How Do You Go About Buying Commercial Real Estate?
Purchasing a property can be simplified down to four steps, with multiple actions required in each phase.
1. Identifying A Property
The first step to purchasing real estate is determining which property type you want to acquire and what market you want to invest in. Every property type – multifamily, retail, office, industrial, and mixed-use – comes with its own benefits and disadvantages. You will want to sit down with a professional to determine which option is best for you. Once you have identified the type of property you wish to acquire and your desired market, you can start searching for prospective acquisitions. If you’re ready to start looking, check out the current Topsides listings.
2. Make an Offer
After you have identified a suitable property to acquire, whether it is actively being marketed or you are making an unsolicited offer, your agent will submit your offer to the seller’s representative. Your offer is submitted as a Letter of Intent (LOI) and outlines the price and terms you wish to purchase the property.
The seller will typically make a counteroffer, and negotiations will continue until you and the seller have agreed upon the price and terms. Depending on market conditions, a seller may receive multiple offers, creating a competitive atmosphere among the prospective buyers. This often results in a seller receiving above the asking price, which buyers competing for an asset must be prepared for.
For example, Topside previously worked with the seller of a small flex/office property in North San Diego. We valued the real estate 10 percent below the last sales comp. Due to the high demand for this size owner/user property, the seller generated multiple offers from qualified buyers. The seller and selected buyer eventually entered into escrow 10 percent above the asking price. And although this was higher than the buyer had initially intended to spend, it was a great opportunity due to the lack of these types of owner/user deals available below $2 million.
3. The Escrow Process
If both parties agree on the price and terms, they will execute a Purchase and Sale Agreement (PSA). This agreement details the acquisition process and includes details such as the purchasing price and contingency deadlines. Once in escrow, the buyer will need to complete the due diligence process (verify the underwriting and review all documents, etc.) and work with the lender and investors to complete the purchase.
Occasionally, buyers will identify something in the due diligence period that will prompt them to re-trade the deal, including offering a lower purchase price.
For example, Topside previously worked with an industrial buyer that was rightfully spooked about the economy because of COVID. He was scheduled to purchase an owner/user deal, a 10,000 square-foot manufacturing facility. Our buyer felt that he was no longer willing to pay the agreed-upon price due to economic uncertainty. However, the seller was motivated to sell and eager to cash out. After extending the escrow and conducting more negotiations, the buyer and seller agreed to move forward with a 10 percent reduction in the purchase price. This was a win-win for both the buyer and seller.
4. Close the Deal
Once all contingencies are removed, the buyer’s deposit will become non-refundable. Details of the transaction will then be finalized, funds will be transferred, escrow will be closed, and the buyer will become the real estate owner.
Why Become A Real Estate Investor?
As an investor, you will be flooded with immense responsibility; but in most cases, the benefits of becoming an owner/user or investor outweigh the downsides. Here are the most common reasons our clients are acquiring real estate in today’s market:
- Owner/users are investing in a stable location for their primary business to operate, leveraging today’s lending environment.
- Investors and owners/users can offset taxable income by deducting depreciation and interest expenses on their investments.
- Using the 1031 Tax-Deferred Exchange program currently permitted by the IRS, property owners can increase their portfolio’s value without paying immediate capital gains tax.
- Diversifying your overall investment portfolio with income-producing real estate has proven to be a hedge against inflation.
- By utilizing debt, landlords can maximize their investment and increase potential returns.
However, these are just a few of the pros and cons of becoming a real estate investor!