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The Step-by-Step Process for Buying Commercial & Investment Properties - YouTube
Channel: Trevor Calton
[3]
today we're going to talk about
[4]
acquiring a commercial investment
[6]
property
[7]
this is important to learn because the
[8]
process for acquiring a commercial
[10]
property is
[11]
vastly different than acquiring a
[13]
residential property
[14]
and for novice investors or new agents
[19]
it's important to understand each of the
[21]
steps in the process to make it easier
[23]
and less confusing
[24]
for all parties involved the first stage
[27]
of the acquisition process is the market
[29]
research
[30]
stage this is the time prior to making
[33]
an offer
[33]
where the client determines how much
[37]
real estate they can afford and begins
[39]
to examine the market
[41]
engaging professionals and preparing to
[43]
identify
[44]
a target and make an offer on a property
[46]
if the buyer intends to use leverage
[48]
and get a mortgage loan which most
[51]
investors do
[53]
then they need to expect to put down
[55]
about 25 to 30 percent
[58]
as a down payment of the total purchase
[60]
price
[61]
additionally most lenders will require
[64]
that the
[65]
borrower or the buyer keep another
[68]
six to 12 months worth of debt service
[70]
or loan payments
[72]
in reserve and in the form of liquid
[75]
funds
[76]
and this is so that the buyer doesn't
[78]
acquire the property and then
[80]
immediately run into a surprise negative
[82]
cash flow situation and
[84]
they already have the first six months
[86]
to a year worth of loan payments
[88]
in the bank just in case the next step
[91]
in this stage is
[92]
for the buyer to determine what type of
[95]
property
[95]
is best for their strategy different
[98]
property types
[99]
and different classes have different
[101]
advantages and disadvantages
[103]
perhaps most importantly is that
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different investments are going to have
[106]
different
[107]
tax consequences so the buyer should
[110]
definitely speak
[111]
to their tax advisor or accountant to
[113]
determine
[114]
what tax benefits are going to be
[116]
optimal for them
[117]
and their investment strategy and their
[119]
long-term wealth building
[121]
the next step in the market research
[122]
stage is to engage a real estate agent
[125]
it's incredibly important to utilize a
[128]
real estate agent
[129]
that specializes in the type of real
[131]
estate that the buyer
[132]
is trying to acquire it is critically
[135]
important
[136]
because the skill sets for different
[138]
types of real estate are
[139]
vastly different important to note is
[141]
that hiring a real estate agent does not
[143]
cost the buyer any money
[145]
typically both agents the listing agent
[148]
and the selling agent are paid
[150]
at closing out of the listing fee which
[152]
is paid by the seller
[154]
one big mistake that a lot of investors
[155]
make is not hiring their own agent
[158]
this is critical because having your own
[161]
agent
[161]
as the buyer means that someone is
[165]
representing the buyer's interest and
[167]
has a fiduciary duty
[168]
to act in the buyer's interest otherwise
[171]
if the buyer doesn't retain their own
[173]
agent
[173]
then everyone in the transaction
[175]
technically works for the seller
[178]
another big mistake that novice
[179]
investors make is not hiring a real
[181]
estate agent that specializes in the
[183]
type of real estate
[184]
they're looking to acquire commercial
[187]
and residential real estate require
[188]
very different skill sets from an
[190]
agent's standpoint
[192]
and not hiring someone who can
[195]
properly represent the buyer can be a
[198]
huge mistake and can end up
[199]
costing them either the transaction or
[202]
perhaps even significant amounts of
[203]
money down the road
[205]
the next step in this stage is to
[206]
evaluate different types of properties
[209]
that
[209]
fit the investor's profile take a look
[212]
at the income and expenses and returns
[214]
that are generated by each of these
[216]
different properties
[217]
it's really important to understand the
[219]
numbers so you can compare
[221]
different investment opportunities
[223]
evaluate the potential management
[225]
issues that come along with different
[227]
types of properties for instance
[230]
maintenance and landscaping could be
[232]
much greater on a property with a lot
[233]
more greenery than perhaps one in
[235]
a more urban setting assess the various
[238]
neighborhoods in which these properties
[240]
are located
[241]
pay attention to the investment in
[244]
infrastructure
[245]
and schools and neighborhoods what do
[247]
the other
[248]
neighboring properties look like those
[250]
are the competing properties that the
[252]
investor
[252]
will have to face if they take over in
[254]
that area
[256]
what do the retail properties and office
[258]
properties look like are they well
[259]
maintained
[260]
all of the demographics give an
[262]
indication of
[264]
what type of quality of investment and
[266]
what the
[267]
management intensity is going to be like
[269]
for this particular property
[271]
looking at multiple properties gives you
[273]
a basis for comparison
[275]
and then will make it easier to identify
[278]
what are going to be the pros and cons
[279]
of
[280]
the acquired property finally
[283]
identify a property to acquire it's
[286]
really important
[286]
to make sure that this property fits
[289]
with the buyer's investment strategy
[291]
most properties for sale at least those
[293]
that are appropriately listed
[295]
should have preliminary financial
[297]
information available
[298]
to the potential buyer prior to making
[301]
an offer
[302]
it's important to take a look at those
[303]
financials to see what the performance
[305]
of the building is going to be like
[307]
that information can be verified during
[310]
the due diligence process
[311]
the buyer should understand that they
[313]
are typically not going to be able to
[314]
see the interiors of any properties
[317]
prior to having an offer accepted it's
[320]
just
[320]
natural that sellers are not going to
[323]
want to disturb their tenants and in
[324]
most
[325]
states have to give 24 to 48 hours
[327]
notice just to
[329]
enter the space most sellers are not
[332]
going to want to do this so
[334]
all offers are typically made subject to
[336]
interior inspection
[338]
and other contingencies that we'll talk
[339]
about in the next phase
[341]
the next stage in the acquisition
[342]
process is the offer and acceptance
[345]
stage this process usually takes about
[348]
one to two weeks
[349]
depending on certain circumstances to
[352]
craft the offer to write it up deliver
[355]
it to the seller
[357]
have them have time to review it perhaps
[359]
by legal counsel
[360]
and then respond written offers can come
[363]
in various forms
[364]
for example an loi or letter of intent
[368]
is a less formal non-binding
[371]
preliminary offer that outlines the
[373]
price and terms
[374]
that the full executed contract would
[378]
contain
[379]
and this sets the stage for the buyer
[380]
and seller to enter negotiations before
[382]
investing all the time and energy it
[384]
takes
[384]
to put the full offer together a full
[387]
formal offer
[388]
usually referred to as a purchase and
[390]
sale agreement
[391]
is the fully written
[394]
outlined binding contract that both
[397]
buyer and sellers sign
[399]
that formerly enters them into
[402]
the sale process unlike the loi
[406]
purchase and sale agreements are binding
[408]
and so all of the material
[410]
contained therein is critically
[412]
important to understand and know and
[415]
also abide by during the acquisition
[418]
process
[419]
whether it be an loi or a purchase and
[422]
sale agreement
[423]
most offers contain three main points
[426]
the price
[426]
at which the buyer is willing to acquire
[429]
the property
[431]
the terms on which they're willing to
[433]
acquire the property including
[435]
how much earnest money they're putting
[436]
down and the due diligence period
[440]
and then the time frame for closing
[443]
the entire transaction earnest money is
[446]
a deposit
[447]
it's a sign of good faith that the
[450]
buyer is serious and intends to execute
[452]
the contract and it's also
[454]
a mitigator of risk for the seller who
[457]
is agreeing to take the property off the
[460]
market
[460]
during this process of negotiation and
[463]
due diligence
[464]
typically earnest money will need to be
[467]
converted to cash and deposited
[469]
with escrow once due diligence has been
[472]
completed
[472]
and oftentimes especially in competitive
[475]
markets
[476]
sellers will require that the earnest
[478]
money becomes non-refundable
[480]
at that point typically we see earnest
[483]
money amounting to
[484]
somewhere between one and five percent
[486]
of the total purchase price and
[488]
if for any reason the buyer does not
[489]
perform to the terms of the contract or
[492]
doesn't close the sale the seller can
[495]
keep their earnest money as compensation
[498]
the next stage in the acquisition
[499]
process
[500]
is the due diligence stage this is where
[504]
the buyer goes and researches the
[507]
property
[508]
the income and expenses the bundle of
[510]
rights or chain of title that's being
[512]
conveyed
[513]
and make sure that what they're buying
[515]
is what they want to buy at the price
[517]
and terms they're offering
[518]
first let's talk about title the buyer
[522]
needs to make sure that the
[523]
seller has the right to convey
[526]
the property to the buyer
[530]
they need to verify the legal
[531]
description to make sure that
[533]
what they think they're buying is what
[535]
they actually are buying
[537]
and they also need to understand whether
[539]
or not the property is encumbered by
[542]
undisclosed liens or other issues
[545]
that may affect the buyer's ability to
[548]
use and enjoy the property going forward
[551]
the second issue that most buyers
[553]
examine during due diligence are the
[555]
books and records or the income and
[557]
expenses
[558]
when the rent roll is provided does that
[560]
rent roll match
[561]
the executed leases that are in place
[565]
how are the expenses are the taxes and
[568]
insurance and repairs and maintenance
[570]
and other operating expenses
[572]
in line with what one would typically
[574]
see in a property of this size
[576]
and do they match what was advertised
[580]
by the listing agent or the seller
[583]
when marketing the property for sale
[585]
effectively
[586]
the buyer wants to know if the property
[588]
generates the amount of net operating
[590]
income that was advertised in the
[592]
offering memorandum
[594]
the third and probably most important
[596]
part of the due diligence process
[598]
is the physical inspection does the
[601]
property
[602]
have any undisclosed deferred
[604]
maintenance
[606]
are there major issues that are going to
[609]
affect the usability of the property
[611]
it's critically important to hire a
[614]
competent
[614]
building inspector that understands the
[617]
property type that's being acquired
[619]
when doing your physical due diligence
[622]
ultimately the buyer just needs to know
[624]
what is the overall condition of the
[625]
property what is the level of deferred
[627]
maintenance and what capital
[629]
improvements are going to be necessary
[631]
after closing at the end of the due
[633]
diligence period
[634]
the buyer has three options they can
[638]
reject the results of the due diligence
[641]
and withdraw from the transaction
[643]
go on to the next one they can accept
[646]
the results of the due diligence
[647]
but go back to the seller for further
[650]
negotiations such as a price concession
[653]
or a deferred maintenance credit
[656]
or some other remedy that
[660]
they will require prior to closing
[663]
or the buyer can accept the results of
[665]
the due diligence
[666]
waive the contingencies and move forward
[669]
to the final stage of the acquisition
[672]
finally we have the financing and
[675]
closing stage
[676]
during the due diligence phase the buyer
[678]
should also have been either talking to
[680]
a mortgage broker or speaking directly
[682]
to lenders
[683]
and procuring loan quotes so
[686]
that when the due diligence time is over
[689]
they are ready to proceed with applying
[691]
for a loan and
[692]
heading to closing important to note is
[694]
that the process
[695]
for obtaining a commercial loan even
[698]
just soliciting quotes from lenders can
[700]
be extremely arduous
[702]
so inexperienced investors should
[704]
absolutely hire a commercial mortgage
[706]
broker to
[707]
represent them in the process of
[709]
negotiating with lenders
[711]
and soliciting loan quotes most buyers
[714]
don't
[715]
engage the lender and pay the formal
[719]
application fee
[720]
until after they've completed their due
[722]
diligence so that they are reasonably
[724]
certain they're going to move forward
[725]
with the transaction
[726]
and they don't have to forego any
[729]
non-refundable application fees
[731]
once the lender has underwritten the
[733]
property
[735]
obtained an appraisal done all of their
[737]
inspections
[738]
they will issue a loan commitment which
[740]
is
[741]
their promise to bring their amount of
[744]
capital to the transaction
[746]
so at this point the
[749]
lender submits their loan documents to
[751]
the escrow company
[753]
the seller will sign over the deed and
[756]
any other related documents
[757]
to the buyer and the buyer will come in
[760]
sign their loan documents
[762]
bring the additional down payment and
[764]
any other costs
[766]
and the escrow company will create a
[769]
reconciliation of all these numbers in
[772]
the form of a settlement statement
[774]
and have each party sign off on it
[777]
once the escrow company has received all
[780]
the funds and signatures
[781]
they will review the documents
[783]
distribute the funds to the seller
[785]
convey the signed deed to the buyer and
[788]
then record the transaction with the
[789]
county so it becomes a matter of public
[798]
record
[813]
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