Do Your Homework with Commercial Real Estate- Part Two

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 first two due diligence items from the list, inspections, and market value, as these are of high importance to evaluating any real estate investment.

Property Inspection
Inspection of any real estate investment property is an important step, and this is especially true for commercial properties. Why is this? Compared to a traditional single family home, a commercial apartment may have 10, 20, or even 100 or more living units that need to each be checked out before a property should be purchased.

This fact makes the inspection process for commercial properties more time consuming but also more important, as the condition of individual units may not be on par with the overall condition of the building itself. Property inspections for commercial properties are thus not just a condition that must be met prior to closing on a prospective deal. They are also a way to assess necessary repairs and/or improvements, which are critical to you being able to run numbers.

Market Analysis
Another key form of due diligence with commercial properties is the detailed market analysis that should accompany any prospective purchase. Naturally, this will include an assessment of market prices for similar prices (just to get a feel for the purchase price you are faced with), as well as market rents for apartment units.

There is also more to market analysis than just these basics. You will want to look at market demographics, primary employers, and employments trends in the area immediately surrounding the property in question. Because your income will be coming from renters, you need to make sure that the local economy supports the commercial property, ensuring that it will be a quality investment for your business.

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.