Once you’ve found a commercial investment property you think you may want to invest in, you’ll need to negotiate with the seller and do some thorough investigation to verify information you’ve been given, and to pick up anything that may not have been revealed or been obvious on the surface. This process can be considerably more involved with commercial property investment than residential property investment.
There are 5 basic steps you need to take when negotiating and purchasing a commercial property.
- Negotiate with the seller
- Exchange conditional contracts, including being subject to finance
- Do your due diligence on every aspect that may impact the value of the property (you can get help with this step from professionals with experience in this area)
- Fine-tune the contract if necessary
- Settle the purchase of the property.
As with any investment the single, most important factor in protecting the long term value of your commercial property investment is to buy well in the first place. It’s much easier to do your research and make an educated selection of property to purchase than it is to improve an under-performing commercial property investment after it’s been purchased. If you’ve paid absolute top dollar, it may be difficult to see value for money in efforts to add value.
Negotiating With The Seller
You want to develop a ‘street-smart’ position that will enable you to hold your own in negotiations to purchase a commercial investment property. If you can’t get what you want through the front door, turn around and see what you can get through the back or side doors! In other words, there is more to negotiation than the purchase price of the property and other ways you can secure your profit before you buy. If you are unable to gain the advantage you want in the price or in other ways (the length of the settlement period, vendor financing, income guarantees from the vendor, etc), you may need to re-think whether the property is the right one for you. You need a ‘take it or leave it’ mentality when negotiating the purchase of an investment property and prior to making a binding commitment with your signature on a contract.
Doing Your Due Diligence
Step 3 of the negotiating and purchasing process requires that you do your due diligence. What exactly does that mean? If the property you are looking to purchase currently has tenants, go and speak with them! How happy are they, what kind of problems do they have with the property, are they willing to extend their lease or are they unhappy and planning to move? These are answers that will help you as the future owner; but they’re also important when deciding on whether or not to purchase the property to begin with.
During this investigation stage, be sure to also check out:
l the title
- condition of the building
- running costs of the building (actual, documented costs, not just ‘industry averages’)
- building efficiency (remember, even though the tenant may be paying the outgoings, if yours is an efficient building the tenant will be more inclined to pay you a top rent)
- leases and how well or how poorly they’ve been constructed, options, when the rent reviews are due and on what terms, etc. – and match these up with the criteria you would expect to find in a well-drafted lease document, keeping in mind there will be an opportunity in the future for you to restructure the leases to your benefit. If there’s a long term lease in place that’s not beneficial to you, then ask the question: ‘Do I really want this property and, if so, why should I pay top price?’