, then you can stay out of the retail limelight and buy something in a warehouse district. These areas are usually cheaper than retail space.
Easy Access
Make sure your location has easy access from the road. Look to see if the site is at a difficult intersection. Is there construction going on that seems like it won’t be ending any time soon? On the other hand, what’s the potential once the construction is completed?
Check out the Competition
If you want to open a bistro in a neighborhood that has several bistros, you might want to try somewhere else with less competition. However, a healthy population of restaurants usually means a healthy population of customers.
Know Your Customer
Find out the demographics of the area you’re interested in. If you want to move your sports apparel shop to a new location, you’ll probably want an area with a high percentage of youth and active adults. An urban area with a lot of pedestrian traffic might be better for this kind of retail shop than a suburban area in a retirement community.
8. Free Parking
We’ve all spent time driving around and around looking for a parking spot. It can be very frustrating, especially when you’re running late. Whenever possible, you want a location that has ample parking for your visitors.
If you have a retail store, restaurant, or other high-traffic business, estimate how many customers or visitors you’re likely to have at any given time and consider rejecting any properties that have fewer available parking spaces than your estimates. Again, use your best judgment and consult your realtor.
Avoid Headaches
Also pay attention to how your parking is situated. If it’s located just off a major road, it may provide a headache for people trying to back out of the parking space, and may even cause accidents. When visiting the property, see how well you can maneuver the parking. If it’s a hassle for you, it will be doubly so for a potential customer or visitor.
9. Get in the Zone
Before you begin the negotiation process for a commercial property, make sure to investigate the zoning laws, as well as what types of businesses you are able operate there. There are zoning laws about the type of business that can be conducted in certain spaces.
For instance, some spaces do not permit food and beverage to be served, or may have restrictions on how late a business can operate. The typical zoning districts in most cities include: residential, commercial, industrial and mixed-use.
Don’t Assume
Zoning can be tricky, so do your due diligence on this topic. Don’t assume that just because the previous tenant of the space had a restaurant that the property you’re looking at is necessarily zoned for food and beverage. Many businesses slide under the radar for months or years while violating zoning laws. Making assumptions can cost you big time and big money when it comes to zoning.
Regulations
Zoning laws can regulate not only the type of business that can operate, but also parking, signs, water and air quality, waste management, noise, appearance of building and more. Find out any and all regulations regarding the property in advance.
Visit your local library or zoning office to get information on all the zoning laws, rules and regulations that apply to the property you’re considering for purchase. Talk to people at the zoning office if you have concerns or questions prior to making the investment. Ask your realtor to double-check your efforts to ensure you’ve covered all your bases.
10. Inspection
Normally, if you are considering buying a home, you have an inspector look at the structure, pipes, electrical system, etc. A commercial property requires even more of a stringent inspection, not only to meet your needs, but also the requirements of the local government.
Before purchasing commercial property, hire professionals to thoroughly examine the electrical system, including the sprinkler and security system, as well as the plumbing, phone, and Internet systems. Since you will have already done your homework on zoning and regulations, you will be aware of the building codes. With the results from your various inspections you can get an estimate of how much work, if any, will need to be invested in order to get the building “up to code.”
A Good Foundation
Hire an architect or engineer to examine the foundation and structure, especially if you have frequent natural disasters such as earthquakes or hurricanes in your area of the country.
Communication
If you are looking at an older building, there may be quite an investment up front to either meet city standards or meet your own standards. Don’t overlook the importance of a high-tech phone and Internet system, especially if you have a lot of employees. If there is not already a T1 or fiber optic network in place, build this cost into your purchase, as it will save you money and headaches in the long term over more traditional (and older) phone and Internet systems.
Make sure to hire an expert to tell you if the changes you need are possible and within your budget. With most commercial real estate loans, you can include these remodeling costs in your financing. Again, make sure to ask.
11. Map Out Your Plan
As a business owner, you understand the importance of carefully planning every move. Buying a property requires no less preparation. Before you begin looking for a building, sit down with your finances and figure out how much of a mortgage you can afford to take on.
Create a Budget
When calculating your budget for buying property, don’t leave out taxes, insurance premiums, and repair and maintenance, as well as costs involved in customizing the space to meet your needs. Failing to create a budget for these often overlooked expenses will quickly put you in the hole with your new property. If you need help creating this budget, ask your realtor or your commercial lender for advice.
Room to Grow
To determine the amount of mortgage you can afford, assess your income and expenses. Your mortgage and property expenses should leave you enough room to operate your business without cutting into your normal expenses.
Sometimes it is necessary to take a cut in profit in order to purchase the kind of space you need to grow. Think of it this way: buying a larger space will allow your company to stretch its wings, which will result in more profits down the road. It’s a risk you sometimes need to be willing to take if you want to grow. Remember, if you buy more space than your company needs immediately, you can acquire tenants who will provide rental income that can significantly offset your monthly mortgage obligation.
Planning Ahead
It’s almost always a good idea to buy slightly more room than you currently need. You can lease out the additional space until you need it. If this is your plan, map out how this will bring in income to help subsidize your mortgage. Remember, however, that you may have periods when some of the space is unoccupied, so don’t rely on the rent coming in to cover your mortgage every time. Make sure you can cover the mortgage on your own.
Have an Exit Strategy
So, how does it all end? Hopefully with big dollar signs. After all, that’s why you’re investing, isn’t it? To eventually cash in on your investment. Therefore, you need to have an exit strategy.
You might choose to hold onto your commercial property through retirement, as real estate is a great asset that can provide you with a steady passive income stream: a lucrative retirement strategy.
12. Before You Sign on the Dotted Line
Having a carefully drafted contract is key in your commercial real estate deal. You are required by law to have a written sales contract, and it is to your advantage to have one with each detail of the transaction documented.
Also, make sure to leave ample time for due diligence and closing, especially if any construction is involved!
Details
Despite the stories of real estate contracts being thicker than phone books, all you really need is a contract that lays out the important elements of your agreements. First, it needs to describe the property and the purchase price, as well as whether the price is due at closing or in installments.
Equipment, etc.
The contract should include any equipment, machinery, or personal property that is included in the purchase price. It should list any contingencies that must be met prior to completing the purchase. A common example of a contingency is whether you are able to obtain a loan to finance the purchase.
Don’t Forget…
The contract should cover how the property taxes and utility bills will be pro-rated between you and the seller, as well as what type of title insurance you must provide. The date for closing and delivery of possession should be in the document, as well as what legal recourse either the buyer or seller has in the event that the other party defaults on the agreement.
And Always…
Once the contract has been drafted, have a lawyer review it prior to signing it. A lawyer may be able to help you negotiate a better deal than what is originally presented.
Unfortunately, not all property sellers are honest, and some will try to hide their true purpose in technical legalese within a contract. Having a trusted lawyer and commercial realtor review your contract will keep you safe in your transaction.
13. Choose a Lender with Care
There are many types of lenders available to assist you with your commercial real estate financing. But keep in mind: not all are created equal. Do your homework in finding a lender that meets your specific needs.
It’s important to find a firm that can give you broad access to capital, understand your priorities, offer you the best deal on your loan and complete the process in a timely manner.
Types of Lenders
There are three basic categories of lenders: direct lenders, indirect lenders and hybrid lenders. Direct lenders lend their own funds. Some examples of direct lenders include commercial real estate lending institutions, banks, and private lenders. Indirect lenders place funds on behalf of others, and include mortgage brokers and mortgage bankers, as well as financial intermediaries. Hybrid lenders both lend their own funds and lend on behalf of others, and include certain investment banks, investment advisors and credit companies.
Banks usually generalize in services, and offer a wide array of products. While this may sound good, think about it for a moment. Would you rather have a lender that knows a little about many financing options, or a lot about three or four products designed specifically for you?
Lending institutions are more specific in nature, and are experts in the products they offer. Banks are more traditional in their financing products, while lending institutions are more entrepreneurial and creative.
Banks often require that you move all of your financial relationships under their umbrella, including deposits, LOCs, etc., while non-bank lenders only work with your real estate loan.
The U.S. Small Business Administration (SBA) is a great resource for small companies looking to expand their business or purchase real estate for commercial use. The SBA offers tools that can help you plan your next move, as well as loan programs for a variety of business purposes. The SBA itself does not offer loans, but works through banks and non-bank lenders to provide small businesses with loan programs that meet their needs.
Get Started Early
It is important to choose your lender early in the process so that you can maximize leverage and get a lower cost of funds. Your lender will ask for certain forms in order to determine your eligibility for financing, as well as to figure out what kind of deal you can negotiate.
You will need to provide your income and expense statement, balance sheet and personal financial statements from all prospective owners of the property. If you don’t have them written already, you will need to create profiles of the management team, including information on education and employment background, as well as experience relevant to your business. Other documents needed include a property appraisal, contract of sale, and plans for the use of the property. Providing these documents early can help streamline the process. Again, your realtor and lender will help you through the process.
14. Know Your Financing Options
While you are in the “shopping” phase of looking for a commercial property to purchase, you should begin to research your financing options. There are many kinds of commercial financing options available, so it is important that you find the one that best suits your needs. It’s also very important to know how much you’re qualified to borrow. This will help you and your real estate broker find the right type of property for you faster.
No matter what type of loan you wind up getting, negotiating the loan will be based on the same basic factors: anticipated use of the property, expected returns from the property or business conducted there, geography, type and size of real estate, perceived risk to lender and market conditions. There is no one rate applicable to all commercial financing. The rate you receive will be based on your specific situation.
If interest rates are low, securing a low fixed rate will mean you pay less interest over the entire mortgage. A variable rate, which is considered by some to be more risky, can give you a lower payment for a period (before it increases), which will let you use the money saved for other investments.
In weighing your financing choices, remember that some debt is good. Don’t assume you should take the loan with the highest down payment requirement so you can “pay off your debt faster”. Putting down more money means you have less to invest in your business.
Term Loans
Based on how much money you need to borrow, there are different financing options available. One option is a term loan. Term loans can be used for a variety of purposes, including financing permanent working capital, new equipment, refinancing, expansion, acquisitions and, of course, buildings.
There are loans specifically designed for commercial real estate or equipment. Banks typically lend up to 80% of the value of the real estate to be financed, and the loans must be repaid in 15 to 20 years. If you are able to come up with the remaining 20% on the cost of the property (and don’t have anywhere better to invest the money), this is an option to consider.
Up Up and Away
Beware of balloon payments. While paying a very low monthly amount at the start sounds great, you often end up spending additional money to refinance your commercial mortgage as lenders reset interest rates or reexamine you and your business over the life of the loan.
Credit Line
If you want a more flexible loan, you may have the option of a credit line that can provide you with cash on an as-needed basis, up to a cap amount. Credit lines almost always have a variable rate, and have interest-only payments for the first one to three years.
Equity Financing/Joint Ventures
Equity financing involves joint ventures with investors that have the capital you need. Usually, the investor will receive a percentage of your business’ profit in exchange for the capital you need to purchase the building or stock in the company if it is public.
Some investors will take a back seat to your executive decisions, while others will want a say in the operation of your company. Joint ventures are not for everyone, so keep in mind all of these factors when considering one.
The SBA 7(a) Loan Program
The SBA has a variety of financing products that are ideal for small businesses. The most commonly used SBA loan is the 7(a) Loan Program. The loan is provided through banks or non-bank lending institutions.
In order to be eligible for a 7(a) loan, your business must be for profit, and you cannot purchase real estate for investment purposes. There are many other guidelines to qualify for a 7(a) loan. The maximum amount a business can borrow from a 7(a) loan is $2 million. Furthermore, all SBA 7(a) loans have prime-based floating interest rates. This type of interest rate structure can leave you vulnerable to monthly/quarterly interest rate swings that can have a significant impact on your monthly mortgage payment.
Now you can see why it is so important to find a commercial lender who can help you digest all of this information and take the time to explain your options.
15. The Best Kept Financing Secret
One of the main reasons small businesses choose to rent instead of purchase their own commercial real estate property is the perception that they can’t afford the down payment. Many of them are not aware that SBA-guaranteed loans are available to qualifying applicants and can provide up to 90 percent loan to cost financing.
In fact, the 504 loan program was designed to assist small businesses in building or purchasing properties while spurring business growth in the local economy.
Only 10% Down
While in some parts of the country, use of the 504 loan program is widespread, there are other areas, such as those east of the Rocky Mountains, where this program isn’t getting the attention it deserves. If you are unable to put down much of the loan cost, the 504 is worth looking at: it only requires 10% – and there are no closing costs in addition to the 10% down! (Please note that there are certain basic criteria you will need to have to qualify for the 10% down program. A good lender work with you to do his or her best to help you qualify for this benefit.)
The other 90% of the financing comes from two places: up to 50% of the total cost (land, building, renovations, and soft costs) is paid for by a senior lien from a private-sector lender, and up to 40% comes from a junior lien from a Certified Development Company (this portion is backed by a 100 percent SBA-guaranteed debenture).
Smaller Payments
Since most banks and loan programs require a minimum of 20-30% of the property cost, and do not fold in soft costs and closing fees, 504 loans are a great way to get the best of everything: by paying only 10% down, you retain more capital and are able to make smaller payments over the life of your mortgage.
Because you have two separate loans with the 504, you end up getting a blended rate that is below market. The first loan is either fixed or variable, and is at or slightly higher than conventional financing rates. The second mortgage (the 40% loan) is considerably lower than market interest rates, and is fixed for the life of the loan. Having a lower interest rate lets your company retain more capital.
504 loans can close in 30 days or less, saving you time, and helping you get into your new property sooner. Another advantage is that there are usually fewer “hoops” to jump through to get approved, as long as you are dealing with a lender who specializes in this type of loan as opposed to one who might process one or two a year. The specialist knows this loan inside and out and can streamline the process, as well as make sure you are receiving all the benefits.
Chris Hurn is President, CEO and Cofounder of Mercantile Capital Corporation (MCC), a specialized, nationwide commercial mortgage lender based in Central Florida that provides 90% loan-to-cost financing with up to 25-year, fully amortizing terms and long-term, below-market, fixed interest rates.
How to Make Money Fast in Real Estate
By Alex Nghiem
Most rookies looking to make money fast in the market of real estate are always eager to know the secrets that the veterans in the business posses. The real thing is that there are no true secrets about real estate. There are just some simple ideas that must be taken in mind in order to truly success.
First of all, the best way to make fast money in real estate is by flipping houses. When you are going to flip houses you always want to minimize the risk. Since you are going to be investing in some business, you must take account of all the numbers involved in the process. This includes how much does the estate cost right now and how much more value can you take away from it. This is the way to portray how successful each investment would be.
Patience is a virtue when talking about real estate investments. Since it may take a fair amount of time in finding the right property you are most likely going to have to spend some spare time doing it. The more you involve yourself into the business the more likely you’ll earn your bundle of cash soon. However, acting fast and without thinking has been the downfall of many first-timers in this market. Take your time and dedicate a lot of thought into your business.
Whenever you find a good deal though, you must act quick. However you are going to need a whole lot of previous experience to do this, since it is hard to recognize one when you haven’t been through the process at least once. For first time investors, the best advice is to choose carefully when you are going to buy, since real estate businessmen make their money by buying.
Besides being patient, a good investor in real estate also knows how to be persistent. Whenever you approach the business with these two qualities in mind, you are sure going to succeed. Since you are going to scan a whole lot of houses on sale, you must not surrender on the first few. There will be at least one that will skyrocket your profits when you decide to take the chance. As said before, the only qualities that are needed to become a wealthy real estate investor is persistence with patience.
Imagine yourself walking away from some good investment opportunities just because you gave up on the first try. Or, maybe you just became impatient. All smart investors in the area know that they should always let the door open for some delayed offers. Real estate demands these types of qualities, mainly just like any other business. Since you are dealing with clients directly you should always have business cards handed out and phone calls made to keep track of your business.
These are about all the advices you need in order to become a triumphant investor in the market of real estate. If you are up towards making serious money in this business, you are going to keep all these ideas in mind to fully succeed.
Learn More About Real Estate Wholesaling Download the FREE Wholesale Manifesto Now: Click Here
Alex Nghiem is the co-founder of several Real Estate investment websites and is a well respected coach. His latest project is the just complted Wholesale Manifesto. Learn All about – Real Estate Wholesaling Here.
Professional Home Staging Increases Traffic To Your ListingsWhile traffic on the freeway is literally a pain in the rear, traffic through your listings is absolutely crucial to your selling success. So how do you drive traffic to your listings and get prospective buyers walking through the door?
You start by making the best of your online presentation. These days approximately 90% of buyers start their home search online. And you have only a few short seconds to pique their interest or your chance to sell to them will pass with the simple click of their mouse.
Outdated house-CLICK and on to the next listing!
Confusing house-CLICK and on to the next listing!
Cluttered house-CLICK and on to the next listing!
In order to avoid the “click” and make a potential buyer’s “must see” list, you need to make sure your listings look terrific in both MLS photos and virtual tours. What is the best way to ensure your listings look as good as possible online so they will drive traffic to your listings?
Professional Home Staging will be crucial to your selling success.
Effective home staging will address issues like flow, function, space, clutter, cleanliness, style, odor and animal issues, and curb appeal. It will also ensure your property appeals to the broadest range of buyers and that its best features are clearly highlighted while minimizing any challenges.
Real estate selling is one time when traffic is a very good thing. The more traffic, the more likely the listing will sell, and sell quickly. It’s like the line from the movie Field of Dreams, “Build it and they will come.” When you are selling it’s, Stage it and they will come – and they will buy!
Mary Fasnacht of Feels Like Home Interiors provides home staging and interior redesign services. She helps home sellers in Washington County, PA and the surrounding Pittsburgh, PA area prepare their homes to make the best possible impression in today’s challenging market helping them to be successful sellers. Please visit her website at http://www.feelslikehomeinteriors.com to find out more about how she can make a difference for your home or listings.
If you have missed a payment on your home or the writing is on the wall that you will not be able to make future payments, now is the time to take action. The decisions that you make in the next 30 days will have lasting effects, either positive or negative on your future financial well being.
One of the first things that you are going to need to determine is whether or not you want to stay in your home. If you are looking to stay you are going to have to determine whether some version of a loan modification is right for you.
A loan modification is where the bank agrees to change the terms of repayment to accommodate your current financial means. This may mean changing your interest rate, adding some of your past due balance to the back end of your loan or increasing the length of your loan to make a more affordable payment. In some states, it may also be accompanied by a reduction in the principal balance on your loan. As with anything, the bank has to see that you will have the capacity for repayment of this loan, and you will have to qualify.
If you believe that your financial situation is going to be ongoing and that you will not be able to afford the home even with better terms or if you are just wanting to sell, then your best option may be a short sale.
A Short Sale occurs when a bank agrees to allow you to sell your home and give them the proceeds even though the amount you give them is less than the total debt owed. That is where the term “Short Sale” comes from, because the sale amount comes up short of the amount needed to pay off the bank in full. So, you have to get the bank to ‘ok’ the amount that the house is being sold for.
To get started doing a Short Sale the first thing you are going to need is … An offer to buy your home. Fortunately for you, after 6 years and now going on almost 300 homes, we are in the business of buying homes and would probably be interested in yours. We can get you the offer you need to get the Short Sale process started. Once we provide the offer to purchase your home the bank will want us to make a strong case to them that you can no longer afford to stay and make payments. Many of these banks were given money by investors to fund your loans. These investors are now going to be taking a sizable loss and want some assurances that this is the best option for repayment of their capital.
To prove your ongoing hardship, the bank requires you to provide them with updated financial information that shows your current situation. Remember, that the only information that the bank has from you is what you gave them when you applied for the loan. In their mind, that reflects your situation. Many times there has been a loss of a job, illness, death, drop in value, etc. that is not reflected in your old financial information. So here is what they will want to see:
1.) Federal Tax Returns – Last 2 years (Generally only the front 2 pages)
2.) Pay stubs or equivalent documentation – last 2 pay periods
3.) Bank Statements – Last 2 months
4.) Mortgage Statement – This applies to any and all mortgages and or HELOC’s (Home Equity Lines of Credit), make sure it has a loan number on the statement.
5.) Hardship Letter – Letter of explanation to the bank as to why you got behind, why you cannot afford to make any further payments or catch up.
(examples of reasons would be: adjustable rate mortgage went up, illness, death in family, divorce, lost job, ect)
Also, in great detail in the letter, explain everything you know wrong with the house (roof leaks, plumbing problems, foundation, mold, carpet and paint, furnace, etc)
6.) Abstract for the property and any closing documents from when you purchased the home.
7.) Completed Fannie Mae Financial Statement
8.) Authorization to speak with your lender (We will provide this document)
Once you have gathered all of this information together, it is time to set an appointment to see the home and to get the offer signed to turn into the bank. One of the most common questions that I get from homeowners is: How long does the process take?
On average it takes about 90 days from start to finish. This can vary based upon many factors, such as the lender we are dealing with, whether we were supplied with a complete package of information, and the time of year. The average submission process goes like this:
Day 1: We receive a full Short Sale Package — We immediately send over an authorization to release information to the lender(s). This allows the lender to speak with us regarding your loan and submit the offer directly to them. It takes about 2-3 days for the bank to upload this information into their system.
Day 3-4: We fax/email the Short Sale Package — Once we have our authorization in the system we can proceed with presenting the offer. The lender tells us where they want the information sent and we send it. It will take a couple days to upload this information as well. Once the bank has received the package they will scan it for completeness and let us know whether there are additional documents that they would like to have signed or submitted.
Day 5-14: Daily calling to the bank to try to get a negotiator assigned. The negotiator is the person who will be our direct contact for the remainder of the negotiations. They will also be the person who will order the independent appraisal on the property.
Day 15-30: Calling the negotiator to attempt to expedite the ordering of the appraisal or BPO (Broker’s Price Opinion).
Day 30 – 45: Schedule and complete the Appraisal/ BPO.
Day 45-55: Time for the negotiator to get the results back from appraisal.
Day 55-80: Negotiate with lender, obtain approval
Day 80-100: Schedule closing and close.
This timeline is mean to provide a general base of reference and can vary from lender to lender.
So, there it is! I hope this has been helpful, the ball is now in your court. If you would like to sell your home, give us a call or shoot us an email to [email protected] and we would be happy to talk to you about whether your home would be a fit for us. Thanks, and we look forward to hearing from you.