A commercial real estate transaction involves a contract deal between two legal entities, rather than two people like in residential transactions. This transaction could take months before fully completed as a result of the multi-step process that it involves, hence leading to the question “what are the steps in a commercial real estate transaction?”
What Are the Steps in a Commercial Real Estate Transaction?
The steps in a commercial real estate transaction include identification and organization, underwriting, due diligence, and closing. Each of these steps includes a series of important activities that slowly lead to the completion of the transaction such as market analysis, pro forma analysis, good-faith deposit, and property appraisal.
Typically, all commercial real estate transactions have their unique process. However, these processes all revolve around the same general framework. The route each transaction takes to completion is determined by the legal entities involved right from the onset, based on the peculiarities of the transaction.
As a new commercial real estate investor looking to invest in properties, here are the steps to follow to ensure the smooth running of your commercial real estate transaction:
Identification and Origination
This stage has to do with the identification of investment opportunities. As a result of the vast number of commercial buildings around, ranging from shopping centers to office towers, investors have to pay a lot of attention while searching for the right one to invest in.
To guide yourself through this process, you should have a market analysis strategy. Building an investment thesis would help guide your market search, meaning you could either:
- Analyze the market based on a specific property type that provides the best investment opportunities, for example, Class A buildings
- Or analyze the market based on geography by determining the best locations to invest in commercial properties
The identification process could take months and could involve reviewing tens or hundreds of properties before selecting one that you believe to be the best for you. For this reason, it is advisable to analyze markets within less crowded areas, such as cities in the Midwest zone like the Cincinnati or Northern Kentucky area, to promote a quicker search process.
This stage has to do with carrying out a thorough analysis of past and current info of the selected property. This research is mostly carried out to determine how well a property will fare in future, based on its past and current performances. Here are some of the activities included in this stage:
- Procuring financial documents of the property such as bank account statements, balance sheets, and invoices
- Carrying out a pro forma analysis based on past data to arrive at a prediction of future expenses and income, thereby determining whether or not the investment is worth it
- Carrying out market and submarket research
- Talking to the seller or their representative to find out their initial price
If the selected property makes it through this stage, then a purchase agreement can be drafted by one of the parties. Furthermore, the buyer makes a good-faith deposit to a title and escrow company to show their serious intent in going through with the purchase.
To quicken this process and to ensure reliable results, it is advisable to work with a local realtor service such as Si Vales Valeo Real Estate.
Due diligence period involves carrying out an inspection of a property to discover as much information as possible about it, in order to determine whether or not to invest in it. The main purpose of carrying out due diligence is to ensure that the property is exactly as advertised and to further confirm the predictions from the underwriting stage.
Here are some ways through which due diligence can be carried out:
- Hiring an appraiser to evaluate the property
- Hiring professional structural engineers to determine the integrity of the building
- Assessing the property’s documentation to be sure there are no questionable data
- Carrying out interviews with the property manager to find out if there are any issues regarding maintenance
- Touring the property to carry out a physical test of all plumbing and electrical systems.
If you are satisfied with the results of the due diligence, you can then move to the final stage of the transaction.
The closing is perhaps the shortest stage of the entire transaction process, but yet, is one of the most sensitive stages. In this stage, both parties sign all necessary closing documents and funds are transferred from the buyer’s agent to the seller’s agent through the title and escrow company. Also, keys, access codes, and important documents are transferred at closing.
How Long Should a Due Diligence Period Last?
The due diligence period should typically last between 30 and 60 days. However, this period could be shorter or longer depending on the needs of the buyer.
Can I Back Out From Buying a Commercial Real Estate Property?
Yes, you can back out of a real estate deal. However, if you do not have a valid reason for doing so, you could lose your good-faith deposit.
The steps above are all salient in a commercial real estate transaction, and following them diligently will ensure that the transaction begins and ends smoothly. If you are in need of any additional help, it is advisable to hire the services of a real estate company, such as Si Vales Valeo Real Estate.