Do Your Homework with Commercial Real Estate- Part Three

Any real estate investment deal worth doing should be able to withstand a little due diligence, and commercial properties are an excellent example of this. As first introduced in previous articles, examples of due diligence you’ll want to perform for your pending deals include:

·Property Inspection
·Market Analysis (values, rents, etc.)
·Title Inspection
·Lien Review
·Confirmation of Seller’s Mortgage Balance and Payment
·Confirmation of “Currency” of Seller’s Mortgage
·Mortgage Terms (e.g. fixed or adjustable, prepayment penalties, etc.)

Let’s spend some time on the final due diligence items from the list, which concern either title or financing, both of which are also critical prior to any commercial property purchase.

Title Inspection

The title to a property shows the chain of ownership and will feature any liens that are attached to it. Both of these factors are important to look into, before you ever close on any real estate investment. Because of family or business arrangements, chains of ownership are not always as clear as you’d like them to be, and your due diligence allows you to confirm that acquisition of the property can be a smooth transfer of ownership.

Lien Review

Another aspect of title inspection for a commercial property is the review of any liens on the property. Liens can come in many shapes and sizes but some of the primary types are listed below:

·Property tax liens
·Income tax liens
·Mechanic’s liens
·Judgment liens

Tax related liens are either due to local property taxes going unpaid or to state or federal taxes that are similarly delinquent. Tax related liens have high priority, when it comes to transferring ownership cleanly, and this is a potential issue you need to be clear about with any real estate investment you consider.

Mechanic’s or judgment liens are usually easier to address during the due diligence period, but are also worthy of your review, as they can still affect the closing process for a commercial property. When these liens appear, it is often a matter of contacting who laced the lien to see what they will accept to consider it fulfilled.

Confirmation of Mortgage Terms

A final form of due diligence you’ll need to consider is a review of any financing terms that the seller of a property has to adhere to. This review may include such items as confirmation of payment and payoff terms, confirmation of the currency of an existing mortgage ( to make sure the payoff is what everyone thinks it should be), and review of any relevant mortgage “fine print” that may affect the final closing numbers for the transaction.

Remember that due diligence is not just there as something to do, just for the sake of doing it. It is designed to protect you, especially given that commercial real estate represents an often-substantial investment of resources.