Commercial real estate is far more complex and has higher stakes than its residential counterpart. Commercial and legal factors relating to the property affect the final purchase price and can also enhance or detract from the property's purpose. At best, you could face the inconvenience of a useless building, but the worst-case scenario could be having to close the business.
That's why it's in all parties' best interest to conduct commercial property due diligence before buying commercial real estate. It ensures that the purchaser gets the property they want and the seller gets the desired payday.
Read on to learn about commercial property due diligence in more detail.
Legal Importance
Several legal issues can block or suspend a property's transfer or use. To deal with them, the buyer must get a real estate attorney to review the following property law concerns:
- Formal requirements (matters related to the deed, registration, and transfer)
- Encumbrances (existing easements, liens, and possible encroachments)
- Municipal regulations (zoning and land use laws)
Getting on top of these legal factors is critical research. Without this, the purchaser won't know if they'll face potential issues with using the building and future lawsuits.
Financial Importance
The financial leg of the due diligence process looks at three factors:
- The current real estate market
- The building's financial performance
- Tax considerations
Looking into the market is critical research because it allows the buyer to see what the best deal is. This shows the availability of similar buildings and their prices. It can reveal how well the real estate investment will keep its value (more or less).
Another critical element is thoroughly reviewing the building's financial reports. This will help you include in insurance costs, security contracts, lease financials, and similar factors in your forecasting. This can help you minimize production costs, secure loans, and more.
If you're looking for a large property to lease to many simultaneous tenants, you must also look at the tenant history. You can check the building's history or learn about the area's trends from a property management firm.
The Value of Inspections
A thorough inspection is the last crucial component of commercial property due diligence. Commercial real estate inspections are lengthy affairs. The inspection alone may go on for several days, and then there's an extra wait for the inspection report.
You may also need a team to help conduct this inspection. You'll need professional tradespeople who can handle larger buildings to sign off on all the important infrastructure. You may even need to get an engineer to help in this process.
Implementing the Best Commercial Property Due Diligence Practices
Commercial property due diligence is an important process for any company wanting to make a wise investment. The legal and financial factors at play have a huge effect on profits.
Doing due diligence helps you get ahead of all these elements. It stops you from getting into legal trouble and raises your chances of making a good investment. The inspection element also protects you from expensive accidents.
Do you want to work with a partner with decades of commercial property experience? PMI Metrobay has you covered! Find your team of industry experts in due diligence, full-service management, and more.
